高樂氏 (CLX) 2016 Q4 法說會逐字稿

Good day, everyone and welcome to The Clorox Company fourth-quarter and fiscal-year 2016 earnings release conference call. (Operator Instructions). As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Mr. Steve Austenfeld, Vice President of Investor Relations for The Clorox Company. Mr. Austenfeld, you may begin your conference.

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

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

In particular, it may be helpful to refer to tables located at the end of today's earnings release. Please recognize that today's discussion contains forward-looking statements. Actual results or outcomes could differ materially from management's expectations and plans. Please review our most recent 10-K filing with the SEC and our other SEC filings for a description of important factors that could cause results or outcomes to differ materially from management's expectations and plans. The Company undertakes no obligation to publicly update or revise any forward-looking statements.

So turning to our commentary on the quarter, there are three key messages to take away from today's call. First, as planned, our fourth-quarter results reflect significantly increased demand-building investments to support awareness, trial and distribution of our innovation pipeline.

Second, we are very pleased with our fiscal year 2016 performance as we made further progress against our 2020 Strategy. The choices we are making to drive long-term profitable growth are working and Steve and Benno will talk more about that in a moment. And third, we are staying the course with our plans for fiscal year 2017, recognizing we continue to face foreign exchange headwinds, a difficult competitive environment and commodity cost volatility, as well as a comparison to the strong results we delivered in fiscal year 2016.

So with that, I will cover highlights of our fourth-quarter business performance by segment. Steve Robb will then address our financial results for both the fourth quarter and the full year, as well as our financial outlook for fiscal year 2017. And then finally Benno will close with his perspective on the business followed by Q&A.

So, turning to Q4, volume grew 7% and sales grew 3%. The variance between volume and sales growth reflects the impact of unfavorable foreign exchange, unfavorable product mix and increased levels of trade spending to drive awareness and trial on a number of our new product launches. US growth, broadly speaking, was strong across all segments, as well as in our international business when looked at on a currency-neutral basis. Excluding the 2 point impact from foreign currency, total Company sales in the fourth quarter grew 5%. If you look at just the US, which is more than 80% of our Company's revenue, sales also grew 5%. So that was the fourth quarter.

If you look at the fiscal year, volume grew 4% with gains in all four of our reportable segments. We are certainly very pleased that our growth in shipments was so broad-based across all of the US and international segments. Again, for the year, fiscal 2016, sales growth was 2% reflecting strong volume growth, the benefit of price increases primarily in international, about 0.5 point of growth from the Renew Life acquisition, as well as strong growth from innovation.

These factors were partially offset by about a point of increased demand spending behind innovation again primarily in our core business and nearly 3 points of unfavorable foreign exchange. If you exclude the 3 points of unfavorable FX, full-year sales increased 5 points.

For fiscal year 2016, again looking at the full year, we gained one-tenth of a point in marketshare across tracked channels with five of our eight US business units holding or growing share, consistent with our strategy to invest more heavily in demand-building activities behind our growth businesses.

Recently, we have seen increased competitive activity targeted in a couple of key categories where spending is depressing pricing levels, the most prominent of which is the bags and wraps category. In addition, we have fully lapped last year's price increase in the laundry business and that category, which is about 10% of the Company sales, has returned to its historical run rate of being about flat.

And in home care, disinfecting wipes is another category we are monitoring for the impact of competitive activity. So with all these factors in mind, our outlook anticipates US track channel categories to be up about 1% in fiscal year 2017. Now it is important to note however that we do expect meaningful growth in fiscal year 2017 in untracked channels and that's going to be across a number of businesses, particularly Clorox wipes, Kingsford charcoal and Glad trash bags, and that growth won't be picked up in the traditional marketshare data.

So with that, I will review our fourth-quarter results by segment. I'm going to start with our cleaning segment. In cleaning, Q4 volume grew 12% and sales increased 6% driven primarily by home care and our professional products business. Looking at the fiscal year, home care, which is our largest domestic business unit, it surpassed $1 billion in sales for the first time in fiscal year 2016 supported by strong growth of Clorox disinfecting wipes behind recent distribution gains in the club channel, as well as continued base business strength driven by increased investments in demand-building. Overall, home care delivered a second consecutive year of very strong marketshare growth.

Turning to laundry, fourth-quarter sales and volume declined primarily due to category softness, and while marketshares across our laundry business were flat, Clorox liquid bleach grew share for the quarter driven by incremental investments in demand creation, high levels of merchandising support and increased strength -- or continued strength I should say -- of our premium Clorox splashless bleach.

And finally, our professional products business delivered double-digit volume and sales gains in the quarter driven by higher shipments of professional cleaning products and our base healthcare products reflecting distribution gains. For the year, professional products delivered high single digit sales gains on top of high single digit gains a year ago.

Turning to our household segment, fourth-quarter volume increased 7% and sales grew 5%, reflecting volume and sales growth in each business, along with the benefit of the May 2 acquisition of the Renew Life digestive health business.

Our Glad bags and wraps business saw high single digit volume growth behind distribution gains and ongoing success from our OdorShield lineup, including Gain scented trash bags. Our OdorShield innovation continues to support consumers' desire for value-added trash bags, which has resulted in a meaningful marketshare gain in our premium trash bag segment. And while the overall marketshare for our bags and wraps category was down due to declines in base trash bags, our strategic focus remains on the higher margin premium bags.

