高樂氏 (CLX) 2016 Q3 法說會逐字稿

Please stand by. Good day, ladies and gentlemen, and welcome to the Clorox Company third-quarter fiscal year 2016 earnings release conference call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded.

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 the conference.

Great, thank you. And thank you for joining Clorox's third-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.

Now, turning to our prepared remarks, I'll cover highlights of our third-quarter performance by segment. I'll then turn it over to Steve Robb, who will address our financial results and our outlook for fiscal year 2016. Benno will then share his perspective on our strategy, results and the acquisition of Renew Life, which we announced earlier today. And then after that, we'll take your questions.

So, starting with our topline results, the investments we're making in our brands to drive profitable, consistent growth are clearly working. In the third quarter, volume grew 4%, reflecting gains in each of our business segments. Sales increased 2%, and that was on top of 3% growth in the year-ago quarter.

Excluding foreign currency devaluation -- so, in other words, on a currency-neutral basis -- total company sales were up 5%, primarily due to strong volume growth and price increases. These factors were partially offset by continuing unfavorable foreign exchange rates, which impacted Clorox in Latin America, Canada, Australia and New Zealand.

In particular, following the currency devaluation in December in Argentina -- a country that represents one of our larger exposures outside the United States -- the Argentine peso was down roughly 40%, resulting in a material foreign exchange headwind through calendar year 2016, and with risk of further devaluation in the future. Looking just at the US, sales grew 4%, reflecting growth in all three US segments.

From a market share standpoint, our US 13-week share increased 2/10 of a point versus the year-ago quarter, ending the quarter at 23%. Our investments in higher-margin, faster-growing businesses are continuing to drive improvement, as this was the fifth consecutive quarter increase -- quarterly increase in market share. Four of our eight US retail business units increased market share, with all-time record shares in home care and strong gains in charcoal.

Our primary opportunities for further improving market share remain in cat litter and water filtration. And I'm pleased that we have innovation in both, supported by significant marketing support.

In addition to improving market shares, driving category growth remains a top priority. And during the quarter, our US categories were up a very healthy 2.5 points, representing our fifth consecutive quarter of US category growth of greater than 2 points. For perspective, during a recession several years ago, our categories were only growing between 0% and 1%.

Turning to international, our market shares were up 4/10 of a point for the 8-month period ending in January. International share growth was particularly strong in bleach. And recognizing uncertainty today in many international markets, it is great to see that our choiceful investments and profitable opportunities in select international markets are paying off in higher market shares.

So with that, I'll review our third-quarter results by segment. Starting with our Cleaning segment, third-quarter volume and sales each increased a strong 5%, largely due to higher shipments of home care products as well as our professional products business. In home care, which is our largest US business unit, sales increased strongly, with growth seen across most Clorox-branded products.

In particular, the relatively mild cold and flu season -- despite the relatively mild cold and flu season, we delivered strong double-digit growth in Clorox Disinfecting Wipes, as well as all-time record shipments of Clorox Cleanup bleach-based spray cleaner. Additionally, our Clorox Disinfecting Wipes with microscrubbers innovation continues to grow share. And, while it's still early, we are pleased with the initial performance of several recently-launched Scrub Singles items.

These are all great examples that show investments in our cleaning and the flow growth platform, which emphasizes quick and convenient cleaning are paying off. In addition, effective in late March, we regained Disinfecting Wipes distribution at COSTCO, a major club customer and a long-time retail partner of Clorox.

Although consumption in the club channel is not fully reflected in traditional external market share reports, this distribution at Costco will be in addition to the greater than 50% market share we have in track channels today within the Disinfecting Wipes segment. This additional distribution will add meaningfully to volume over the next year, but also modestly impact margins recognizing the club consumers typically buying a larger size item with a lower margin profile for manufacturers like Clorox.

That said, consumers in the club channel tend to be very loyal to the brands they buy. So we are very excited to be able to meet the needs of club channel consumers for disinfecting and cleaning solutions through this expanded distribution.

Turning to laundry, sales decreased slightly in the quarter due to continued softness in the color safe bleach category, and lower shipments of Clorox -- regular Clorox bleach related to our price increase taken in February of 2015. Importantly, however, our focus on Clorox splashless bleach continue to drive sales and share growth on this higher-margin business.

And finally, within the Cleaning segment, our professional products business delivered strong double-digit sales growth. We feel very good about the strength of this business and continue to believe this will be one of the faster-growing businesses in our portfolio going forward.

Turning to the Household segment, we delivered 3% volume and 4% sales growth, driven by strong gains in our Charcoal business. Charcoal strength was aided by very favorable weather ahead of the main growing season, as well as favorable product and channel mix, as well as distribution of new items. including an Easy Light bag, new charcoal items with hickory and Applewood, and a new competition briquet.

Early-season merchandising got off to a strong start at key retailers, as evidenced by higher consumption and meaningful share growth. And, while we may see a slowdown in the fourth quarter. given the very strong results in Q3, our Charcoal business is fundamentally sound and on track to have a strong fiscal year, as evidenced by 7% volume growth fiscal year-to-date behind strong fundamental execution with the customers and compelling demand-building campaigns.

Turning to bags and wraps, sales were flat, although this masks the success we continue to have in driving our strategy to accelerate profitable growth -- namely, driving category trade-up from base trash bags to higher-margin ForceFlex and OdorShield offerings. As evidenced, our premium trash bag segment was up high-single digits in the third quarter, supported in part by our new Glad with Clorox kitchen trash bags featuring antimicrobial properties that help control the growth of bacterial odors, as well as the recent launch of two new scents of Glad OdorShield bags with the Power of Febreze.

