高樂氏 (CLX) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to The Clorox Company's second-quarter fiscal year 2015 earnings release conference call. (Operator Instructions). As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Steve Austenfeld, Vice President of Investor Relations for The Clorox Company. Mr. Austenfeld, you may begin your conference.

Great, thank you. Welcome, everyone and thank you for joining Clorox's second-quarter conference call. On the call with me today are Benno Dorer, Clorox's Chief Executive Officer and Steve Robb, our Chief Financial Officer. We are broadcasting this call over the Internet and a replay of the call will be available for seven days at our website, TheCloroxCompany.com.

Let me remind you that on today's call we will refer to certain non-GAAP financial measures, including but not limited to free cash flow, EBIT margin, debt to EBITDA and economic profit. Management believes that providing insights on these measures enables investors to better understand and analyze our ongoing results of operations. Reconciliation with the most directly comparable financial measures determined in accordance with GAAP can be found in today's press release, this webcast's prepared remarks or supplemental information available in the financial results area of our website, as well as in our filings with the SEC. In particular, it may be helpful to refer to tables located at the end of today's earnings release.

Please recognize that today's discussion contains forward-looking statements. Actual results or outcomes could differ materially from management's expectations and plans. Please review our most recent 10-K filing with the SEC and our other SEC filings for a description of important factors that could cause results or outcomes to differ materially from management's expectations and plans. The Company undertakes no obligation to publicly update or revise any forward-looking statements.

Now turning to our prepared remarks, I will cover highlights of our second-quarter business performance by segment. Steve Robb will then address our financial results and financial outlook for fiscal year 2015 and finally Benno will wrap up our prepared remarks, as well as open it up for Q&A. Consistent with today's press release, all of our commentary today is on a continuing operations basis unless otherwise stated.

Turning to our top-line results, in the second quarter, volume was up 4% and sales grew 3%, including the impact of 3 points of unfavorable foreign currencies with the largest impact coming from Argentina. Excluding the impact of foreign currencies, sales grew 6%. Our growth reflects higher volume, as well as a nearly 2 point benefit from price increases. Importantly, our sales results reflect strong performance across all US segments and international on a currency-neutral basis.

In Q2, our US 13-week marketshares decreased 1/10 of a point versus the year-ago quarter. The slight decline in the quarter reflected continued intense competitive activity in our cat litter and Brita businesses. Conversely, we saw marketshare improvements in our laundry business with Clorox Liquid Bleach and Clorox 2 Stain Fighter and Color Booster at two-year highs.

The home care category also continues to strengthen. For eight consecutive months, we have grown marketshare in this business with strong second-quarter gains in Clorox disinfecting wipes leading the way. Burt's Bees also grew marketshare in the quarter with very strong gains in face and lip care.

Looking at our US categories, they were up just over a point in the second quarter, a nice improvement following the half point gain we saw in Q1. We are continuing to invest to improve our category trends and strengthening our marketshares remains a top priority.

With that, I'll review our second-quarter results by segment. In our cleaning segment, Q2 volume in sales each increased 3% behind strong results in our professional products and home care businesses. Our professional products business delivered 21% volume growth and 19% sales growth behind double-digit shipment gains in professional cleaning and healthcare, along with a solid gain in food volume. While concerns about Ebola and Enterovirus had limited impact on our retail business, which I will discuss in a moment, healthcare institutions did respond with significant purchases of cleaning and disinfecting products contributing to top-line growth for the quarter. Following such strong sales in Q2, we anticipate some slowdown in professional products in Q3 as these concerns have now abated.

In home care, which is our largest US business unit, sales increased behind strong execution on several merchandising events, along with distribution gains for our toilet cleaners. This solid volume and sales growth more than offset a distribution loss on Clorox disinfecting wipes at a major club customer last calendar year, a loss that we have now anniversaried beginning this month.

In the near term, we don't anticipate getting distribution back at this customer. For perspective, our focus is on profitable growth for Clorox and category health, not growth at any cost. We believe we have the right strategy in place to drive our business and category growth in a profitable manner. In particular, we continue to believe there is opportunity for increased household penetration in the wipes category, particularly as we launch meaningful innovation. For example, we recently launched several new products, including a wipe with micro scrubbers, that is consumer-preferred versus those currently in market, as well as new Clorox triple action dust wipes that allow consumers to dust an entire room with one extra large wipe that picks up dust, hair and allergens such as pet dander.