Turning to cat litter, volume in the quarter grew, as did sales, behind our recent launch of Fresh Step with Febreze. We are pleased with the initial response to this launch, which contributed to marketshare growth in the quarter and we plan to continue investing in demand-building activities to drive awareness and trial in this highly competitive category.

Looking at charcoal, the business grew sales in Q4 and that's following a double-digit sales increase last quarter. Results were driven by strong in-season merchandising and strength in the home hardware channel. Notably, in the last three years, we've added nearly $100 million in sales on this business and that's on a base of about $500 million. So we've grown the business by nearly 20% and again, that's just over the last three years.

And lastly, within the household segment, we feel very good about our newly acquired Renew Life digestive health business. While still very early and only two months in, initial sales expectations are on track and integration activities are going well. We feel great about the Renew Life employees who have joined the Clorox team and we look forward to providing an update on this business in future quarters.

Turning to our lifestyle segment, volume and sales were up strongly, led by double-digit volume and sales gains in Burt's Bees. Growth in Burt's Bees was driven primarily by innovation in lipsticks, tinted lip balm and BB Cream, supported by growth as well in the base business.

In our food business, volume and sales also grew solidly driven by our Ranch With bottled salad dressings. These salad dressings leverage the heritage and great taste of Hidden Valley Ranch salad dressing, but with an additional flavor such as sriracha, cucumber, cilantro lime and others. Since our launch of Ranch With dressings, which occurred about 18 months ago, we've gained about 14 share points in the Ranch With segment.

Additionally, our Soy Vay Asian sauces and marinades continue to perform well with volume gains in Q4.

Our Brita water filtration business delivered flat volume and sales in Q4 as gains in our pour-through and faucet-mount businesses were offset by declines in bottle on the go. And while overall share was down, share trends for pour-through and faucet-mount systems are improving. We are continuing to focus on driving trial and distribution behind new pitchers and better filter value supported by national television ads, as well as through digital, public relations and social media campaigns centering on a partnership that kicked off in March between Brita and Stephen Curry, the National Basketball Association's most valuable player.

And finally, turning to our last reportable segment, which is international, that segment represents a little less than 20% of our Company sales, volume was up about 1% and sales were down 9% reflecting the impact of unfavorable foreign exchange rates, an impact that Clorox and our peer companies have experienced for over a year now. Excluding the 14% unfavorable impact on foreign currencies in this segment, sales for international grew 5% on a currency-neutral basis.

In the quarter, international grew overall share with strong gains in bleach, surface cleaners and non-bleach laundry additives behind our select demand creation investments. So with that, I will turn it over to Steve Robb to provide more detail on our fiscal year 2016 performance and our outlook for fiscal year 2017.

Thanks, Steve and welcome, everyone. We are certainly very pleased with our results in the fourth quarter and fiscal year. We are performing well in what remains a challenging environment with incremental demand-building investments driving growth across all our US segments. Importantly, in fiscal year 2016, we delivered another year of margin expansion supported by productivity gains and strong cost savings.

Turning to our financial results for the fourth quarter, Q4 sales grew 3%, reflecting 7 points of volume growth, which included more than a point of benefit from the Renew Life acquisition and about a point of pricing from international. These factors were partially offset by more than 2 points of unfavorable foreign currency exchange rates, about 2 points of unfavorable mix, largely driven by expanded distribution of Clorox Disinfecting Wipes at a club channel customer and nearly 1 point of incremental trade spending.

Gross margin for the quarter came in at 45.4%, a slight decline of 20 basis points, reflecting about 120 basis points from higher manufacturing and logistics costs, 50 basis points of negative impact from one-time integration costs related to the Renew Life acquisition and about 50 basis points of negative impact from the voluntary recall of certain Liquid-Plumr products. These factors were partially offset by 110 basis points of cost savings and 90 basis points from lower commodity costs reflecting an expected slowdown in recent favorability trends, which we discussed last quarter.

Selling and administrative expenses came in at 14.1% of sales as expected. And as we've previously communicated, we've significantly stepped up our advertising and sales promotion investments for the quarter with an increase of $41 million or 27% versus year ago to about 12% of sales to drive awareness and trial behind innovation and maintain the health of our core business.

Net of all of these factors, we delivered diluted earnings per share from continuing operations of $1.26, a decrease of 13% versus the year-ago quarter, reflecting the benefit of higher sales, more than offset by significantly higher advertising and sales promotion investments consistent with our strategy to support our brands.

One-time integration costs from the Renew Life acquisition also reduced fourth-quarter earnings by about $0.03. And as we mentioned in the press release, one-time charges from the voluntary recall of the limited number of Liquid-Plumr products impacted fourth-quarter diluted earnings per share by nearly $0.04.

Now I will turn to our results for the full fiscal year. Sales grew about 2% reflecting 4 points of volume growth, which included about half a point of benefit from the Renew Life acquisition and nearly 2 points of pricing benefit primarily in international. These factors were partially offset by about 3 points of currency headwinds and nearly a point of higher trade spending. In fiscal year 2016, our product innovation programs delivered about 3 points of incremental sales growth.

Gross margin for the fiscal year increased significantly by 150 basis points to 45.1% compared with 43.6% in fiscal year 2015 driven primarily by 140 basis points of favorable commodity costs, 130 basis points of cost savings and 90 basis points of pricing. These factors were partially offset by about 140 basis points of higher manufacturing and logistics costs.