It's also worth noting that our Food Storage segment, made up of food storage bags, wraps and containers, had its second consecutive quarter of solid volume growth, and is up 3% in shipments fiscal year-to-date. So, all said, we expect the Glad business to have a strong finish to fiscal year 2016.

And in cat litter, third-quarter sales decreased, primarily due to the timing of promotional spending behind the launch of Fresh Step with Febreze. While it's still very early, we are pleased with the initial response to this launch, and plan to continue investing in demand-building activities to drive profitable growth in this highly competitive category.

Looking at our Lifestyle segment, volume grew 4% and sales grew 5%, reflecting sales growth in all three businesses: natural personal care, water filtration, and food.

Starting with our Burt's Bees business, it delivered another quarter of double-digit volume growth behind continued strength in facial towelettes; momentum behind recent innovations, including new lipsticks, blemish foam cream -- also known as BB Cream -- as well as a refresh on our tinted lip balms. Burt's Bees Q3 market shares were up in every major segment, reflecting the broad-based health of the business.

Turning to our Brita water filtration business, sales grew strongly, driven by double-digit volume growth, particularly in untracked channels such as eCommerce. We are continuing to focus on driving trial and distribution behind new pitchers and better filter value.

Our demand-creation strategy is centering on a partnership between Brita and Stephen Curry, the National Basketball Association's Most Valuable Player, kicked off in March with national television ads as well as through digital, PR and social media campaigns. And while it's still early, we feel very good about this partnership.

In our food business, while volumes decreased slightly, we did see our third consecutive quarter of sales growth supported by the expansion of our Ranch With bottled salad dressings. In addition, our focus on innovation and our base ranch flavor drove meaningful share growth on Hidden Valley dressings and dips. Volume on our dry business was up in Q3, driven by the February launch of Greek yogurt dressing and dips.

And lastly, our acquisition several years ago of the Soy Vay Asian sauces and marinades, continues to pay off, as we saw significantly higher volume in Q3, with even higher expectations for Q4. So overall, we feel very good about the direction of our food business.

Turning to our last operating segment, international sales dropped 9%, due to unfavorable foreign exchange rates, with all major markets being impacted by the strength of the US dollar, and particular impact being seen in Argentina, one of Clorox's bigger international markets. As noted a moment ago, following the Argentina currency devaluation in December, the Argentine peso was down roughly 40% and remains at risk of further devaluation going forward.

Putting that aside, on a currency-neutral basis, sales for international grew 9%. Although foreign currency headwinds remain a challenge for us and for other multinationals, we are pleased that our Go Lean strategy, focused on driving margin improvement in international, is working, and has enabled us to keep margins stable as we focused on driving value in four areas -- specifically pricing, cost savings, rightsizing our infrastructure, and optimizing demand-creation.

We've also segmented our portfolio -- our international portfolio into fuel and growth businesses, as we've done in the US, and are investing selectively in high-growth opportunity areas. For example, we are stepping up investment in Burt's Bees in markets like Canada, Australia, the UK, Chile and Mexico.

And we're also investing in laundry initiatives in Latin America and the Middle East. For example, our Clorox clothes color safe laundry additive innovation is off to a strong start in several international markets. Looking forward, we remain committed to our international business and look forward to improving international margins over time.

So to wrap up, we're very pleased with our topline performance in Q3 and fiscal year-to-date, which reflects the significant investment we've made in our brands. Looking ahead, in addition to incremental trade promotion spending in the second half of fiscal year 2016 to support new products, we also anticipate increasing our advertising investment to about 12% of sales in the fourth quarter to keep our brands healthy and growing.

You can look at this investment in two main buckets. The first bucket is supporting innovation, including the product launches we referenced today -- namely, new offerings of Clorox Disinfecting Wipes; Premium Glad trash bags as we build on the OdorShield line; Fresh Step cat litter with Febreze; several Kingsford Charcoal items; new flavors of Ranch With bottled salad dressings; and a number of recent Burt's Bees launches, both in the US and in international markets. So that support is all innovation-focused.

The second bucket of greater investment is protecting our brands from competitive pressures in key categories. For example, we're investing savings from decreased resin costs to defend Glad at the shelf. In home care, we're increasing promotions in-store to defend against competitive activity, and we plan to continue investing in demand-building activities behind Fresh Step with Febreze, and drive profitable growth in the highly-competitive cat litter category.

Looking ahead, as noted in this morning's press release, we have raised our sales growth outlook for fiscal year 2016, reflecting our strong results to date as well as a solid finish anticipated in Q4.

So with that, I'll turn it over to Steve Robb to discuss our Q3 financial performance as well as our updated outlook for fiscal year 2016.

Well, thanks, Steve. And welcome, everyone. Well, we're certainly pleased with our strong results to date, including our third-quarter performance, which enabled us to raise our fiscal year 2016 outlook. Our updated outlook also includes the announced acquisition of

the Renew Life business. I'll address the details behind our full-year outlook in just a minute.

First, I'll turn to our financial results for the quarter. In our third-quarter, sales grew 2%, with volume and pricing contributing a combined impact of nearly 6 points, partially offset by more than 3 points of unfavorable foreign currency and a little more than a half-a-point of higher trade promotion investment.

