高樂氏 (CLX) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Clorox Company second quarter FY16 earnings release conference call.

(Operator Instructions)

I would now like to introduce your host for today's conference call, 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 CEO; and Steve Robb, our Chief Financial Officer. We're broadcasting this call over the internet, and a replay of the call will be available for seven days at our website, thecloroxcompany.com.

Let me remind you that on today's call we will refer to certain non-GAAP financial measures, including but not limited to, free cash flow, EBIT margin, debt to EBITDA, and economic profit. Management believes that providing insights on these measures enables investors to better understand and analyze our ongoing results of operations.

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.

Turning to our prepared remarks, I'll cover highlights and our second-quarter business performance by segment. Steve Robb will then address our financial results and outlook for FY16. Finally, Benno will close with his perspective, as well as open up the call for Q&A.

Turning to our top-line results, in the second quarter volume grew 1%, and sales were flat, as the benefits of pricing and volume growth were offset by unfavorable foreign exchange and increased trade spending. On a currency-neutral basis, sales grew 3%. That was on top of 6% in the year-ago quarter.

Each of our US business segments grew sales in the quarter, as did our international business on a currency-neutral basis. Market share in the US during the quarter increased 0.1 point versus the year-ago period, up to 22.3%. We're pleased to see that our investments in higher-margin, faster-growing businesses are continuing to support stable to growing market shares in our categories. We're also pleased that international shares grew meaningfully for the six-month period ending in November, which is the latest available reporting period.

Looking at our categories, five of our eight US retail business units increased market share, with particularly strong gains in home care and charcoal. In addition to improving market shares, driving category growth remains a top priority. During the quarter, our US categories were up a very healthy two points. As this quarter's performance highlights, the investments we're making behind innovation and strong marketing communications to drive profitable growth are working.

With that, I'll review our second-quarter results by segment. Starting with our cleaning segment, second-quarter volume and sales each increased 2%, largely due to higher shipments of home care products. Within home care, which is our largest US business unit, sales increased strongly, with growth seen broadly across Clorox-branded products. In particular, we saw double-digit growth on Clorox Disinfecting Wipes, and that's despite a fairly muted cold and flu season to date.

Building on our Cleaning in the Flow growth platform, we began shipping three new Clorox Scrub Single items in December: Heavy Duty, Decide-a-Size and Multi-Purpose. These items build on previously launched new products such as Clorox Disinfecting Wipes with Microscrubbers, which have done particularly well in market.

Sales in our laundry business also increased in the quarter, driven in part by our most recent price increase on Clorox bleach, which was a year ago in February of 2015. From a market share standpoint, while overall bleach share dipped in the quarter, we were very pleased to see strong share growth on our Splashless product line. Splashless bleach is a trade-up from our regular product, and we're driving growth with new sizes and dedicated advertising. Consistent with our strategy, this is a great example of a margin-accretive product helping to drive profitable growth.

Partially offsetting the increased sales in home care and laundry was a decline in sales from our professional products business, which was comparing against very strong double-digit growth in the year-ago quarter, which had been driven by last year's ebola and enterovirus concerns. Looking forward to the remainder of FY16, we continue to expect our professional products business to grow sales strongly.

Switching to the household segment, we delivered flat volume and 1% sales growth. In bags and wraps sales were flat, as we lapped a price increase taken in November of 2014, and also increased trade promotion spending. Consistent with our strategy to accelerate profitable growth, the Glad business is driving category trade-up from our base trash bags to our higher-margin premium trash bag business, represented by our ForceFlex and Odor Shield offerings.

In September, we began shipping to key retailers new kitchen trash bags branded as Glad with Clorox. These bags feature anti-microbial properties that help control the growth of bacterial odors. We expect this new item to successfully build on prior launches of Glad Odor Shield bags with the power of Febreze. We're also launching two new scents in this line in the third quarter, to continue bringing news to the premium trash bag category.

Turning to charcoal, and keeping in mind that Q2 is a relatively small quarter for this business, we were pleased to see that sales grew strongly in quarter, behind consumption and distribution gains. Also, at the tail end of the quarter we began shipping new products for the upcoming season, including an EasyLight bag, new charcoal offerings with hickory and applewood, and a new Competition briquette.