Selling and administrative expenses for the full year came in at about 14% of sales, essentially flat versus year ago and consistent with our long-term target of about 14% or less of sales. Advertising spending as a percentage of sales for the fiscal year 2016 was 10.2%, a full point higher than in fiscal year 2015. For the full fiscal year, our effective tax rate on earnings from continuing operations was about 34% and net of all of these factors, fiscal year diluted earnings per share from continuing operations was $4.92 compared with $4.57 in the year-ago period, an increase of 8%.

Fiscal year 2016 free cash flow was $596 million or 10.3% of sales compared with $733 million or 13% of sales in the year-ago period. The decrease in cash flow reflects higher tax payments in fiscal year 2016 and higher performance-based incentive compensation payments related to our strong fiscal year 2015 results, partially offset by earnings growth in fiscal year 2016.

In fiscal year 2017, we anticipate free cash flow as a percentage of sales to be in the range of 10% to 12% consistent with our long-term goal. As a reminder, we define free cash flow as cash from operations less capital expenditures. At the end of the year, our debt to EBITDA ratio was 1.9, just slightly below our target range of 2 to 2.5.

And now I will turn to our fiscal year 2017 outlook. As we mentioned in our press release, we anticipate sales growth in the range of 2% to 4%. And here is how we are thinking of sales growth for the fiscal year. We anticipate US category growth at about 1%, reflecting slower growth rates than what we saw in fiscal year 2016 driven in large part by increased competitive activity at the store shelf in a few categories. And we expect about 3 points of incremental sales growth from our innovation pipeline. We also anticipate 2 points of benefit from the Renew Life acquisition.

Our sales outlook also includes 2 points of impact from unfavorable foreign currencies with more than half of the anticipated impact expected in the first half of the fiscal year and about 1 point of impact from unfavorable mix. Excluding the 2 point impact from unfavorable foreign currencies, we expect fiscal year 2017 sales to grow between 4% and 6%.

Turning to margin, we anticipate gross margin to be about flat following strong margin expansion in fiscal year 2016 as commodity cost tailwinds begin to dissipate. For perspective on commodities, we've recently seen prices begin to stabilize and we anticipate a modest benefit from commodity favorability in fiscal year 2017 that will likely decline as we move through the fiscal year.

We also anticipate unfavorable mix, including new distribution of Clorox Disinfecting Wipes at a major club channel customer. Importantly, our cost-savings pipeline remains healthy and will help offset inflationary pressures and support higher margins over the long term. We anticipate fiscal year EBIT margin expansion in the range of 25 to 50 basis points. That's on top of 50 basis points of growth in fiscal year 2016 and it reflects lower selling and administrative expenses driven by more normalized levels of performance-based incentive compensation costs and cost savings.

Next, as we mentioned in our press release, we are adopting a recently issued accounting standard update that requires tax impacts from stock-based compensation to flow through income taxes on the income statement, a change we believe brings better alignment between earnings and cash flows.

Under the previous accounting standard, these differences were recognized in the balance sheet instead of the income statement. As a result, we expect our fiscal year effective tax rate to be between 30% and 31% benefiting fiscal year diluted earnings per share by $0.25 to $0.30. This change also means we will likely see more variability in our quarterly and annual tax rates. To be clear, the adoption of this accounting standard will not change the Company's total cash flows.

Net of all of these factors, we anticipate fiscal year 2017 diluted earnings per share from continuing operations to be in the range of $5.38 to $5.58. Excluding the impact of the updated accounting standard, fiscal year 2017 diluted earnings per share is expected to be in the range of $5.13 to $5.28.

Before I turn it over to Benno, I would like to share with you additional thoughts on fiscal year 2017. We believe we have solid plans for fiscal year 2017, but continue to face a tough business environment, as well as a comparison to strong fiscal year 2016 results. In light of our expectations of slower growth rates in our US categories, we are closely watching the state of the US economy and our consumer. We also expect ongoing foreign currency headwinds to challenge the profitability of our international business.

So here is how we are responding. First, we are going to stay the course with our 2020 Strategy. It certainly delivered very good results in fiscal year 2016. In particular, we will continue to invest strongly behind our US brands and categories, particularly those categories with growth tailwinds and where we have a strong innovation platform.

Next, we will continue to execute our go lean strategy in international, which includes taking pricing and continuing to drive cost savings to help rebuild our margins over time. We'll also continue investing strategically behind select international growth initiatives such as Burt's Bees distribution and product innovation.

What's important to know is that international is a strategic part of our overall portfolio. We have leading brands across multiple countries, particularly midsize countries. We have attractive growth rates and a strong consumer base. While it will take time, we believe that we are taking the right actions to improve the profitability of our international business over the long term.

In closing, we are certainly very pleased about our strong finish to fiscal year 2016 on top of the strong results in the year-ago period. We are making the right choices to support the health of our core business and drive the success of our innovation programs, and we continue to support our margins by driving productivity gains and cost savings. With that, I will turn it over to Benno.

Thank you, Steve. Hello to all of you on the call. As Steve Austenfeld noted in his opening remarks, there are three key messages we have for you today. First, our Q4 results reflect incremental strategic investments to drive top-line growth that we believe will be sustainable and profitable long term, keeping the core of our business healthy in a continued challenging macroeconomic environment. This approach is paying off with increased volume and sales growth across our US segments.