Gross margin for the quarter increased 210 basis points to 45.3%, reflecting 180 basis points from favorable commodities, primarily from resin and diesel; 120 basis points of cost savings; and 100 basis points of pricing benefit. These factors were partially offset by about 150 basis points of higher manufacturing and logistics costs, primarily driven by higher inflation in international markets.

Selling and administrative expense decreased to 14.3% of sales compared with 14.7% of sales in the year-ago quarter. Selling and administrative expenses were also slightly lower on an absolute dollar basis.

Our advertising and sales promotion investment for the quarter was up $22 million, with total spend more than 10% of sales. And it reflects continued strong support for our US business and incremental investments in select higher-margin international businesses, including Burt's Bees.

Net of all of these factors, we delivered diluted earnings-per-share from continuing operations of $1.21, a 12% increase versus the year-ago quarter, reflecting strong gross margin expansion and higher sales. Our fiscal year-to-date free cash flow was $323 million compared with $398 million in the year-ago period, reflecting higher employee incentive compensation payments made this fiscal year related to the Company's strong fiscal year 2015 performance as well as higher tax payments.

These factors were partially offset by higher earnings from continuing operations. We now anticipate our full-year free cash flow to be in the range of 10% to 11% of sales.

We ended the quarter with a debt to EBITDA ratio of 1.8, below our targeted range of 2.0 to 2.5. However, with the recently announced acquisition of Renew Life, we anticipate being at the lower end of our target range by the end of the fiscal year.

Now we'll turn to our updated fiscal year 2016 outlook. As Steve mentioned, we raised our fiscal year sales outlook to 1% to 2% growth, based on our sales results to date. And we feel good about landing in the mid-to-upper end of our range. We continue to anticipate fiscal year 2016 sales to benefit from 3 points of product innovation, moderated by continued slowing international economies and unfavorable foreign currency exchange rates. On a currency-neutral basis, we now anticipate sales growth of 4% to 5%.

We now anticipate EBIT margin expansion of about 50 basis points compared to our previous outlook of 50 to 75 basis points. The lower estimate for EBIT margin reflects nearly 25 basis points of impact from the one-time transaction costs and other related acquisition expenses, including the effective inventory step-up charges and intangible asset amortization.

All other assumptions for EBIT margin remain generally the same, including greater gross margin expansion behind lower commodity costs, partially offset by continued global inflation impacting both manufacturing and logistics costs. Other factors pressuring EBIT margin continue to include inflation in international markets and weaker foreign currencies, as well as consumer demand-building programs to support the long-term health of our brands.

We continue to anticipate selling and administrative expenses to be about 14% of sales in fiscal year 2016, and we continue to anticipate our fiscal year 2016 tax rate on earnings from continuing operations to be between 34% and 35%.

For added context, I'd like to address what we will anticipate for the fourth quarter. First, as we discussed in our last earnings call, we began stepping up our level of advertising investment in the third quarter. We expect this to continue through the fourth quarter. And we anticipate advertising spending to be about 12% of sales to support recent innovation, including our Burt's Bees lip colored products and Fresh Step with Febreze cat litter.

For the full fiscal year, advertising spending is expected to be about 10% of sales, an increase of about 1 point of sales versus year ago. And while this will reduce margins and earnings in the near-term, we believe these are the right strategic investments to drive the long-term growth of our core business.

With respect to the acquisition, we anticipate about a point of sales benefit from Renew Life in the fourth quarter. For the full year, we don't expect the business to contribute meaningfully to company sales until fiscal year 2017, given the acquisition was closed late in fiscal 2016.

Net of all of these factors, we raised our fiscal year 2016 outlook for diluted earnings-per-share from continuing operations to be in the range of $4.85 to $4.95, which includes dilution of about $0.03 to $0.05 from the acquisition. This compares with our previous EPS outlook of $4.75 to $4.90.

I'd also like to provide additional perspective on the Renew Life acquisition, a business rooted in the fast-growing digestive health category and complementary to our global portfolio. This US-centric bolt-on acquisition is consistent with our strategy to acquire leading brands in fast-growing, midsized health and wellness categories.

Over the last several years, Renew Life has enjoyed high-single-digit sales increases and gross margins that are generally in line with our Company averages. Importantly, we believe the business was acquired for a good price -- $290 million, or about 2.5 times sales. And while this business is anticipated to be dilutive to earnings-per-share over the next year or so, as we invest heavily in demand-creation programs and integrate the business into Clorox, we anticipate the business to be EPS-neutral to accretive in fiscal year 2018.

As we look ahead to fiscal year 2017, we'll be keenly focused on the following things. First, we continue to face a tough business environment in international markets. We anticipate ongoing foreign currency headwinds will negatively impact fiscal year 2017 sales by about 2 points.

Second, we plan to continue investing heavily in advertising, consistent with our full-year 2016 spending levels, to drive awareness and trial of our new products. Our increased investments will help sustain the momentum of our core business in the face of ongoing competitive activity and consumers who remain cautious in their spending.

Third, integrating Renew Life into Clorox is a priority. And we'll place strong emphasis on investing in demand-creation and expanding distribution to drive the growth of the business and its categories. In fiscal year 2017, we anticipate Renew Life will contribute nearly 2 percentage points to Company sales, and expect our investments to integrate and fuel the growth of the business will reduce earnings-per-share by about $0.05 to $0.07.