Importantly, as part of our strategy to expand wipes usage around the home, we also introduced Clorox Scrub Singles Kitchen Pads, which come preloaded with Clorox cleaner and are meant to be tossed after use thereby eliminating one of the most germ-laden items in households, the reusable sponge. There's a version of Scrub Singles for use in bathrooms as well.

As we've shared with you before, Clorox remains the clear leader in the wipes category with marketshares near 50% in tracked channels, more than twice that of the nearest branded player and share trends have continued to improve. Early in the quarter, we did see an uptick in wipe shipments heading into the cold and flu season behind consumer concerns regarding Ebola, but heightened consumer demand moderated quickly as reported cases dwindled.

With the flu season just now getting into full swing, we will be monitoring consumption and using regional flu data to work with retailers to help target disinfecting wipe shipments where they are needed most.

In our laundry business, sales declined due to decreased Clorox bleach volume as a result of category softness compared to strong category growth in the prior year. From a marketshare standpoint, our investment in this brand and focus on value are paying off as December marked the fourth consecutive quarter of marketshare growth on Clorox bleach. Looking ahead, due to increases for input costs for our bleach business, we're in the process of implementing a 7% average price increase effective February 1.

In our household segment, we delivered 3% volume growth and 5% sales growth. The segment's top-line results were driven by strong performance in our Glad and Cat litter businesses. Our bags and wraps business grew volume 3% driven by innovation behind the Hawaiian Aloha scent, as well as new Gain-scented trash bags through our partnership with Procter & Gamble. Sales on Glad were up double digits behind price increases taken in 2014.

Even in the face of intense competition, cat litter volume and sales increased behind distribution growth of our new Fresh Step Extreme lightweight product. We are continuing to invest aggressively in innovation and communicating our value proposition versus the competition, particularly focusing on excellent clumping and odor control such as with our new Eliminate Odor for 10 Days campaign that was launched in the second quarter.

Keeping in mind that Q2 is a relatively small quarter for our charcoal business, sales and volume declined following double-digit growth in the first quarter as retailers transitioned to our new and improved Kingsford Charcoal product that launched in January in advance of the 2015 grilling season.

In our lifestyle segment, volume grew a strong 5% and sales increased 4%. These results were driven by very strong double-digit volume and sales growth on Burt's Bees, largely due to innovation in lip and face care products. In particular, our new lip crayons and new vanilla bean and wild cherry lip balm flavors grew strongly in the quarter supported by our first ever Burt's Bees television advertising.

Our facial towelette business and skin brightening products were also very strong in the quarter.

Turning to our food business, sales grew versus the year-ago quarter behind higher volume for bottled and dry Hidden Valley products. Finally, the segment's positive results on Burt's Bees and food were partially offset by lower sales and shipments of water filtration products, primarily due to consumption declines on pour-through filters. As previously communicated, we started shipping an improved Brita filter in August that is faster and easier to change than competitive filters. In November, we began shipping improved pitchers. With our focus on innovation, we are optimistic that our water filtration business will have a stronger second half of the fiscal year.

Turning to international, volume was up 5% behind strong operating performance and volume growth in nearly all regions. However, sales declined 2% due to the impact of unfavorable foreign exchange rates. If you exclude the impact of foreign currencies, sales for international grew 11%. With oil and other commodity prices having fallen, capital investment in some countries has moderated resulting in slowing economic growth in some of our key markets such as Chile and Peru. Strategically, we remain committed to growing profitably in our international markets and continue to take steps to overcome macroeconomic trends such as negative foreign currencies, high inflation and slowing GDP growth. In particular, we continue to carefully assess spending across our international division and implement price increases to mitigate the macro headwinds.