Second, we are very pleased with our fiscal year 2016 performance and the progress we are making against our Strategy 2020 accelerators, which I believe will continue to create value and drive long-term profitable growth in the years to come. On the top line, we delivered 2% sales growth or 5% on a currency-neutral basis, excluding the 3 point impact of unfavorable foreign currencies.

On the bottom line, we grew diluted earnings per share a very strong 8%, which includes our deliberately increased demand spending. We grew marketshare for the US and international supported by another strong year of innovation. We entered the digestive health category. Two months in, the transition is going well and we are excited to bring the benefits of Renew Life's digestive health products to more consumers by building on the success the team has achieved with our proven distribution, marketing and innovation capabilities.

And we delivered top tier returns for our shareholders doing it the right way by investing in our brands, providing innovation and better value for our consumers and driving productivity and cost savings in order to not just grow, but grow profitably.

Third, we are staying the course for fiscal year 2017. Our fiscal year 2017 outlook reflects a healthy base business while taking into account ongoing headwinds from foreign exchange, a difficult competitive environment and comparison against our strong fiscal year 2016 performance.

In addition, we are closely monitoring the general health of the US economy and consumer. We have confidence in our strategy and we will continue focusing on our accelerators, which are working well for us. We will continue to accelerate momentum in our portfolio with strong demand investments behind our brands. We will continue to drive our innovation program and deliver a robust collection of launches in the back half of the new fiscal year.

We will continue to transform how we engage with consumers in the digital arena with industry-leading levels of spending that are yielding positive returns. We will continue our focus on productivity and cost savings to fund these investments while also growing margins. And we will continue to draw on our extraordinarily engaged workforce that is driven to create solid and consistent value for our shareholders. And with that, let's open it up for your questions.

(Operator Instructions). Steve Powers, UBS.

Maybe just a few housekeeping. So on the tax rate guidance, is the implication that the 30% to 31% fiscal 2017 rate is broad brush strokes the right run rate beyond 2017, or would there be a reason for a reversion back to historical levels?

It's actually hard to know, Steve. We certainly believe that's our best estimate for what will happen in fiscal 2017. But as I indicated in my opening comments, there's going to be significant variability potentially in both the quarters and the years. I do think there will be ongoing benefit beyond fiscal 2017, but it's hard to call whether we are going to get a full 4 points of benefit.

Actually what I would recommend that you do and recommend that everybody do in this is if you look at the most recent 10-K that we have out there, if you go to the footnotes in the tax section, you will actually see historically what this benefit has been that's been flowing through equity and that's probably not a bad starting place to just go back and look at the history on this.

Okay. That's very helpful. Thank you. And then on the Renew Life benefit in the quarter, I think you said it was just over a point or a point plus on sales in Q4. Can you talk about how much that contributed to volume versus sales mix because if it's volume then that would signal -- I think a fairly sizable part of your household segment volume was Renew Life. I just want to clarify if that's the case.

It made a modest contribution to volume and I would say it was generally in line with the sales contribution.

Okay, okay. And then I guess the bigger question is just you spent, as you signaled you would, you spent a lot on demand-building in the quarter both on trade and on A&P, it sounds like -- I guess there's two parts to this question. How much demand do you think you pulled forward from Q1, the early part of fiscal 2017 and as we think about the cadence of fiscal 2017, should we expect that elevated A&P and trade to filter into the first half, or is there a reason you can shut it down and start clean in 2017?

A lot of the incremental investment that we made in the fourth quarter that we had previously communicated actually came in the form of advertising, so we don't believe there was any pull forward on the volume based on what we can see. Again, what we are trying to do is get awareness, trial and repeat, so we certainly would expect to get some benefit in the first half from the investments we've made in the fourth quarter.

As far as the ongoing investment level in advertising, as we had indicated on the previous call last quarter, we were about 10% of sales this fiscal year, fiscal 2016. We anticipate a similar amount in fiscal 2017, but to be clear, you will see variability across the quarters. We do like to time these investments when we've got innovation and news to talk about, so you could see it go up and down on the quarter, but I would say the incremental point we put in 2016 will remain in 2017 based on what we know today.

That's great. Was there any pull forward on the distribution gain? And then lastly and then I will stop, any quantification that was material on the bleach plant sale? Thanks.

There is no pull forward again based on what we know on distribution and what we can see. As far as the bleach plant sale, just as a reminder for everyone, we've been driving world-class manufacturing for the last several years. As a part of that, our team has done a fabulous job of really increasing productivity. So we made a decision to close the Los Angeles bleach facility, move the volume to other plants within our network and as a result, we were able to sell the facility. We received a little over $10 million for it, so we certainly felt very good about that and that did give us a one-time gain in the quarter.

Just as a reminder, in the fourth quarter of fiscal 2015, we also had a similar one-time gain, but this was on the sale of low-income housing partnerships that we had, so they don't completely offset, but I would just remind everyone that there was two one-time gains in each of those two quarters respectively.

Olivia Tong, Bank of America.

Clearly a big pickup in spend and volume responded. So in response to the first question, you talked about the tale, the benefit in the first half from some of this spending, but when I looked at your fiscal 2017 outlook, it doesn't necessarily assume for the full year a whole lot. So can you talk about the puts and takes that are embedded within your expectations for fiscal 2017 top line?