In closing, we're very pleased with our third-quarter performance and the ability to continue investing strongly in our core business while acquiring a leading brand in Renew Life. We remain committed to our long-term strategy of driving profitable growth, including making strategic investments to fuel our innovation programs and our cost savings pipeline.

Now I'll turn it over to Benno.

Thank you, Steve, and hello to everyone on the call. I'd like for you to take three things away from today's call and press releases. First, our 2020 strategy continues to deliver strong shareholder returns. Second, consistent with the 2020 strategy, we've been making significant investments in our brand behind the strategy accelerators, and these investments are working.

Third, we remain focused on accelerating consistent profitable growth by positioning our portfolio behind tailwinds, as reflected in the acquisition of Renew Life, into our family of brands.

I'd like to share a little perspective on each of these three areas. The first takeaway -- our Strategy 2020 continues to deliver strong shareholder returns. This is certainly evident in our strong Q3 topline growth, reflected by growing market shares and household penetration on key brands in the US.

On a currency-neutral basis, we're seeing growth in international as well. We have strong gross margin expansion, supporting incremental investments in our brand, and we delivered strong earnings-per-share growth. These results, the health of our businesses, and our overall strong fundamental execution, have enabled us to raise our fiscal year sales and earnings outlook.

The second takeaway -- consistent with the 2020 Strategy, we've been making significant investments in our brands behind our strategy accelerators, and these investments are working. As discussed earlier in the call, in addition to incremental trade promotion spending in the second half of the fiscal year to support new products, we anticipate increasing our advertising investment to about 12% of sales in the fourth quarter to keep our brands healthy and growing.

Now you might ask yourself why the increased investment and why now? Well, we have strong momentum on our brands, as evidenced by our recent results, and seek to continue that momentum by investing behind our strategic priorities -- in particular, the strong innovation currently in market. But we're also continuing to support the health of the base business by investing in awareness and trial.

And we do like the long-term returns on these investments based on extensive analytics we do across all of our brand investments. So in a nutshell, we are taking a long-term view to invest in driving sustained profitable growth in an environment where such growth is hard to come by.

And the third takeaway -- we remain focused on accelerating consistent profitable growth by positioning our portfolio behind tailwinds such as digestive health. as reflected by the acquisition of Renew Life into our family of brands.

We are very excited about the opportunity Renew Life brings to the Clorox portfolio as a leader in health and wellness, with an emphasis on digestive health. Through this acquisition, we are expanding into a fast-growing market that aligns with our strategy to accelerate growth through bolt-on acquisitions of brands in midsize categories that are number one or strong number two in market share; economically attractive; and leverage our core competencies.

Renew Life is the number one brand of probiotics in the natural channel, with a steadily growing share in the food, drug and mass channel. And probiotics products represent about two-thirds of Renew Life sales.

Digestive health is a growing consumer need and still a highly fragmented category, which provides for an attractive competitive set. The digestive health market in the US represents annual sales of more than $10 billion, and is growing at about 7% annually. The probiotics sub-category is about $1.3 billion annually in the US and is expected to grow at 15% per year.

This acquisition enables us to expand our health and wellness platform even further. We believe that we have an opportunity to make a difference to the business through our strong 3-D brand-building capabilities. We also believe that Renew Life has scalability and distribution expansion potential in existing and new channels.

So we look forward to building on the strong foundation the Renew Life team has built, and bringing the benefits of digestive health products to more consumers, while maintaining a keen focus on the health of our core business.

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

Thank you, Mr. Dorer. (Operator Instructions) Steve Powers, UBS.

So some of this you touched upon in the latter part of your prepared remarks, but just that step-up to 12% in ad spending in Q4, was that always the plan? Or you decided to do that based on the year-to-date strength? And if it's the latter, just talk about how your -- what your assurances are that you'll get a good ROI on that investment. And do you wish at all that you'd spent more earlier to kind of even out those investments in the marketplace?

So, Steve, this is Steve Robb. The short answer is yes. This has always been a part of the plan. You might recall on the third-quarter earnings call, we talked about significantly stepping up our consumer demand building investment programs, particularly advertising. You saw that in the third quarter where we invested incrementally about $22 million in advertising, and we're going to step it up again.

Part of the timing this year for the advertising investments, it's a reflection of the new product program. If you're going to step-up your level of advertising, you want to have something to talk about. And Fresh Step with Febreze, the Burt's Bees lip color launch, these are the things that we're really leaning in heavy to. So the spending increase is back-loaded this year, but it's back-loaded consistent with the programs.

And then finally, from a return on investment, we do a lot of extensive measuring and tracking and scorecarding of all of the investments we make. And to date, we've seen very good returns. We're going to continue to lean in. And, as always, we'll adjust as appropriate, as we get new information. But, at this point, we feel like it's a very good ROI. But keep in mind the investments we make in the fourth quarter, most of the benefit will, I think, be in future years as you get awareness and trial on those new products.

Okay, great. And I know some of it is going to be targeted at the cat litter business. And I just -- a little bit more perspective there, because the consumer takeaway data still looks soft, at least in the track channels -- I think it was down 5% in April, your business was, and down over about a -- just over a point in the last 12 weeks, despite the marketing and the R&D efforts to date.

So I know you said you were pleased. Just any update there. And what should we be -- what is realistic to expect from that business as we progress forward into your fourth-quarter and beyond?

Yes, Steve, we remain pleased with this. We've always said that it's going to take time for us to turn the share around. It's actually great to see that, if you look at the last four to five weeks in the quarter, share had stopped eroding and it started to be flat. So we feel good about that and we're investing behind it.