Turning to cat litter, in the second quarter sales declined in comparison to the year-ago quarter, which benefited from the launch of Fresh Step Lightweight Extreme cat litter. In December, we began shipping Fresh Step with the power of Febreeze across multiple formats and in all sizes. The product is starting to appear on shelf, and advertising starts in a few days.

Turning to our lifestyle segment, sales grew 2%, with double-digit gains in natural personal care, and solid gains in food, partially offset by a decline in water filtration sales. Sales in our food business grew solidly, behind our Ranch With, bottled salad dressings, such as Ranch with Sweet Chili and Ranch with Roasted Garlic, as well as dry Hidden Valley dressing and dip mixes, such as Greek Yogurt.

Turning to our Brita water filtration business, sales declined following a very strong first quarter. Our focus on Brita is to drive trial. In mid-December we announced a new demand-creation strategy, centering on a partnership between Brita and Stephen Curry, the National Basketball Association's most valuable player. The initial announcement was broadly covered across social media, and Stephen Curry will be featured in national television ads beginning in March, as well as through digital, public relations, and social media campaigns.

On our Burt's Bees business, sales grew double digits, largely due to the launch of new lipsticks, blemish balm cream -- also known as BB cream, and new mint cocoa and caramel apple lip balms. In addition, facial towelettes continue to perform strongly. We enjoyed particularly strong consumption behind our holiday program this year. This quarter's results reflect the health of the Burt's Bees business, as the quarter's double-digit gain comes on top of double-digit sales increases in the year-ago quarter.

Lastly in international, sales declined 7%, reflecting unfavorable foreign currency exchange rates, essentially across all markets. However, on a currency-neutral basis sales for international grew a solid 6%. As we look ahead to the second half of the fiscal year, and the possibility the foreign currency head winds may worsen, we're very pleased that our go lean strategy in international is working. It enabled us to maintain margins as we focus on price maximization, cost savings, right-sizing our infrastructure, and optimizing demand creation. Over time, we remain committed to improving our international margins.

To wrap up, we're very pleased with our top-line performance for the first half of the fiscal year, which is on track with our expectations. With that, I'll now turn it over to Steve Robb to provide more detail on our second-quarter performance, and updated outlook for FY16.

Thanks Steve, and welcome everyone.

We're very pleased with our second-quarter performance. We grew sales in our US segments, and in the international segment on a currency-neutral basis. Importantly, we continue to expand our margins by driving productivity and cost savings programs across all of our businesses, delivering our highest second-quarter gross margin in five years, which helped mitigate the impact of double-digit foreign currency declines in most countries. We're also pleased to raise our fiscal year EPS outlook, which I'll talk about in a moment.

First I'll turn to our financial results for the quarter. In the second quarter sales were flat, with volume and pricing contributing a combined impact of about three points, offset by nearly three points of unfavorable foreign exchange rates, and nearly a point of higher trade promotion spending.

Gross margin for the quarter increased 210 basis points to 44.6%, reflecting 180 basis points from favorable commodities, primarily from resin and diesel, 130 basis points of cost savings, and 110 basis points of pricing benefit. These factors were partially offset by about 150 basis points of higher manufacturing and logistics costs.

Selling and administrative expense as a percentage of sales was essentially flat versus year ago, at about 14.2% of sales. Advertising and sales promotion investment for the quarter was more than 9% of sales, essentially flat compared to the year-ago quarter. Importantly, our investments in our US retail business remained healthy, at more than 10% of sales. In addition, we continue to increase total demand-building investments to support our brands. Now net of all these factors, we delivered diluted earnings per share from continuing operations of $1.14, an 18% increase versus the year-ago quarter, reflecting strong gross-margin expansion.

Fiscal year to date, free cash flow was $110 million, compared with $207 million in the year-ago period, reflecting higher employee incentive compensation payments from the Company's strong FY15 performance, and higher tax payments. These factors were partially offset by higher earnings from continuing operations. Notably, we continue to anticipate free cash flow for the fiscal year to be about 10% of sales.

Now I'll turn to our FY16 outlook. We continue to anticipate sales growth of flat to up 1%, based on solid first-half sales growth, followed by flat sales in the second half of the fiscal year, reflecting strong volume growth, offset by foreign currency declines, and higher trade promotion investment.