Looking at the balance of fiscal year 2015, as noted in this morning's earnings release, we have increased our sales growth outlook for the full year to be about 1%. The revised sales outlook takes into account the strength of the first half, along with an updated outlook for the second half of the year. As I discussed, we anticipate some slowdown in Q3 in professional products following very strong Q2 shipments in part related to Ebola and Enterovirus concerns that have now greatly abated.

In addition, we now anticipate stronger foreign exchange headwinds, along with higher trade spending to support our categories and grow marketshares, as well as defend against reduced prices by competitors following the decline in import costs. Now I will turn it over to Steve Robb to provide more detail on our Q2 performance and our outlook for fiscal year 2015.

Thanks, Steve and welcome, everyone. We are pleased to have delivered a strong second quarter and a solid first half for fiscal 2015. In addition to strong sales growth in the quarter, we delivered another quarter of very good earnings growth. As you saw in our press release, we have raised our fiscal year outlook for sales and earnings per share to reflect our solid first-half results.

In our second quarter, sales grew 3% reflecting 4 points of volume growth and 2 points from pricing, partially offset by 3 points of unfavorable foreign currencies. On a currency-neutral basis, sales grew nearly 6%. Our top-line results came in better than expected driven by strength in our Glad, professional products and Burt's Bees businesses.

Gross margin for the quarter increased 10 basis points to 42.5% reflecting 130 basis points of cost savings and 100 basis points of pricing, largely offset by 90 basis points of higher commodity costs, as well as 90 basis points of higher manufacturing and logistics costs reflecting continued inflationary pressures in international.

And as we've previously communicated, we continue to see significant cost pressures in the logistics and transportation market due to the tight supply of trucks and railcars.

Selling and administrative expense was lower in the second quarter at 14.2% of sales compared to 15% of sales in the year-ago quarter when the Company made incremental investments to change IT service providers. Cost savings also contributed to lower selling and administrative expenses.

Advertising and sales promotion investment for the quarter was more than 9% of sales reflecting continued strong support behind our brands, particularly to drive trial of new products. Notably, our US retail advertising spend was about 11% of sales.

Our effective tax rate of 34.9% was almost a point lower versus year ago, but in line with our full-year projections. Out of all of these factors, we delivered diluted earnings per share from continuing operations of $0.97, an 8% increase versus the year-ago quarter.

Fiscal year-to-date free cash flow was $207 million compared with $159 million in the year-ago period. The increase was driven by lower employee incentive compensation payments, lower tax payments and the initial funding of the Company's nonqualified deferred compensation plan last year. These factors were partially offset by $25 million in payments to settle interest rate hedges related to the Company's issuance of long-term debt, the expense of which will be amortized over the ten-year life of the debt.

In December of 2014, we issued $500 million in senior notes increasing the Company's quarter-end cash balance with proceeds subsequently used to pay down a portion of the notes that matured on January 15 of this year. For fiscal year 2015, we continue to anticipate free cash flow as a percentage of net sales to be about 10% of sales.

Now I will turn to our fiscal year 2015 outlook. As Steve mentioned, our fiscal year sales outlook now anticipate sales growth of about 1% reflecting solid first-half sales results, product innovation and the benefit of pricing. Our sales outlook also now anticipates an even greater impact of unfavorable foreign exchange rates in the range of 2% to 3%. In addition, fiscal year sales are anticipated to be impacted by slowing international economies, as well as higher full-year trade promotion spending as we continue to invest in our business and drive trial of new products. (technical difficulty) are expected to more than offset higher manufacturing and logistics costs.

Given the significant decline in oil prices, we now anticipate lower resin prices in the second half and commodity costs are expected to be about flat for the full year. For fiscal year 2015, we continue to anticipate selling and administrative expenses at about 14% of sales. EBIT margin is expected to be about flat as incremental demand (technical difficulty) expansion. We continue to anticipate our fiscal 2015 tax rate to be about 34% and net of all of these factors, we have raised our fiscal year outlook for diluted earnings per share from continuing operations to $4.40 to $4.55.

As we look ahead to fiscal year 2016, we anticipate the benefits from continuing commodity softness to be partially offset by continued increases in logistics costs. Also, as we have done historically, we may use a portion of the resin-related savings to address potential competitive price cuts. We'll also closely track headwinds in international markets, including foreign currency declines and slowing economies.