The customer takeaway is strong, early consumer acceptance is strong, and we are investing behind this, certainly knowing that competition aren't pushovers in this category. But we know, from consumer data, that we have a better product on-hand. And we're investing in awareness and trial, and we continue to be optimistic that this innovation is going to make a difference to the business.

Great. And then just one last one, if I could, which is around the Renew Life acquisition. Should we think about that as accretive to fiscal 2018 versus the current base case? Or is that too ambitious, given the investment plans that you talked through?

Yes, I think what I'd said in my opening remarks is -- and it's early days, and so we need to get farther into it. We've owned this business for about a day now. But based on our internal projections, we anticipate it will be neutral to accretive in fiscal 2018.

And again, part of the reason that you're not seeing more accretion earlier, this is a business that has been growing high-single digits. Again, it's got attractive margins. Just like we did with Burt's Bees many years ago, we want to fuel that growth. So we are going to be stepping up the level of consumer demand, building investments over the next couple of years.

Particularly is, we expand the distribution across the US. So, that's the number one reason, I think, as you get into fiscal 2018, we are being a bit cautious on the EPS accretion. But certainly, it's a profitable business with good cash flows and we feel very good about it.

Okay, great, thank you.

Bill Schmitz, Deutsche Bank.

Hey, what happened with gross margin relative to your guidance? Because I think you were saying like 100 basis points for the full year, and then it was up like a couple-hundred basis points for the first half. It seemed like you were thinking gross margin was going to be flat, and then it came up like another 200 basis points this quarter.

So, were you guys just being conservative? Or did something sort of change for the better in the quarter? And then maybe just what do you think the gross margin is going to be up for the full-year now?

So, Bill, I couldn't hear the second part of the question. Let me try the first part, and then if you have a follow-up question, we're happy to answer it.

Gross margin certainly came in better than we had anticipated in the third quarter. Two drivers I would call out. The first is just stronger topline growth for the Company. You know, as you know, you get a bit of scale advantage when you have stronger growth. And we also had some positive mix. We had real strength in some of our businesses like Brita, which is higher margin; our Burt's Bees business, which is higher margin. So that certainly helped.

I would also say commodity costs came in a bit better than we had expected. Now, I'm going to caution on that as well, because I do think commodity cost is starting to reach a bottom at this point. I think we found the floor and we're watching it pretty carefully. Because I think, as you go into the fourth quarter, and as we look at our gross margin, we think gross margins are likely to be flattish in the fourth quarter.

And the reason for that is, we're starting to lap some of the commodity goodness we saw in the year-ago period. And we are also investing more in consumer demand spend, that we talked about earlier.

So, I feel great about the margin expansion for the Company. I feel good about delivering about 50 bps of EBIT margin expansion for the year. But I do think, looking forward, gross margin growth is going to start to slow down as the commodity tailwinds dissipate.

Okay, great. And then just on this Renew Life acquisition, are you funding it with cash on-hand? Or are you going to -- debt?

Yes, it's a good question. Short-term, you'll see us use a mix of cash and commercial paper. I think, longer-term, we'll have to take a look at our capital structure and upcoming debt maturities, and then we'll make a determination on the best way to fund it. I think it's safe to say, over the very long-term at some point, we'll probably go out with additional debt. But that's a decision we'll take in the future based on the facts and circumstances that we have.

Okay, yes. Because the reason I ask is that assuming it will cost you maybe a couple-percent at most in terms of (technical difficulty) -- it seems like based on your (technical difficulty) guidance that the thing is going to lose quite a bit of money, like $8 million -- $10 million next year. Is that directionally what you guys are thinking?

Yes, the -- Bill, the $0.05 to $0.07 of EPS dilution for fiscal 2017, it's really being driven by the cost to integrate the business, which is important to us. Because, remember, if we can integrate this quickly, we can get revenue synergies. We can get it on the same trucks, we can assist in accelerating the topline growth for the business.

So, we certainly have money to integrate the business. We also have money for the step-up in inventory, which, as you know, you have to do; intangible asset amortization, et cetera. So, those are the primary drivers. But in addition to that, we'll also spend more on consumer demand, building investment.

To be clear, it's a business in fiscal 2017 that we're expecting good growth rates, healthy margins. But what we found is it's important to integrate quickly, and to lean in and build on the momentum that the great people at Renew Life have been delivering over the last couple of years.

Got it. And then will this be a platform for you guys? I mean, so is this like a broader entry into the CMS space? Or is this kind of like an opportunistic (technical difficulty) --?

Yes, Bill, we certainly look at this as strategic. And I think it's very consistent with what we've said over the last two or three years since we've begun the journey on the 2020 strategy. What we've said is that health and wellness -- as defined as in me, on me, around me -- is a space that we are very interested in. And this certainly is bull's eye.

We believe that certainly this acquisition will be attractive for our shareholders as a standalone, but we'll certainly also continue to look at this as a potentially broader platform, just like we've done with Burt's Bees. I look at Burt's Bees as a very solid role model for this, where the first tranche or value-creation came from distribution expansion, followed by strong investments in the base business to continue to drive what clearly here is a fast-growing category based on a growing consumer need.

About two-thirds of US consumers have experienced digestive health issues, and that trend is expected to continue behind the dietary habits that we're seeing from consumers. So, investing in awareness and trial on the base product certainly is the second opportunity here.