Our full-year sales outlook reflects stronger growth in the US, as we continue to lean into our strategy to invest incrementally in our domestic brands. We anticipate the strength in our US businesses to be offset by lower sales in international, due to increasingly unfavorable foreign currency exchange rates, including the recent significant evaluation in Argentina. On a currency-neutral basis, we continue to anticipate sales growth of 3% to 4%.

Our full-year sales outlook also continues to anticipate about three points of incremental sales growth from product innovation, continued slowing international economies, and about three points of negative impact from foreign currency declines, and heightened competitive activity in the second half of the fiscal year, from competitors stepping up in-store promotion in key categories.

We now expect EBIT margin to increase in the range of 50 to 75 basis points, reflecting about 100 basis points of gross margin expansion behind lower commodity costs, partially offset by continued global inflation impacting manufacturing and logistics costs. Other factors pressuring EBIT margin include inflation in international markets and weaker currencies. In addition, we anticipate incremental investments to sustain our future cost savings pipeline, and consumer demand-building programs to support the long-term health of our brands.

We project selling and administrative expenses to be about 14% of sales in FY16. We continue to anticipate our tax rate for the full year on earnings from continuing operations to be between 34% and 35%. Net of all of these factors, we now anticipate our FY16 outlook for diluted earnings per share from continuing operations to be in the range of $4.75 to $4.90, versus our previous outlook of $4.68 to $4.83.

In closing, we feel very good about delivering strong results in the first half of the fiscal year. Our business is healthy, and we remain committed to our long-term strategy of driving profitable growth.

With that, I will turn it over to Benno.

Thank you, Steve, and hello everyone.

We are very pleased with our second quarter and first-half results. We're especially pleased to have delivered 18% diluted EPS growth in Q2, driven by robust margin expansion. Clearly, our strategy is continuing to work and deliver strong results for our shareholders, and we remain committed to investing in the business to drive profitable growth. We're certainly pleased to have raised our EPS outlook for the full year.

With that, let me share my perspective on our Q2 results, the effectiveness of our strategy, and our outlook for the second half. First, we delivered solid Q2 results. Our US business achieved sales growth with gains across all business segments, and our international business delivered healthy sales growth on a currency-neutral basis.

Strong innovation, coupled with our increased demand-building investments translated to US market share and category growth. Through our last reporting period, international also realized meaningful share growth. We achieved healthy margin expansion of more than 200 basis points, to deliver our highest second-quarter gross margin in more than five years.

Second, our 2020 strategy is continuing to work, and we'll continue leading in to drive growth that is profitable and sustainable. In the US, we launched a number of new products late in Q2. While still early, we are encouraged by the initial consumer response. We have additional promising innovation launching across our portfolio in Q3.

We continue to eliminate costs that are not meaningful to consumers, and reinvest the savings into the business, such as by leveraging technology to engage with consumers and drive household penetration. We are very pleased our domestic business is healthy.

In international, where the profitability of our business remains challenged due to weakening foreign currencies, our team is relentlessly focused on the four pillars of our go-lean strategy to improve profitability. I feel very good about the future of our international business, recognizing the fundamental strength of our brands in many countries, which is reflected in increased market shares.

We feel very good about our strong second-quarter and first-half results. While we're very pleased with our strong year-to-date performance, I want to emphasize we focus on driving sustained performance over the long term, consistent with our 2020 strategy. Given that long-term focus, as Steve Rob noted, we're considering investing in some supply-chain related projects that will feed our future cost savings pipeline, and benefit margins in future years.

We're also increasing our demand-building investments in the back half of this fiscal year, to keep our brands healthy and growing in the face of anticipated competitive activity in selected categories. I'm pleased that we're able to make these investments for the long term health of the business, while also raising our earnings outlook for the current fiscal year.

With that, let's open it up for your questions.

Thank you, Mr. Dorer.

(Operator Instructions)

We'll hear first from Jason English with Goldman Sachs.

Hi, good afternoon folks. Thanks for letting me ask a question. You've been talking for a while now about the risk of stepped-up competitive aggression, the need to maybe dial back or reinvest some of your prior price increases. Based on the tenor of your comments, it sounds like that may be becoming a reality now, with higher trade spend this quarter, the caution about more intense competitive activity in the back half, and the need to reinvest. Is that a fair statement? Can you elaborate further in terms of the shape of the reinvestment? What do you expect A&P to look like for the year? As you step up trade spend, is there a risk the price light actually reverts into negative territory for the US?