Before I turn it over to Benno, I did want to let you know that moving forward we will provide next year's fiscal year outlook starting with fiscal 2016 during our Q4 earnings call, which takes place in August. This change allows us to provide you with an outlook based on a full year of actuals and puts us more in line with the timing of our peer groups' outlook announcements. I am happy to address any questions you might have on this process change, but I wanted to make you aware of this prior to the Q3 earnings release in May. And with that, I will turn it over to Benno.

Thank you, Steve and hello, everyone. It's great to be joining you on my first call as Clorox's CEO given the strong second quarter we just completed. This quarter's performance follows a very solid Q1 and it also speaks to the commitment to the 2020 strategy and our focus on continuity with the leadership transition. That continuity of purpose is evident in our continued emphasis on category and overall marketshare improvement, profitably driving growth and stronger top-line performance and creating shareholder value.

Now clearly as we head into the second half, we are facing a number of challenges, including continued softness in several categories, worsening foreign exchange headwinds and slowing economies in many international markets. I believe we are taking the right steps to support our brands with increased investments while driving margin improvement to grow profitably in this difficult environment.

As I discussed with you on last quarter's call, the defining opportunity for Clorox is accelerating profitable growth. Looking ahead, we're leaning into four key elements of our 2020 strategy that I believe drive the greatest value. These areas of emphasis, which we are calling strategy accelerators, will drive decisions around where we will invest more heavily, again, with the intent to drive profitable growth. And I would like to take a few minutes to introduce these to you today and at an analyst meeting we plan on hosting later this year, we will delve more deeply into how we are activating them.

The first area of emphasis is accelerating portfolio momentum. In other words, leveraging tailwinds to generate more growth from our portfolio and investing more heavily against those brands and categories that have a stronger [right] to grow. The second is accelerating 3D technology transformation, which aims to address increasing consumer fragmentation, a shift in how today's consumers shop and buy their products and how we must engage with them to win the battle for the physical and virtual shopping cart.

The third area of emphasis is accelerating innovation. Now this isn't just about product innovation, it's about innovation in sales and marketing, as well as product supply. Really anything that has to do with our demand creation model built around the 3 Ds of desire, decide and delight. Innovation in all these areas drives category growth and we are committed to driving more of that.

Finally, we want to accelerate our growth culture while at the same time maintaining our tradition of operational excellence. We want to dial up our strong Clorox culture to have an even more deeply ingrained growth mindset. I strongly believe these four areas of emphasis are what we need to drive growth while doing so profitably. And I look forward to sharing more about them with you over time.

Now with that, let's open it up to your questions.

(Operator Instructions). John Faucher, JPMorgan.

Yes, thank you. Good afternoon, everyone and Benno, congrats. Want to talk a little bit about the pricing that you talked about, and I think you said it is going to come in on February 1. Could you give us a little more of an idea -- and I apologize if I missed this -- where you are seeing that pricing going through sort of domestic versus international? And then given all the news about raw material deflation, etc., how you foresee competitive response on this pricing because we've seen a lot of talk about upticks and promotional spending going forward, so do you feel comfortable that the pricing is in and it is there to stay? Thanks.

I think what you are referencing is the 7% price increase on bleach, which is domestic -- liquid bleach. We have a profitable growth focus, as you know, and really these costs are fully justified. We are seeing cost inflation in several areas, whether that is transportation, logistics, corrugates, wages, benefits and these are costs that not just Clorox sees, but these are costs that are visible and occurring to our competitors in private label as well.

I would like to remind you that we are pricing to a long-term cost advantage and not to a peak. And again, these are fully cost-justified. We do have a strong track record in pricing. So over the last 10 years, 95% of our pricing increases have stuck. They are based on very strong analytics as well and we are in the process of talking to our retailers as we speak.

So based on that strong track record and the cost justification, we are confident that this price increase will be successful. At the same time, we'll always monitor what will happen in the marketplace, what will happen with competition and we are certainly also willing to spend back if needed to defend the business.

Thank you.