And then the third opportunity is to look at adjacent spaces around, whether that's organically or perhaps through additional business development activity. And perhaps that will yield an opportunity to add additional growth down the road. But for the time being, we are focused on driving awareness and trial and distribution on the base products by applying our strong 3-D capabilities, which I think are a wonderful fit to add to the great work that the current team has already done on the business.

Okay, great. Thanks so much.

Joe Altobello, Raymond James.

First question on the wipes business at Costco. Was there any impact from this quarter? It sounds like it happened in March. I wasn't sure if there was a pipeline fill for that.

No, Joe, this started shipping again at the very end of Q3, so no impact.

Okay. And then going forward, what's the volume impact you think that will have?

Well, I don't know that we disclosed the specific volume impact, but obviously, Costco is a significant customer of ours. And certainly what these Costco customers, as well as club customers in general, are, is pretty loyal to the channel. So the volume incrementality certainly is expected to be pretty significant to the wipes business, which will continue to help us increase household penetration on Disinfecting Wipes.

As you know, Disinfecting Wipes is a business that has been growing share very strongly for us over the last two years, frankly. The category also is up 6% over the past 52 weeks, and we're clearly leaning into a tailwind on wipes. And now we're happy to have this business back.

What I will say in addition to your question, Joe, is, importantly, we stayed principled as we regained this distribution. What we commented on two years ago was that it is always our aim to stay fair and equitable to all trade customers, and ensure that all customers qualify for the same conditions. And it's important to close the loop on this, and emphasize that that statement has remained true, as we've been able to regain the distribution at Costco at this point.

Got it, that's helpful. And then switching gears to Burt's Bees. It looks like another double-digit quarter. How much further is there for that brand to extend into other categories? And where do you think the brand has a right to enter from a product perspective going forward?

Well, without getting into specifics, Joe -- which I know you'll understand that we can't -- we certainly believe that this brand has a lot of potential in three ways. And all of that is consistent with what we said in the past.

First of all, just continue to drive awareness and trial on the base business: lip, face, body. We have a lot of products out there that enjoy a very strong consumer loyalty, but have an opportunity in increasing awareness in trials so more consumers can use these products. And that is job number one. And we're driving that through tactics like TV advertising, which we, for the first time, did last year, and which we'll do again this year, and believe we'll deliver solid additional growth just on the base.

The second opportunity, certainly, is an expansion into new categories. And we're very pleased with how lipsticks is going. It's now the number five lipstick in a very cluttered market. And it's overtaken some very established and prominent brands. Most recently, lipsticks did receive a very prestigious award by Cosmopolitan magazine. who called it their favorite lipstick ever, which certainly is something that we were very pleased to see.

And then, third, the opportunity continues to be in international. And Steve Austenfeld has talked about that earlier on this call where we believe that both in markets that we are already in, as well as in markets that we have a very small presence, there is a lot of opportunity to repeat the success that we've had in the US. And we are investing in that.

So, category expansion will continue to be name of the game, but it's really part of a three-pronged growth strategy that also includes growth on the base and growth in new countries.

Understood. Okay. Thanks, Benno.

John Faucher, JPMorgan.

I wanted to chat a little bit about the cat litter. This is obviously a category where we probably had the greatest competitive headwinds over the past couple of years and probably the toughest for you guys to crack from that standpoint.

So I guess as you look at it, how comfortable are you now that this is -- you sort of figured out the two or three pieces that you need to push on in order to get the shares moving in the right direction longer-term, given the fact, again, that you've had so much tough competition over the past couple of years?

Yes, certainly a business that we want to perform better. And as we said earlier, John, we are encouraged by what we're seeing but we're not done yet. So this will take more time. What we've said is that it requires an increase in investment, and we're certainly putting in place. What we've also said is that will require innovation. And with Fresh Step with Febreze, we're off to a good start.

But what we've also said is that it will require sustained innovation over time. And we're certainly working on that. And we have perspective plans in place to follow up with more innovation later in the year and later in this calendar year, and then the next calendar year as well.

So this is a journey. We're off to a good start. We have more work to do. but we're certainly encouraged by what we're seeing.

Great. And then if I can just ask a follow-up for Steve on the FX guidance. I mean we are not seeing the type of guidance for the type of currency impact that you're talking about for next year. So, are you using forecasts as opposed to spot rates? Or are you potentially looking at another deval that you've built into your numbers from that standpoint? Thanks.

Yes, we use a bank consensus rate. So basically they're forward-looking rates. And it's hard to call the FX market, as you know. But if you just look at the devaluation that Steve Austenfeld talked briefly about, in Argentina, and look at the carryover effect of that, and just put on the softening currencies, particularly in Latin America, preliminary estimates would seem to indicate about a 2 point drag on sales next year.

Probably a little bit stronger in the first part of the year than the second half of the year, but we'll have to see. But what's important to note, I think for each country, it's different. So our market participation is probably different than many other companies. And that may be driving some differences.

Okay, great. Thank you.

Olivia Tong, Bank of America.

On the wipes business, a lot of the one-off concerns that drove wipes are well in the past, you know, the virus concerns and things like that. And this was a fairly benign cold and flu season. So I was surprised to see wipes and cleaners up double digits. So can you talk through what drove that? Do you think this is a sustainable level going forward?

And how do you feel about inventory levels at retail, particularly given a fairly temperate start to the year in terms of weather, which obviously helped charcoal? And then obviously now the greater availability now that you're back in Costco.

Yes, Olivia, first of all, congratulations again on the birth of your son.