Jason, this is Steve Robb. Let me lead off on this. First to provide some color, just like we said at the end of the first quarter, we do anticipate stepping up the level of consumer demand-building investment pretty significantly in the second half. I think you're going to see a split of that investment. Some's going to go into trade promotion spending, and then I think some is going to go into advertising.

To dimensionalize it over the long term, we talk about advertising being at this 9% to 10% percent of sales level. I think it's likely we'll be above 10% in the second half of the fiscal year. A lot of this is to support our new products. One of the things we know is we've got these preferred products, so if we can get trial we get repeats. You're going to see us continue to lean in on both the innovation as well as some of our base products. Then the spend should start to ramp up as you move through the second half of the fiscal year.

Real quick, just to clarify. The rhetoric on preparing for more intense in-store competitive activity in the second half, is that a reality you're beginning to see, or is this just the same cautionary language we've been hearing from you for a while?

I would say, as we said in last quarter, we anticipated a step-up in competition, because what we know is when you build share quarter after quarter, typically the competition at a certain point leans back in. At this point we're starting to see it in a couple categories -- Glad, where you've got lower commodity costs. People are spending back in the market. We think it's prudent to step up our level of investment, in particular because we've got good things to advertise, and we've got preferred brands. We continue to anticipate it. We're seeing a little of it now. We'll have to see how the second half unfolds.

Thanks a lot, guys.

Next we'll hear from Steve Powers with UBS.

Great, so actually just cleaning up on that. Should we be expecting more like 150 to 200 basis points of incremental demand-building in the second half between trade and A&P, because it doesn't feel like we've seen that 100 basis points that you had aimed for the full year so far through the first two quarters?

Fair enough. In the first half of the fiscal I would say most of the incremental consumer demand-building investment, which there has been some, has really been focused on trade spending. It's been a little bit less than a point. You will see a meaningful step-up in the second half, both in advertising as well as trade spending. That's actually one of the reasons why the margins in the second half, EBIT margins in particular, are expected to be down versus a year ago. Again, we think it's prudent to take some of these commodity cost tail winds we're seeing and invest it right back into our business, as we mentioned in our opening comments.

Great. A main question on Hidden Valley, actually if I could, and really dressings in general. I'm just curious to see if you're seeing any signs or anticipating any change in the competitive environment, and that category specifically. I'm thinking on the one hand you've got one of your main competitors, who had just gone through the process of in-sourcing production, presumably with the aim of accelerating innovation. On the other hand, you've got Heinz Kraft, who has shown what they can do when they focus their trade-spend muscle on a category like mustard. How are you guys thinking about monitoring those dynamics, or do you think I'm portraying the environment incorrectly? Thanks.

Steve, this is Benno. Look, this is a competitive category and always has been a competitive category, but we continue to be optimistic about this, and we're doing well in the market place. Our innovations are successful -- as I'm thinking about Ranch With, where we have noted previously that we've gained more than 10 share points behind our expansion in this important segment. We continue to have innovation, both in the core as well as in adjacent spaces, and food coming as well. We remain focused on investing in the health of the business. We're doing well in the market place. I'm not expecting at this point a fundamental change to our strategy, nor to the dynamics in the category.

Great, thank you.

Our next question will come from Bill Schmitz with Deutsche Bank.

Hi, guys. Good morning. I was trying to figure out your gross margin guidance for the year, because it looks like it's going to be flat in the back half, which doesn't make a lot of sense, given you said most of the front-half spending was promotional and the back half is going to be advertising? Any color on that would be super helpful, and then I have a follow-up.

Sure Bill, this is Steve Robb. Let me answer that question for you. As you said, gross margin in the first half is certainly up nicely. I think we're up a little over two-fold points, which feels pretty good. We do anticipate on a full-year basis gross margin will be up about a point -- could be a little above that or a little below depending on how things play out. But it's likely to be flattish in the second half. The reason for that is a couple of fold.

First, we're just starting to anniversary some tougher comps in gross margin. If you look at the second half of FY15, you'll see that our gross margin stepped up quite a bit, so we're certainly comping that. Actually holding on to those gains feels pretty good.