Olivia, let me try to build on the comments that I made at the opening where we tried to break out for you our expectations around category growth, obviously the benefit of Renew Life and innovation. Here's another way to think of it. As we look at the full year for fiscal 2017, we anticipate sales growth in the range of 2% to 4%. Now included in that is about 2 points of foreign currency, which by the way offset about 2 points of benefit from the Renew Life acquisition, so you can net those out.

And then if I look at the 2% to 4% on the core basis there, I would say the US business continues to perform very well. We think we will be well within this 2% to 4% long-term growth target that we have for our US business.

International on a currency-neutral basis we think will likely be in this 5% to 7% growth range, but obviously when you layer in currencies, which are real, international is obviously going to be challenged next year and it's certainly not going to be growing.

So on balance, I would say we are feeling pretty good about the US business. It's challenging in international, which is why we are really leaning into rebuild the margins and accelerate profitable growth, but we think we have a solid outlook. Again, there will be variability across the quarters as there always is, but we think this is a solid plan.

Got it. And then you mentioned expectations for faster growth in the non-track channel versus the track, obviously you've got the Costco wipes addition, but what else is driving that greater growth?

Olivia, we are seeing really strong growth in non-track channels on several of our larger brands. You've mentioned wipes, which is pretty obvious and doing really well in the club channel. We are also seeing very strong merchandising in Kingsford charcoal, which has been on a remarkable run over the last year, in particular as it relates to home hardware, which also is not tracked.

And then we are starting to see what we started talking about perhaps 18 months ago, our LOOP SKUs, our lower out-of-pocket SKUs, that are at the very low end of the dollar channel and also not tracked. To make an impact, we have 22 of such SKUs out there right now and they are well-received as consumers are looking for value at all ends of the spectrum and that's starting to do pretty well.

So I would point to those factors in particular, but perhaps to general strength across our portfolio outside track channels as consumers are looking for value and a lot of value is to be found in those non-track channels.

Understood. Thank you.

Jason English, Goldman Sachs.

A couple housekeeping questions. One, I guess I was a little surprised by the answer to a question earlier about trade spend and the comment that most of the reinvestment was really focused on advertising. It stands in contrast to the pretty sharp negative inflection on price mix this quarter. So can you just elaborate a little bit more on what drove that negative inflection if it wasn't more elevated price -- or more elevated promotion?

So, Jason, to clarify, for the fourth quarter of fiscal 2016, there's really two things that occurred. One is the stepup in advertising that was previously planned and communicated. That was the $41 million. We also did step up our trade promotion investment in the quarter again to drive additional trial on new and existing products that we have. So both are true. And we reinvested both in trade spending and advertising, although advertising was the larger piece of that.

And on carryforward on the go-forward? I know you've commented on this, but just to really nail it home, the magnitude of negative erosion on that price mix line, that's not something we should expect to carry into next year, correct?

We do anticipate -- well, two things. First, as it relates to the top line, we would expect that volume growth will be faster than sales growth. Why? Well, number one is because we've got FX headwinds and then second, there's always a bit of mix drag and some trade spending that may drag on that line as well that we are watching carefully.

I think turning to gross margins, mix has historically been a bit of a drag on our gross margins and we certainly anticipate that will likely continue in fiscal 2017 and it might even be a little bit higher in fiscal 2017 than we've seen in recent times and that's just because we are seeing a shift to some larger pack sizes. We did pick up the incremental distribution at a major club account, which is great. It's a nice business. It's profitable, but it has lower gross margins.

And one of the things that I think Benno and Steve talked to that we are watching carefully is just the competitive landscape. As we've been talking for more than a year, competitive activity has really started to ramp up and we will respond to that accordingly to protect our base business, but that's something we are keeping a sharp eye on.

Thank you. One last housekeeping question and then I will pass it on. I think your response to your other questions indicated that you feel that your reported sales in the US are tracking pretty well with consumption, no pull forward on promotions, no pull forward on distributions. So, A, is that fair? And B, if we assume that US 80% is tracked and 20% is untracked, it implies something like -- using Nielsen as a proxy for tracked -- it implies that that (inaudible) measured may be growing around 20%. Is all that square a foot with what you guys are seeing?

Jason, first of all, your assumption that reported sales is about in line with consumption is correct. I would perhaps offer the perspective on the coverage rate in some categories be well south of the 80% that you mentioned. On some of the businesses like Kingsford and like Brita, the number actually is closer to 60%. So there is a substantial part of our business that is non-tracked and that indeed is doing very well.

But overall, for the overall business?

When you say for the overall business (multiple speakers)?

Overall US portfolio. Is the 80%/20% ratio right and is the implied 20% growth in untracked sort of right?

So don't know that we comment on the growth rate in non-tracked. 80% is a good number for, like I said, for some of the businesses, but not for all the businesses. There are several large businesses of ours and I mentioned two of them where the number is closer to 60%.

One other factor, which clearly is emerging and we've been putting a lot of investment behind it, is the growth in the digital channel, so online sales and (inaudible) continues, which we certainly expect it will and you are aware of the spending investment we put behind that, then I think you are going to see more and more over time of our sales end up being in the untracked channel, at least to the extent that the online or digital space is untracked today.

Right on. Cool. Thank you, guys. I will pass it on. Congrats on a good year.