Thank you, appreciate it.

You know you're right in saying that the cold and flu season has been relatively benign, but we feel like the wipes business has reached a threshold where cold and flu certainly helps, but we are the business is no longer dependent upon cold and flu.

So the success is really based on several things. First of all, just basic consumer trends. We've talked to all of you before about the fact that this is a very preferred product form, as consumers increasingly clean in the flow versus on their hands and knees. So we're just having a lot of consumer tailwinds.

Second, we are fueling those tailwinds with innovation -- mostly innovation that increases the versatility of use and allows consumers to use wipes in new places, whether that's on glass, whether that's on wood, whether that's in bathroom, or more recently for the tougher jobs in the kitchen.

Clorox Disinfecting Wipes with microscrubbers has been incredibly successful and is growing market share. And we are fueling that success with additional investments. And then certainly, the distribution expansion, like the one that was talked about, will help.

So we have high hopes that we'll continue to see strong growth on wipes in the future. Certainly near-term, we see -- we'll see very significant growth as we continue to benefit from the Costco distribution expansion. But we think that, based on the investment in those few pillars that I mentioned, we'll continue to see sustained growth on Disinfecting Wipes along -- down the road.

Ali Dibadj, Bernstein.

Just a couple of questions. One is, as you think about gross and operating margins going forward, what should we think about as we start to lap commodity benefits? Steve, you mentioned flat coming up here, but thinking more about fiscal 2017. Because you are lapping commodity benefits. I don't see new price saying on your sheet here necessarily that that's meaningful -- AMP up, et cetera. It feels like you're kind of signaling a deceleration of EPS growth for 2017. And I want to get at that through the margin lens first, please.

So let me address the margins. So, first of all, we'll provide the outlook, Ali, in August that we typically do every year. What I do think is important as a trend to call out is commodity prices, which are notoriously difficult to forecast. But again, as I said earlier, energy prices have really started to come up pretty sharply. It looks like the commodity market has stabilized.

What does that mean? It means as we go into fiscal 2017, particularly as we move through fiscal 2017, I think some of the benefits we've been enjoying from lower commodity costs are going to start to dissipate. What we can do as a Company is focus on the things we can control. Keeping the cost savings pipeline healthy. And we're doing that.

We're focusing on rebuilding our margins in international with our Go Lean efforts. That's something we're also going to continue. And we're also focused on taking pricing in high inflationary economies.

So, I think the actions that we're taking should, over the very long-term, help us deliver EBIT margin expansion in the range of 25 to 50 bps. But you will see variability across the quarters and even across the years at times. But I do feel good about the programs we have in place to not just keep the margins healthy but build them over the very long-term.

And then from -- if I take that from a topline perspective as well, I think Steve Austenfeld mentioned this quarter about 20 basis points up on market share. And that's meaningful, that's good. But it does suggest very much to your point as well that your category is accelerating.

As you go forth, that's a lot of volume. But what I'm trying to figure out from a category perspective -- because you're growing clearly ahead of the category but not massively ahead; the category is accelerating -- what dynamics do you see there going on in the category? And as you go forward, do you think you'll be able to take more pricing to offset the commodities and so to keep that category momentum going at this pace?

So, Ali, let me start with the second question, which is pricing. Again, what we've said is we'll price to recover inflation into our -- protect our margins over the long-term. So, we would prefer not to take pricing, given the consumer remains at a fragile condition. Nonetheless, at this point, we'll take pricing where we need it over the long-term.

The key for us ultimately is going to be innovation and driving innovation growth. So, here's how we think of it over the next couple of years and maybe into fiscal 2017. We continue to aspire to deliver 3% to 5% topline sales growth.

Now embedded in that is an assumption that our US business grows at 2% to 4%. I will say, based on what we're seeing, not just with the categories, but importantly our innovation programs and the investments that we are making, we feel very good about delivering solid growth in this range of 2% to 4%, based on what we know today.

I think the bigger challenge that we have, like many other companies, is on the international side, where the slowing economies, the FX headwinds, the challenging environment -- I think that's likely to weigh on topline sales growth for international in fiscal 2017, which is why our efforts to focus on innovation, going lean are the right efforts.

So, on balance, I feel like we're doing a pretty good job as a Company. We've got solid plans that we're building now for fiscal 2017. And we'll provide additional color on the August call.

Okay. And my last question is just going back to Renew Life. I think you guys -- in Benno's piece, made a good case, a compelling case for why this is a strong business in and of itself. But I still don't understand why it's a great business for Clorox, why it's a great business for you.

It's clearly a different category, different competitor set, different expertise. So I'm trying to always ask this question of, is it buying growth? Or is there something you can add to it that's incremental to what they could do themselves or with some other partner? Thank you.

Yes, Ali, we certainly believe that we can add to this. So, first of all, if I look at just the basic category -- fundamentally, we're a health and wellness company. So, our Company was founded 103 ago today and it was founded based on disinfecting products and bleach.

And over time, whether that's through our professional products, through Brita, through Green Works, through Burt's Bees, we have continued to go deeper into health and wellness. And this is just another example. So for us, we look at this as a health and wellness business where our capabilities can make a real difference.

First of all, this is the number one brand in the natural channel, but there is a very significant potential to grow through distribution in food, drug, mass, certainly here in the US, but also in Canada and then in international over time. And that's really bull's eye as it relates to applying Clorox world-class capabilities.

I would hold up our capabilities when it comes to driving distribution against any company in our space. And we've certainly proven that time and time again.