The second thing is we will be increasing our trade promotion spending. That's certainly going to weigh on the gross margin. Finally, we took some pricing. We're starting to anniversary as we move through the second half, some of the pricing benefits that have been flowing through gross margin in the first half of this year. While we absolutely expect commodities will be a tail wind in the second half, it's going to be less of a tail wind than you saw in the first half -- again, because we're starting to comp some of the benefits we saw in the second half of FY15.

From our perspective, we think we've got very healthy gross margins. We certainly feel good about the trends. Importantly, we feel very good about the full-year outlook for the EBIT margin that we've shared with you today.

Okay, great. Argentina and Canada, which we never talk about, what are they as a percentage of sales and profits? How localized is production, because obviously both of those currencies have gotten a little wonky recently. I'm trying to figure out what the transaction impact might be?

Yes, let's take each one separately, first starting with Argentina. Argentina represents about 4% of our sales. Let me be clear, that was before the devaluation we saw in December, which you might recall we anticipated and built into our outlook. I think on a go-forward basis, Argentina is probably something like 3% to 4% of our sales -- not the largest part of our business.

I would say related to the devaluation of Argentina we anticipated, it's unfolding about as we had expected. I do think in the second half of the fiscal year, and probably for calendar 2016, Argentina will weigh on results a bit, following the devaluation. Generally I feel pretty good about the long-term direction of the country, some of the changes they're making. Importantly, because we anticipated this, we have good plans, we're executing it well, and things are coming in as expected.

Canada -- Steve, do you want to take the Canadian question? Yes Bill, Canada is also about 3% to 4% of our sales. Unlike Argentina, which doesn't have as much transaction exposure, there are some items that we sell in Canada that are manufactured in the US. They do have some US dollar exposure, which will give us a little bit of a head wind on the gross margin line from a transaction exposure standpoint, but I wouldn't call it significant.

Okay, great. Sorry, I promise just one more quick one. If I look at the Nielsen data, it doesn't seem like your promotional spending is ticking up if you look at percentage of sales on deal? What's missing, based on what you guys said about the roughly 100 basis points of higher promotional spending?

Again, most of the incremental investment that you're going to be seeing is going to be in the second half of the fiscal year. It has stepped up in the first half, but you may not be seeing all of that in the numbers. I do think, particularly as we move through the third quarter and certainly well into the fourth quarter, you will see a step up, both in advertising as well as trade promotion investment.

Okay, great. Thanks, guys.

Moving on, we'll hear from Ali Dibadj with Bernstein Research.

Hi, guys. If I look at your gross margin benefit that you're getting from the commodities going down and pricing going up, this sweet spot where the commodities are going down and pricing's still up. You go across time, this 290 basis points for this quarter is relatively high. If we look back, it looks like there is -- calendar year 2009 was a time where you also had some of these benefits as this much of a positive from both of those.

What happened after that, very much as you described, is that gross margins were a little bit more challenged. I get that, you have to put more back into trade spend. You have to invest on the commodity, Steve as you said, back into the business. That I get Your guidance going forward, feels like it will be the next four quarters, not just the back half of the year.

But what also happened subsequent was that your top line fell quite flat. That was a very different time frame, arguably, but really it was a 2-point drop in your top-line growth as you had to spend back perhaps more than anticipated into the business from commodities. It wasn't just a gross margin issue, it was also a top-line start to slow.

I ask, notice that in the context of your 3% to 4% organic sales growth going forward, and trying to understand how you're making sure you're not going to see the top line slow down dramatically as well, as it has done when you've exited this sweet spot of commodities and pricing?

Ali, this is Steve Robb. That's a great question, which is why we're investing for incremental profitable growth. One of the reasons we're taking some of the commodity goodness we've been seeing in the last couple of quarters, we're putting it back into the innovation. We're putting it into our new products. We're supporting our base business -- which is why, as I had mentioned in my opening comments, we feel quite good about volume growth in the second half of this fiscal year. We anticipate fairly strong volume growth.

I would say that we're playing for the long term. We're focused on delivering not just good quarters, but more importantly good years consistently over time. By making these incremental investments, we think that it will lead to better long-term performance for the Company.

So -- sorry, did you want to add something or no?