Chris Ferrara, Wells Fargo

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

Yes, Chris, I think what this will be about is really identifying the businesses that have the strongest tailwinds and ensuring that we have the right investments behind them and I think the growth of Burt's Bees in the last quarter is perhaps a good example of what this will look like. We have for the first time launched a TV advertising campaign because we realized that the awareness behind the brand really has a lot of upside on the base business even though the brand has been around for 20 years and that has been leading to really nice results on the base business.

We are leaning into the investments behind the innovations more strongly and we've really seen how lip, but also face innovation has yielded really nice results last quarter. And finally, we are working with retailers to make sure we have the right in-store support out there. So really it is helping us understand where those tailwinds are, investing in those tailwinds behind a portfolio like Burt's Bees and like certain areas in home care and like food enhancers and using that to drive growth, but growth the right way.

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

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

I'm sorry. I mean by your biggest economy I meant the US, which has been getting better, right?

In the US, what we are seeing is -- certainly, in the second quarter, we have seen a slight uptick. All categories grew a little over 1% and that is up half a point from previous quarters, so that is good. And if you think about what is happening here in the US, you see indications of an increasing consumer confidence. The University of Michigan just issued their Consumer Sentiment Index. It is highest since 2004, I believe. There is hope that there perhaps will be higher consumer spend due to lower oil prices, so those are good things. At the same time, household formation is still lower than it historically has been. The jobs that are created still pay less than the jobs that were lost during the recession and there still is this bifurcation in society where the bottom half isn't really doing well.

So there's puts and takes. I would say we are cautiously optimistic. Our expectations right now still are based on flat to low single digit category growth and for us, we focus on what we can control and that's investing in innovation. We have a strong innovation plan also going out in Q3 of this fiscal year that we are investing behind and we have talked to you in the past about increasing our demand spend by 1 point of net sales. Over time, that is called for by our strategy and we are certainly leaning into that, a focus on delivering better value than competitors in private label.

So we feel like we are doing what we can do to drive category growth, but I would like to let this play out in the marketplace for a quarter or two. It's really too early to call it a positive trend.

Thank you.

Olivia Tong, Bank of America Merrill Lynch.

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

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

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

I would say the biggest thing on Glad, Olivia, is that we have certainly leaned into the price increase and merchandising has been very strong last quarter. But also our innovation on Glad is really working well and in fact, in Q3, we are backing this up with an innovation that we feel very strong about and that is in partnership with P&G, we are launching glad with Gain scents. The Gain scent is one that played well as a scent endorsement across various categories and we feel like this is another opportunity for us to support our strategy of differentiating our trash bags and encouraging tradeup by delivering something that is unique and very hard for our competitors to replicate.

So in a nutshell, really strong merchandising but in particular very strong consumer acceptance in this premium trash segment behind our innovation and as a result, you have also seen our marketshare in this premium trash segment up quite nicely.

Great. Thanks, Benno.

Steve Powers, UBS.

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

Yes. It's a good question and the short answer is it is hard to know. A couple of things I would point out. Obviously oil has moved down pretty significantly over the last 90 days. It is not clear how long it will stay down at these levels, so I think as we start looking at our fiscal 2016 planning, we will have to take a hard look at how long will these prices really stay at today's level. I think certainly for the next six months or so we expect them to be depressed. Beyond that, I think it remains to be seen.

A couple of other things I would point out about the resin market. The supply demand balance still remains fairly tight here in the US and so resin prices have yet to come down. Actually, in the first half of our fiscal year, resin pricing was up. We do anticipate it will go down in the second half, but that's mainly being driven by lower prices overseas and that's creating some downward pressure here in the US. So it's good, but I would just temper expectations a bit to say it is not just energy prices, it is also the supply demand balance.

And then finally, as you think of resin, which is the largest commodity that we buy, keep in mind historically in this category when you have seen a large move downward in resin pricing, more than half of that has been spent back in the category and that's certainly what we are anticipating.

So in short, it's always better to have a tailwind than a headwind, but I think at this point we are cautiously optimistic on how that might play through in fiscal 2016.

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

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

Okay, thanks.

Ali Dibadj, Bernstein.