Jonathan Feeney, Consumer Edge Research.

I guess my first question would be, when you look at the new club customer you got, that happened mid-year 2016 and you've been getting a fare for that and maybe I don't know if there's other reasons, it seems like dollar shipments are a little bit ahead of what takeaway appears to be. I assume that's the major reason; correct me if I'm wrong. So does this mean that we are going to see maybe stronger dollar shipments and maybe volume in the front half than the back half next year?

I'm sorry, are you asking about first-half sales growth versus second-half sales growth, or are you asking about (inaudible)?

That's correct.

Okay. We typically don't comment on that. We provide a full-year outlook. I would say there's going to be variability across the quarters. That would be expected. Probably the only thing I will point out to you is I do anticipate the foreign currency headwinds are likely to be stronger in the first half of the fiscal year than the second half. Why? Because we saw a major devaluation in Argentina that we are going to have to work through the balance of this calendar year before we lap it.

And then following BREXIT, we saw some of the currencies weaken against the US dollar again, so I think that's certainly going to weigh on the first-half results probably a bit more than the second half. But beyond that, we will focus on the full-year outlook and focus on driving long-term growth.

Thanks so much for that. And secondly, just a follow-up on an answer to one of your questions on increased competition. Where is this increased competition broadly coming from? Is it more from private label, not taking pricing up as much, or maybe taking pricing down in some places, or is it coming from other competitors who maybe you've gained a little bit of share in major channels against?

Yes, so it's mainly from branded competitors, and again, we anticipated -- and it's mostly in the form of trade promotion -- and again, this is something that we anticipated about a year ago and it's playing out about as foreshadowed. Growth is hard to come by in the US. We have a lot of growth and we have a lot of growth coming from innovation, but broadly in the industry, there is not a lot of innovation around, which is why as competitors are looking for growth in a reasonably low commodity environment, they are investing in trade.

And we are seeing that in various categories, home care and Glad, our trash bags, are two categories that we've mentioned in the past and that are playing out as we anticipated and we can expect at elevated trade promotion environments to stay with us for the foreseeable future as commodities stay where they are.

Our approach perhaps, if you allow me, it's certainly to an extent respond in kind so competition doesn't buy share from us that could erode the business in the long run, but our focus mainly is on earning marketshare, not buying marketshare, invest behind innovation, invest behind engaging with the consumer digitally, two things that have a long-term positive effect on our brand equity.

So that can mean that we may be willing to temporarily accept share declines, for instance, on Glad where we are seeing that right now, but always with an eye on the long-term health of our business and the profitability. So in a nutshell, elevated trade spend from branded competitors; likely here to stay; and we are applying a balanced and disciplined approach, as you'd expect.

Great. Thank you very much.

Ali Dibadj, Bernstein.

Wanted to ask about 2017 top line again. So if you exclude currency -- if you exclude Renew Life, that gets to the 2% to 4% that one is looking for. What happens if you exclude the wipes distribution in Costco? So what's the underlying sales growth? And I don't really know how to think about it because if you go back to March 2014, it looks like, where you lost that business, there's a negative 8 point swing in volume trends for the segment, but it really only lasted a quarter and there wasn't any mix benefit at that point. So I don't know whether it's 2% to 4% with or without Costco, or whether it's 1% to 3% given what we've seen this quarter or even 0% to 2% without Costco for 2017.

Ali, our plans call for in the US business excluding Renew Life to be solidly within the 2% to 4% is our best estimate, and while we anticipate a modest benefit from picking up new distribution on Clorox Disinfecting Wipes, I would say the innovation is significantly larger. So it's a nice benefit, but I wouldn't overstate the size of the benefit to the Company's growth.

But also, Ali, good question. I will perhaps add that the wipes story of success is certainly not dependent upon this new distribution with the major customer. If you look at the size of the wipes business in March by when we regained distribution, it was actually larger than it was with distribution at that customer two years earlier.

So what we expect for wipes is continued momentum, with all of our customers, continued growth in all channels because we are driving innovation, because we are supporting the brand through advertising and because we have about 50% of household penetration in the category still to go. And the Costco business certainly helps, but is just one driver behind the strength in the business overall.

I appreciate that, but is it going to be a point or it doesn't even round to a point? Because again I'm going back to March 2014 and it hit after that first quarter, but I'd assume, yes, you have pallet fill out of Costco or the club store, but you probably still have that until you lap that, right? So are you saying, Steve or Benno, it doesn't even run to one point of the 2% to 4%?

So, Ali, normally we don't provide that granularity. I'm going to in this instance. On a full-year basis, it's less than a point. It does not round to a point. And again, we are very happy to have it back, but what's more important is that we have grown the wipes category as Benno talked about and this is great to have product wherever the consumer shops, but I wouldn't overstate the impact of the top line.

That's helpful. You guys mentioned obviously several times un-tracked channels, un-tracked channels growing more, clearly club, perhaps dollar certainly online as well. How do you think about cannibalization in that instance? So you are getting this, for example, club channel, you are showing up with Brita on Amazon, etc. much more aggressively. How do you factor in your growth going forward, the cannibalization of that versus the incrementality?