We've also proven that in the health and wellness space, through brand-building and through innovation, we can make great differences to businesses that we acquire over time, whether that's Burt's Bees, or if you reach further back, Hidden Valley or Brita, we pretty much followed the same model. They were pretty small when we bought them. They were new categories for us when we bought them. But we've made an incredible difference and turned them into brand powerhouses.

And as we evaluated this space, which we are very familiar with through extensive diligence, and as we evaluated the fit with our own capabilities, we got to a space where we felt that we are very comfortable that we're not just buying a business that is profitable, and in a fast-growing category, but one that we can make significant difference to.

I appreciate it, thank you.

Why don't we take two more questions? And then we can follow-up offline with any others.

Jason English, Goldman Sachs.

Thank you for the question. I guess I want to come back on the guidance question, we're trying to work back into sort of the guidance as we think about next year with the investment. Very simple question, your long-term algorithm at 25 to 50 basis points of (technical difficulty) [margin] expansion per year. Is there any reason to believe that that may be in jeopardy next year as you accelerate the spend?

So, Jason, again, as I've said, we will provide the outlook in our August call. I think what we did want to foreshadow is major trends, and I'll just kind of tick through them. Two points of FX headwinds, I think that's important.

Commodity cost tailwinds, which will likely continue through the fourth quarter, maybe into early part of fiscal 2017, we've got to say. But that's something we're watching closely. We do intend for the advertising investment, which has really stepped up from about 9% of sales to 10% as a Company, we think that's permanent. And I think you'll see us continue to invest at that level of consumer demand building investments, at least for advertising over time.

And I would say that when we look out over the next few years, we feel very good about our EBIT margin expansions. but we need to get more information before we provide an outlook on fiscal 2017 on EBIT margin.

Yes. Fair enough, fair enough. You mentioned international in some of the macro headwinds, the currency headwinds that you're facing there. You kind of came out of the gates this year with some nice progression in turning the margins. They've now turned back against you, and pricing is decelerating as FX pressure mounts. What's preventing you from getting the commensurate degree of pricing in these markets as we try to mitigate some of this pressure?

Yes, so we are taking pricing in some of the higher inflationary markets, but you know, it's a balance. We've got a very good track record of taking pricing, and importantly keeping the pricing that we take and keeping our brands healthy.

As much as we would love to be able to price recover all of the FX and inflation, you have to take a measured approach with the consumer so that you do it in a sustainable way. So I would say that as inflation and FX has squeezed margins particularly in Argentina and some of these larger countries, we are taking pricing. It is sticking. But we are trying to do it over time.

So, it will take time to rebuild the margins through pricing. We are doubling down on our cost savings efforts in some of these countries, applying our US capabilities there, which we think makes good sense. And we are also rightsizing infrastructure investment. Because we do think the international markets, particularly emerging markets, are going to continue to be challenging. And we want to basically assume a challenging environment and structure accordingly.

So I think it's going to take time for us to rebuild the international margins. I do think international will challenge our result in fiscal 2017. But I can also say that I think we're putting in the right long-term plan in executing as well to create a healthy growing international business for the long-term.

Very good. Thank you. I'll pass it on.

We'll now take our final question from Lauren Lieberman with Barclays.

Just a quick question about your comment earlier on kind of remaining true to your long-standing policies of kind of fair and equitable pricing, and deals and relationships with all customers. We all know that Walmart is kind of looking to invest in price and looking to its suppliers to help in that.

So how do you deal with that in that situation, when you have a major customer kind of asking for help to contribute to their business, but you've been so steadfast in how you manage relationships across customers? Anything you can help share there would be great.

Yes, Lauren, as always, we don't comment on specific discussions that we have on any negotiations with customers. But what I can tell you is that our Walmart business continues to be very strong, and that we certainly live up to the fair and equitable principle with Walmart in all our discussions that we have.

I'd also remind everybody of what we have consistently said in the past. And that is that the vast majority of our discussions that we have with Walmart are around growth, because that's what they are looking for and that's what we can bring. So we talk about how we are investing in their categories. We talk about our innovation, their early adopters on many of our innovations. And we talk about how we can grow their categories with both investments and innovation.

And we're doing that well. Right now, again, our business with Walmart remains very healthy and strong. And we're certainly working our hardest to keep it that way, given that they are a major customer.

So what I feel most positive about is that the premise that we've always talked about that the two companies, Walmart and Clorox, are so strongly strategically aligned, continues to be true. Where they're investing benefits our Company. Whether that's in the improvement of store operations. which certainly helps us, for instance, by eliminating out-of-stocks. Whether that's by investing in eCommerce -- which ,as you know, is a growth platform for us as well, and remains our fastest-growing channel; or whether that's their investments in smaller formats, like neighborhood markets where they really rely on number one and number two brands, of which we have so many, to drive growth and assortment.

So, I continue to feel good about our business with Walmart, and I continue to feel good about the progress that we're making based on the focus on how we can grow their categories with our innovation and with our demand spend.

Lauren Lieberman;^

Great. Thank you.

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

Thank you. So, to sum up, I'm very pleased with our performance for the third quarter and fiscal year-to-date, because we are making the right investments for the long-term health of the Company. Our strategies continue to work, and we're delivering strong results for our shareholders and consumers.

So, thanks for joining us, everyone, and I hope that all of you will have a great rest of your day.

This concludes today's call. Thank you for your participation. You may now disconnect.