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

So Ali, let me take that question. A few thoughts. First of all, the price increases are cost-justified. I would just point out when you look at the total supply chain whether it's labor inflation, healthcare costs, transportation costs in particular or even all the other raw material sets, those have all been moving up, so we try to price, as Benno said, to the long-term average cost, so I think we feel both the bleach increase, as well as Glad is a cost-justified price increase.

Now as it relates to Glad, as you know, the resin market -- it actually tends to go up pretty quick and comes down slow has been the history, but there has been a long-standing issue where if prices start to come down in the spot market for resin, sometimes you'll see a stepup in merchandising activity. Well, that is certainly what we are planning for and it is certainly baked into the outlook and our expectations, but I think we have got a long track record of managing the ups and downs of resin pricing with the Glad business quite successfully. So we have seen the story before. We managed through the long-term costs and I think we feel pretty good about the decisions we have taken and if conditions are different than we think, we will manage through it.

Okay, okay, that's helpful. I do want to go back a little bit to the lean in, I guess, on portfolio and try to get your sense of how comfortable you are with bags and wraps, professional and Burt's really leading the day. And on the one hand, it is great because it's diversification from your, quote/unquote, historical business or core business, but how do we think about that going forward and what are we going to hear about from your core and underlying businesses?

And if you can tackle -- as you talk about portfolio -- the role of international because, of course, the main target we've been hearing about for a little while in terms of international is improving the margins there. And I get it; it is tough to tell with currencies. As best as we can tell, the margins are still going down or not getting that much better. So I am trying to understand how that fits in your portfolio? Does Clorox need to be an international company? Does it need to try to grow that business or should it just not? So both category portfolio, I guess and also international and geographic portfolio too, please.

Yes, so, on category first, as you know, if I take a step back, we are very focused on driving the core business. If you look at the three businesses that you referenced, Ali, that grew last quarter, two of them really have been growing strongly for a long time and we have always pointed out those two businesses, professional and Burt's Bees, as growth areas and like I said, we are leaning into investments and those investments are showing good returns.

Glad, I probably wouldn't expect growth rates that we've seen in the last quarter on Glad on a consistent basis going forward, but if I really look at underlying growth drivers, that's innovation. The businesses where we've had strong innovation, they have grown and as you know, we are very focused on growing our business behind innovation and like I said, we have a very strong innovation program out there also for the fiscal year back half.

So we are growing, we are going the right way and importantly, if you look across the segments, we are growing in all segments so I feel good about how much we are focused on the core and which businesses are growing and I certainly would expect home care also going forward to contribute more. As Steve said, we have just now a few days ago cycled through a distribution loss with a major club customer, so that the wipes growth that we are seeing in tracked channels hopefully will be visible also in shipments as we compare them versus a year ago.

On international, I think what we have said in international is that what we do want to do is grow more profitably. We are expecting 5% to 7% in sales growth, but we want to turn around our margins. International has a role in Clorox. We are executing the fundamentals well, but I will also remind everybody that we are not trying to transform the Company into more of a global player. It is 20% of our portfolio and if I project on forward to 2020, I don't expect that number to be significantly higher.

Certainly as you think about the challenges that we are seeing from an inflation point of view and in FX, I think what it will mean is that we will be more focused than ever on the activities on the margin enhancement side, whether that is pricing, whether that is margin accretive innovation, applying the strong cost saving focus that we have in the US and international, or this goes back to the accelerator that I mentioned, moving the portfolio towards more profitable categories. That really I think will become more of a focus going forward. How can we move our portfolio towards the categories that are more profitable and less perhaps volatile? Burt's Bees is a good example and then certainly countries that are more economically stable and attractive like Peru and like Colombia, in and frankly outside of Latin America. So international has a role, but we will be very mindful to make sure that we grow, but grow profitably.

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

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

Thank you.

Joe Altobello, Raymond James.

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

The professional products business in terms of volume growth, no, the business was up double digits in both volume and sales.

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

On a total company basis, that's right.

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

I wouldn't overstate the slowdown in professional. The business was up double digits in the second quarter. Obviously some of that may be inventory that will get worked off in the third quarter, but, on balance, we still think professional products will be in this 10% to 15% growth. I think as you look to the second half of the fiscal year -- here is how we are looking at it. The full-year outlook for the Company is for sales growth of about 1%. Now on a currency-adjusted basis, it's probably in the range of 3% to 4%.