In general, that's, of course, always factored into our outlook. There's a certain element of cannibalization always, but the reality is that there's a certain element of channel loyalty, Ali, certainly in club, but also in dollar. So the question here for most consumers is am I going to buy a Clorox product or competitive product in the channel versus am I going to buy the Clorox product in channel A or in channel B. So needless to say there is a positive effect from any distribution gain that we can get across a variety of the channels. But there's a certain element of cannibalization and based on our analytics, we always have a pretty good handle of what that cannibalization is and we factor that in as we think about our sales and profit forecast for the fiscal year.

Okay. You mentioned profits -- sorry, my last question is just on gross margins (inaudible) seemingly to your stock is actually quite important and you've had it looks like five quarters now of really triple-digit basis point increase in the gross margin line, and then this time it was clearly not that. And if you pull out Renew Life, it was still slightly positive, but commodities look like -- so far commodities net of manufacturing logistics has turned negative, pricing benefits very much to the strategy, which I'm not saying is wrong, but the strategy that you are laying out for 2017 is going to be dissipating. Trade promo broadly is increasing. How are you going to get gross margins to be flat even as opposed to down for 2017? What are the drivers that are switching that the other way than I would've expected?

Okay, you've got a couple of questions in there, but I just want to make sure for clarity's sake, commodity costs were a tailwind in the fourth quarter, but they were less of a tailwind than what we had previously seen. It was about a 90 basis point tailwind. It had been about 180 in the previous two quarters. So to be clear, that certainly was nice.

Looking forward, how do we feel about margins? We feel good about the EBIT margin expansion of 25 to 50 bps driven by cost savings and lowering our SG&A. I would say cost savings is on track. I feel good about pricing. Most of that will come from international, but let's see what happens with commodity costs. If that's different, we are not afraid to take pricing in the US if we need to over the long term to protect our margins.

We will likely get a modest commodity cost tailwind in fiscal 2017 based on what we know today. Again, that will likely dissipate, but when we run the math, Ali, with these numbers -- and you can take a look at the Web attachments and I think it will be pretty clear -- that gets us to numbers that are about flat with some variability across the quarters.

I think importantly as we look to fiscal 2018 and beyond, I think our belief is that we are laying the groundwork for continued healthy margin expansion, 25 to 50 bps of EBIT and I think over the long term gross margins will also continue to grow, but I think fiscal 2017 for the reasons we've articulated coming off of two record gross margin years, probably closer to flattish.

Okay. Thanks very much, guys.

Linda Bolton Weiser, B. Riley.

Just also on the question with, I guess, gross margin, certainly this competitive activity you are seeing is related to the commodity cost tailwind. So as we see those tailwinds dissipate, is it fair to think that maybe the competitive activity also dissipates by the end of the fiscal year, or is there a lag effect and that's more of an FY2018 phenomenon in terms of a little bit less competitive activity?

Remains to be seen, Linda. Certainly what we've seen historically is that whenever there's a more significant uptick in commodities costs that some of that trade promotion activity -- and the Glad business perhaps is a prime example of that -- generally tends to subside. So that would be our expectation here as well. It's really premature to talk about timing at this point. Certainly our current assumption is that commodities for the fiscal year are going to be, as Steve mentioned earlier, somewhat of a benefit still and that therefore trade promotion will remain elevated.

Okay. Maybe you talked about this when you announced the Renew Life acquisition, but I would just be curious what percentage of its sales is online because that category really does lend itself to online sales, and how does that compare for example like to Burt's Bees' percentage of sales online?

Linda, the Renew Life acquisition, 80% is in the US of the sales and within the US, the majority of the sales are in the natural channel. E-commerce is a relatively small percentage of sales on that business. We certainly see what you are seeing and that is an opportunity for that business to be a meaningful addition to what is already a strategic platform to invest in eCommerce for the Company and we think that the capabilities that we've brought to the business are going to help us with eCommerce.

But I will tell you the biggest opportunity, immediate opportunity perhaps for us is to take a brand that is heavily skewed towards the natural channel and in fact the market leader in the natural channel to food/drug mass where the brand is arguably somewhat underrepresented and where the growth in the category has really taken off right now and of course that is an excellent fit with our capabilities because building categories and profitable brands with our customers in the food/drug mass channel is a hallmark of what the Clorox Company has been known for. And we think that that capability is playing very well for Renew Life and that'll be our first growth pillar for the business this fiscal year.

Okay. And then just sticking on Renew Life, does your acquisition of that business signal a growing interest in your Company in the more general OTC drug category?

I think what we've said, Linda, in the past is there are three areas of interest. It's natural personal care where we have a beautiful brand in Burt's Bees, but where there are brands that are perhaps complementary in terms of which consumer they speak to or a geographic orientation and we'd love to add to the portfolio in natural personal care.

We've said that we like food enhancers as a category that we have capabilities in and that is a growing trend in consumers and a very profitable category that has tailwinds so we continue to be interested in that. And then we've always said that health and wellness is an area of opportunity for us and that can have many legs. Certainly the probiotics category and dietary supplements is one that we've made a foray in now. There are also other aspects of health and wellness that we are interested in, but to your specific question on OTC, that is less of a focus for us as a company.

We like businesses that are on strategy and importantly a great fit with our capabilities, and as you got from my previous remarks, distribution capability in food/drug mass is one of our world-class capabilities and we would like to take advantage of that rather than build new distribution capabilities that are less center of the plate for the Company.

Great. Thanks a lot.

Lauren Lieberman, Barclays.