Sorry, Ali, it's Steve Austenfeld. I would just point out, as well, in comparison to that time period you're referring to, our categories are much stronger and much healthier than they were a year ago. I mentioned earlier in my prepared remarks our categories are up about 2%, and that's been pretty consistent over the last several quarters to almost a year. I think we feel much more confident, not only in the strength of our brands, as Steve noted in the investment we're making, but just in the underlying health of our categories.

From the competitive -- that's helpful. From the competitive angle, you mentioned a couple categories, a couple competitors who are taking their prices a little bit more aggressively, it sounds like. Can you characterize it a little bit more? Is it the private-label folks who want to drive trial, so they're starting to get more aggressive on taking the commodity benefit to the consumer? Are you hearing anything from Wal-Mart, your biggest customer at 26% to 27% percent of sales. Is it the branded players? As a subset of that, can you discuss a little bit your price gap versus your peer group, your competitors in some of these categories? Are there still places there out of whack?

Ali, this is Benno. The last one up front, price gaps are about where we want them to be. I would not consider them to be out of whack. If you think about competition, we've previously talked about three categories. I want to re-emphasize that's really where the competitive focus is.

The first one is Glad trash, where through lower commodities we are seeing private label and the one branded competitor. We're anticipating that some of that commodity goodness is being passed on through trade spend, and we are certainly planning for that.

Home care is a business where we've been very successful. We've certainly noted that in our Q2 remarks, and where we've been gaining market share over a number of periods. We expect that category, in particular in wipes, which is the hot bed where we're doing particularly well, to become more competitive from a branded competitor point of view in the back half.

In litter, as Steve Robb noted earlier, we have innovation coming up that we believe in, in Fresh Step with Febreeze. We're investing incrementally behind that innovation. It really is a case-by-case, but we think it's very prudent for us to plan for that. Our strategy calls for an acceleration of profitable growth. The increase in spend is certainly very consistent with that.

And still in those categories. Okay, that's helpful. Thank you.

Our next question comes from Wendy Nicholson with Citi Research.

Hi, my first question is a follow-on to that. I know one of the things you talked about back at the Analyst Day was the way you have shifted your focus and expanded your focus, or broadened your focus with regard to specific retail channels. In terms of the incremental trade promotion, would you say there's a consistent level of trade promotion that you're engaged in across the retail channels? Is the fact that you're putting particular money into grocery in some areas boosting that level of spending, as well?

Related to that, can you talk about Burt's Bees specifically? We got the gift box of lipsticks in the mail, and they were fabulous. They looked great. But my question was wow, this is something that's very different than we've seen in the past from Burt's Bees. This doesn't feel like a drug store product. How much is the retail distribution for Burt's Bees specifically changing?

Wendy, on retail channels first, our policies are fair and equitable. We do not favor any channel over the other on trade. We want to make sure that all of our retailers have the same access to the same plans. We should not expect any increase in trade promotion on selected businesses to favor any channel over the other. On Burt's Bees, thank you. I'm very happy you liked it. That's very consistent with the initial consumer response that we get, and certainly also the response from our customers.

This has been a great quarter on Burt's Bees, where we delivered double-digit growth on top of double-digit growth a year ago. We're investing behind lipsticks, but also the base business to keep it that way.

Look, it's a pretty attractive price point -- the lipsticks, I'm referring to, $8.99. It's really a great product that has unique moisturizing benefits. We think that compared to some of the more expensive brands out there, this delivers terrific value to consumers. Like I said, the initial customer response is very positive and will continue to drive that, without losing focus on the base business.

We have still a tremendous opportunity to drive the businesses across lip, face, body that we're already in. We'll continue to have a balanced investment program. Certainly, I think some of you had noted that while we've seen a solid sales increase in the lifestyle segment, that the profitability has not followed that sales increase. That is because we're investing incrementally in the business, which is a reflection of the optimism we have behind Burt's Bees and the other brands in the lifestyle segment.

But that distribution, the double-digit growth on top of double-digit growth, is that organic or is that the result of expanded distribution?

Well, certainly if you think about it, Wendy, just from a lipstick point of view, that distribution of course is incremental. I would still look at that as organic, because we've now just entered a new segment through innovation. From that we will draw value down the road. I would look at it as organic, but certainly the distribution growth on lipstick and other new innovation has contributed to the double-digit growth for the quarter.