Certainly in the first half of this fiscal, we were at the high end of that. We came in at about 4% currency-neutral sales growth. As we look to the second half, I think we feel very good that we are on track to have good positive volume growth. We are very much on track to have sales growth that is solid from an organic standpoint. I think the big wildcard that we are all watching pretty carefully is what happens with foreign currencies and again, the outlook is 2% to 3% there, but we could be at the mid or upper end of that range based on where the spot rates are today. But absent that, I think the organic plans that we have are performing quite well for the Company.

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

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

Okay, great. Thank you.

Wendy Nicholson, Citi Research.

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

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

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

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

Got it. And so even when you're -- and I assume the gross margins on Bees are pretty good, so the incremental advertising is not materially going to move the needle on the EBIT margin or the pretax margin for Bees, is that fair to say?

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

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

Terrific. Thank you so much.

Michael Stieb, Credit Suisse.

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

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

Okay, thanks.

Connie Maneaty, BMO capital Markets.

As you take a look at the portfolio and invest in the ones that give you the highest return, are there some brands or products that you would look to exit or deemphasize because they do cost money to run? And I am thinking -- I don't even know if Good is still around, but things like Green Works. So what is your opinion on the parts of the portfolio that won't be getting most of the future investment?

Overall, Connie, we feel good about the portfolio and at the end of the day, we are applying the same capabilities across the entire portfolio, whether that is capabilities with the consumer or capabilities with a customer or capabilities within the supply chain and the synergies are pretty real; strong cash flow, as Steve talked about. SG&A is comparatively low and ROIC is very strong. So I am very comfortable with the portfolio that we have. That isn't to say that we will always look with the Board on an annual basis at whether there is opportunities and whether we are still the highest value owner or not. And it is quite possible that we might be looking at the smaller -- some of the smaller businesses, but in general very, very comfortable with the portfolio and don't feel the need to do anything different.

We want to grow bigger rather than smaller and I think what we have said is that we are interested in bolt-on acquisitions to the tune of $25 million to $100 million in areas that are growth areas for us and that are margin accretive, on strategy, fit with our capabilities and that ideally are US-centric. So we are looking in whether that is health and wellness or natural personal care or food enhancers and see if we can add and that's really the mindset that we are in. While we will always be focused on growing the core business first, we think that there is places that we can play that we are not playing in yet and that's really our priority.

Thanks. And just a follow-up -- I think I will call you back later, Steve.

Bill Schmitz, Deutsche Bank.

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

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

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

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

Okay, just to follow up on the original question that Faucher asked, I think it was the first question, it seems like this promotional spending elevation in the front half of the calendar year is pretty consistent across the Companies that reported so far. It's a little bit coincidental, so I'm just wondering -- and obviously it is also impacting gross margin because of the higher gross to net -- is that really competitive-driven or are retailers starting to ask for some money back already because if you look at the Nielsen data, it doesn't seem like the percentage of ACV on deal, it's actually coming down, it is not going up?

I think as Benno had indicated, I don't think the competitive landscape has changed that much over the last couple of months. What I would say is it is higher than it has been historically, so it's a very intense competitive environment here in the US as companies have taken some of their focus off some of these emerging markets and focused back on the US, but I wouldn't say that broadly it is more competitive than we saw say three or six months ago.

All of that said, the one trend that we are watching very carefully is this resin price, which again if it starts to move lower, which is what we anticipate, historically, what we've seen is a good percentage of that has been spent back into the category. But absent that, I think the landscape remains as intensely competitive as we talked to you three and six months ago.

Got you. So none of it is driven by retailers asking for more money back?

No, we haven't seen that.

All right. Thank you so much.

Erin Lash, Morningstar.

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

Yes, the priorities are completely consistent with what we've been saying for many years now. We will support organic growth, as Benno talked about, keeping the core healthy. It is certainly working for us and it is something we are going to continue to do. We are interested, obviously, in M&A activity. If we can get businesses with $25 million to $100 million in sales that are margin accretive and have some tailwinds, we are interested in that.