Got it. I don't know that I heard a direct answer to Ali's question specifically about Wal-Mart. I think ever since Wal-Mart came out, whatever, a year ago and said hey we're going to go after these companies for more trade promotional dollars and all that stuff and SKU rationalization. You guys have said historically, no, nothing's changed really. Just to be crystal clear, the increases that you're putting forth now or you're planning to put forth in terms of trade promotion, it's coming from you, it's not a request on the part of the retailers asking for more from you?

No, the increase is proactive, and like I said earlier, will impact all retailers. I know you'll understand that we don't discuss specific plans by retailer; but what I can tell you is that the level of strategic alignment that we have with Wal-Mart continues to be very strong.

We are growing very nicely with Wal-Mart, business is very strong. We have a strong innovation pipeline with Wal-Mart, which leads to the fact that the vast majority of the conversations we continue to have with that customer are around how we can grow their categories and our brands with them for the benefit of their shopper. Once again, the trade spend increase is a plan, and will affect all retailers, and is not in response to whatever might have happened or is rumored to happen with any specific retailer.

Terrific, thank you.

Moving on, we'll hear from Lauren Lieberman with Barclays.

Thanks, good morning. I love the lipstick too, very moisturizing. Just want to talk a little bit about international. You guys have enormous experience pricing in the US, and have had a very good read on elasticity and how things would progress, both as pricing goes in, and as you anniversary it. Can you talk about your confidence in or the quality of your analytics internationally, and where you think elasticity has been as you expected, for better or worse? Thanks.

We feel equally confident in our ability to take pricing in international. We are in fact taking pricing across a number of the international businesses today. I wouldn't say, Lauren, that there's a difference between US and international. Our track record to take pricing international is very strong. Now at this point are we able to close the entire gap that we see from -- or the entire amount of cost increases that we're seeing through inflation in international? No, but we are taking pricing pretty broadly.

As you might have seen, our volume in international has been somewhat flat, and our organic sales growth was 6%. Much of that different was certainly driven by pricing. I feel optimistic about where we are in pricing in international. We have a pretty good read on what happens, and it's pretty much playing out in the market place as we expected.

Great, thank you.

Thank you, Lauren.

Our next question comes from Javier Escalante with Consumer Edge Research.

Hi, good afternoon over here. Good morning over there. My question tackles this trade spending decision, whether it's reactive or proactive from a longer-term perspective. True, your gross margin is great this quarter, but it has been rate-bound for the last five years. If categories are up 2%, which is a change in a long time, and you feel confident about the health of the categories, you feel confident about innovation, there is a deflationary environment in commodities, it seems to me that you are leading the charge here in terms of the trade spending. Why? Shouldn't you actually hit or aim at expanding gross margins? Why is this? Thank you.

Javier, this is Steve. I'll take that question. When we look at trade spending, first to be really clear, and this is important, this is a choice we're making as a Company. It's a choice to step up the level of in-store merchandising behind things like Burt's Bees, or litter with Febreeze, because we think again we've got great products, and if we get trial we get repeat. We've talked that before.

I think in some categories like Glad what you see is when the commodities come down, the good news is you get a bit of a tail wind in margin. But you also tend to see a bit more money go into the market. What we tend to do is adjust our trade spending up and down to reflect that in selected categories.

I would say is when we look over the long term, you'll see us do two things. One, if commodities start to recover -- and we don't think that will happen in the short term -- but as they recover you'll see us make adjustments in the trade spending in selected categories. I think we've demonstrated we know how to manage our trade spending in commodities over time.

Second, these dollars can move around on the P&L. We may put more into advertising or R&D. The key for us is to invest for profitable growth and stay true to the 2020 strategy. Again, I think we feel good about the choices we're making today, but we retain the flexibility to make different choices in the future as the markets evolve.

Just a clarification, right? In theory, we all like the notion of gross margin to spend, because it will give you more wiggle room in terms of how much -- what did your spend in trade spending, what did your spend in advertising. Why is it that then structurally your businesses don't allow for gross margin expansion? It seems to me that you're saying well basically the second half is going to be flat, even though all these positive things. It's currently confusing, because at some point it seems as if you are leading the charge as if you don't want to maintain the pricing environment that would allow to build gross margin, a la Colgate, say.