As we have talked in the previous call, we feel very good about our debt to EBITDA. At the end of the first quarter, it was about [1.9]. It is elevated, as I indicated in the second quarter, but that is just because we have pre-funded some debt, but we certainly have dry powder. I think what you should expect going forward is we'll obviously keep the dividend healthy, but if cash starts to build up and we don't have a use for it, either for M&A or to support core growth, probably in the form of share repurchases at some point we will lean back into that. To date, we have been doing just some modest share buybacks earlier this fiscal year, but we haven't done much and we have been more focused on refunding of the debt to date.

Got it. Thank you; that is very helpful. And then within the advertising spending line, I was wondering if you could just talk about the degree to which you have been using digital I guess as a -- compared to traditional advertising means and how effective or how you are measuring the returns on that and where you see that going?

So digital right now is a little over 30% of our overall advertising sales promotion spend. That is, as we understand, the leading level in our industry and it is also up quite significantly over the last few years and again, it is really based on a solid understanding of ROIs and the ROIs that we are getting in this space are really attractive. So we expect that shift to perhaps continue so that there is always going to be space for TV. TV continues to be a very effective driver of, in particular, awareness, especially around innovations and like I said, we feel good about our innovation program for the rest of the fiscal year.

But, for us, we call this -- what we need to be is always on. We need to be where the consumer is no matter where she is in her purchase cycle and digital and social media is particularly suitable to help us accomplish that. So digital plays a very strong role and I expect that to keep going.

Thank you.

Lauren Lieberman, Barclays.

Thanks, just two quick things. One was a follow-up on the promotional environment question. I still just am not sure why the commentary on an increase in trade promotion in the back half of the year versus prior expectations because I would've thought that -- you were saying if resin prices come down, you will be watching it, so I would think that is more of a fiscal 2016 dynamic than something in the next six months, so anything you can add there would be great.

Yes, to clarify, I think as I indicated in my opening comments, the increase in trade promotional spending is a full-year number. It is likely we will spend a bit more in the second half, but it is mainly a full-year comment. I think what is important is we are agnostic on whether it is trade or advertising. What we looking for is the highest returns and what resonates the most with the consumer. So whether that is advertising, trade promotion or other things, we will be investing more. We're trying to get to this 1 point of incremental demand building investment as a percentage of sales over time and so we're going to spend more, I think, is probably the key takeaway. But you will see it fall in different lines of the P&L at different times.

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

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

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

Okay, great. Thank you.

Javier Escalante, Consumer Edge Research.

Question with regards to the US again and I think that it was alluded earlier in the call, but I would like to, if it is possible, to get more clarification, has to do with the growth in the US. I know that the hospital part probably added a point, but still that means that growth in retail sales in non-tracked channels probably grew well over 10%. And I wonder whether you can tell us which particular brands, or what kind of retail format is growing -- you guys are finding new points of distribution to be posting that kind of growth and to what extent there were one-timers, promotional one-timers, other than the one that was described when it came to Ebola? Thank you.

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

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

Thank you.

Why don't we take one more caller?

Connie Maneaty, BMO Capital Markets.

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

Connie, I think what we have said -- the inflationary pressures are obviously pretty real and the increases that we previously mentioned are the kind that tend not to reverse themselves. I think most of the pricing we've taken to date has really been focused on the international markets where we are dealing with much higher rates of inflation. You will continue to see us lean into that.

On the US side, again, where it is cost-justified and we are pricing to a long-term average cost, we will continue to take pricing. As Benno noted, we've got a very long track record of doing this and balancing it with value. I will say forward-looking that one thing that has worked for us that we want to continue is trying to marry up pricing with innovation because I think if you can bring those two things together, it translates into good value for the consumer [itself] and it tends to do much better. So the short answer is we're not afraid to take pricing in the US when it is cost-justified. We would like to avoid it when we can and certainly marry it up with innovation, but we feel like the recent price increases we've taken are the right ones for the long term.

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

Great. Thank you.

This concludes the question-and-answer session. Mr. Dorer, I would now like to turn the program back to you.

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

That does conclude today's conference. Thank you for your participation.