The one thing, Javier -- this is Benno. I would say that we should not assume that trade spending is pricing. One thing that Steve Robb noted earlier is that a lot of the spend in the back half, as was the case in the front half, went into the support for our innovations -- innovation to generate trial, for which we get a great return, which we know from our analytics.

Trade spend isn't bad. Trade spend is spending that drives our brand equities. I think you know that we have a very disciplined approach to how we spend. We spend where we get the greatest ROI short term and long term. We believe that trade, in particular during times when you have strong innovation, certainly plays a role in driving our brand equities and continuing driving the strong brand health that we have today, and that we have expect to have in the future, too.

Just to finish up, is this innovation gross-margin accretive? Is it -- do you plan to maximize the product mix with this innovation, because then I don't understand still why gross margin cannot build up from here?

We have an internal criterion, and that is that innovation has to be gross-margin accretive to the Company. Then if you think about some of the innovation that we invest in at this point, for instance Burt's Bees lipsticks, you can imagine those are very attractive businesses where we get a great return in the long term. If we can drive trial behind what undoubtedly is a great product, which we know from internal testing, as well as if you go for instance on any of the sites that consumers use to post reviews, the initial consumer response is very enthusiastic.

This is a great investment. It is an investment for the long term, and certainly not an investment to maximize the profitability on lipsticks for any given quarter. How can we not invest in the long-term health of this business if we have promising innovation like that? We're taking the long-term view, and we're not afraid to invest behind it, even though in any given quarter short term it might not maximize gross margins or the profitability of the business.

Javier, I'm sorry, the last point I would like to make, just for the record, o0n gross margin in FY15 our gross margin was up 90 basis points, call that about a point. This year we anticipate gross margin being up about a point. Importantly, we're investing more in our cost-savings pipeline over time.

The idea that we can't expand gross margins, we've been doing that for six quarters, and we've got some very strong results we've been posting. We certainly feel good about the plans we have in place to expand EBIT margins 25 to 50 bips over the long term, annually.

Thank you very much.

We'll hear next from John Faucher with JPMorgan.

Yes, thank you. Benno, I want to talk a little bit about uses of cash. We've generally seen a little bit of a slow-down in the repurchase over the past couple of quarters, which makes some sense. You're down below the low end of your leverage ratio. Don used to talk a lot about the tuck-in acquisition piece surrounding health care.

Can you give us maybe your view of M&A, in terms of where that could be different? Would that lead to something where you could foresee something bigger happening? Should we still -- I know you mentioned tuck-in in the slides at the Analyst Day, but are you taking a more holistic view of the M&A opportunities as you look at where you stand right now? Thanks.

No change in strategy. Tuck-ins are still preferred. What we have said in the past, which continues to be true John, is that natural personal care, broader health care, or health and wellness and food enhancers, are businesses and categories that we're strongly interested in.

We have certainly noticed that we're looking at everything, if we think that it adds value to our shareholders. As you can imagine, we look at a lot of things throughout the year, as do our competitors, I presume. But what we are after is businesses that are a strong fit with our strategy, that are attractive from a growth as well as a margin perspective, and importantly, businesses that we can get at a good value.

We will stay disciplined. We will look for the right opportunity. We do that all through the lens of making sure that whatever we might do in the future creates value for our shareholders. I would characterize that as staying the course. We have preferences, but look, you can never say never. We look at everything, and a lot of things throughout the course of the year, through the lens of making sure that we create value.

Got it, and then just one for the quick follow-up on that, which is, is tuck-in defined more by -- you talked about it more from a let's say a segment standpoint or a category standpoint. Is tuck-in defined more by segment, or in terms of something you already have, or is that more of a size component? How would you define that, or is it both?

I would say it's both. Look, again, we have a preference for acquisitions of a certain size, but we also want to make sure that whatever we might do is a good fit with our capabilities, and close in, so it's a combination of both.

Great, thanks.

That will conclude our question-and-answer session for today. Mr. Dorer, I would like to turn the program back to you.

Yes, thank you. To sum up, we're very pleased. Our strategy continues to work, and delivered strong Q2 results. Our business is fundamentally healthy, and we're pleased to have raised our outlook, which we believe presents a balanced view of the challenges and opportunities we see for our business during the second half of the fiscal year. Thanks for joining us today.

Ladies and gentlemen, again that does conclude today's conference. We thank you all for attending.