You talked about A&P investments being very targeted towards trial-building and some of the innovation. It would be great to know what businesses in particular you've been focusing that incremental spending on.

Typically, Lauren, what we said is that we like to skew the investments towards our growth parts of the portfolio. I would say it's been pretty balanced last quarter across multiple brands, whether that's in home care, whether that's in litter, whether that's Burt's Bees, or whether that's foods. I would point you to the areas where we've had strong innovation, and our innovation program, of course, across the Company has been pretty balanced.

Burt's Bees in lip and face, Fresh Step with Febreze, which as you've noted has done well initially in the marketplace, wipes with micro-scrubbers, Hidden Valley Ranch with Greek yogurt and the flavored ranches. So it's been pretty balanced across the board in areas where we felt like we can support innovation that is going to be profitable and that shows a lot of promise in the marketplace.

Great. And then I just had one more question on Renew Life. First, about how much of the business is international? Is 10% a decent estimate? That was first. Secondly was just to confirm that you said earlier that the majority of Renew Life's flowthrough volume this quarter not in price mix? And then also why are you putting it in the household division? Just curious, reporting line wise, I would have thought it would have been in lifestyle, more similarities to Burt's and I was just curious about that. Thanks.

Yes, let me start off, Lauren, with the last question. Why did we put it in the household segment? Because under the accounting rules, you have to group things with similar economics and the margins are attractive. They are at Company average margins, but the margins are much more closely aligned with the household segment than they are say with the lifestyle segment so that's why we made the decision to do that. I will ask Benno to maybe address your other questions.

Yes, international, Lauren, 20% of sales, mostly Canada. So that tells you that the immediate opportunity certainly is very focused and very aligned with our capabilities in North America, but mid-term, as we've done quite successfully with Burt's Bees, there certainly is an opportunity to build out this business also in international given that probiotics and digestive health more broadly is a broader trend. You asked a question on price mix. Could you repeat that?

Oh, sure. Just that it's in the quarters, or really in the next three as well, as you are folding it in, is it primarily reported in volume, not in price mix?

I don't think we've given a breakdown of price mix in our outlook, to be clear. But I would say that generally we are seeing obviously consistent trends between volume and sales with Renew Life, at least based on what we know today. We've owned the business for 90 days. We've put some initial plans in place. Let's see how that plays out as we go through the year, but I guess the takeaway for everyone is it's about 2 points of top-line sales growth, and I would imagine volume would be fairly consistent with that, but again let's get into the year and see how it unfolds.

Okay. What I was just trying to get at is that in year one, not about are you taking incremental pricing at all, just if in year one of the acquisition it flows through volume as it folds into the P&L. That was the point because the price points are tremendous per unit, so that's why I was asking.

Yes, the focus for year one, Lauren, is on distribution expansion, on applying our marketing capabilities and starting to bring innovation to the business. We are certainly having a keen eye on value, but at this point I would view the key value drivers to be distribution/expansion in the first place and just better awareness and trial behind the many good and differentiated products that the brand already has.

Lauren, the only thing I would add specific to your question is we convert -- to your point, the price at shelf was quite attractive on these products, but we convert all of our products to an equivalized volume unit, so even though these products may have a relatively high price point on shelf compared to our other products, that's not going to drive the price mix gain that you are thinking of because we equivalize volume units, and we do that for all of our businesses. So maybe that helps answer your question on price mix.

Okay. It does. Thank you.

Erin Lash, Morningstar.

I apologize if I missed it earlier, but I was hoping you could give a little bit more detail surrounding the success that you saw with the launch of Fresh Step with Febreze. Obviously, that's a category where you've been challenged over the recent past and just what you are seeing in that particular space.

Erin, if I rewind 12 months ago, what we've said is that we like the cat litter category because it's got a lot of consumer tailwinds and that what we are focused on as we were at the time battling share losses was to earn back marketshare and not buy back marketshare, and we've said that innovation is what it would take to do this profitably and sustainably in a competitive category.

Fresh Step with Febreze was launched earlier this calendar year and it's based on a superior proposition around the core benefit in the category in odor control and certainly this initiative is off to a very promising start, so we are now seeing sales respond. We are starting to see share respond. Over the last 13 weeks, the business has returned to marketshare growth. So we invest behind what we believe to be a very promising and differentiated innovation in this category, and we are also not resting on our laurels, but again what it will take in a rather competitive category is a continued stream of innovations. And we have more innovation to come in fiscal year 2017 to support what is now a tailwind in cat litter.

Thank you. That's very helpful. And then I just had one follow-up. Obviously you are still digesting and working to leverage the Renew Life acquisition, but just to get your sense in terms of the pipeline for future deals, obviously you guys generate a ton of cash, but you've spoken over the last year or so about the premiums that sellers are demanding and just an update in terms of your thoughts in that regard?

I would say that our number one priority is to integrate the Renew Life business and to deliver against the promise of profitable growth from that business, so that's the number one priority. And then second, let me closely add that obviously keeping the base business healthy is actually critical.

All that said, we have dry powder to do more deals. As you pointed out, as we've been pointing out for some time, the multiples that deals have been trading at has made it difficult, I think, for many of the strategics to buy attractive properties and I think then it's incumbent on companies to try to fish in different ponds to look for opportunities in different places where you might have an opportunity to get a good deal.

So we have the money. We have the resources to be able to do more deals. We'd like to be able to do it. But our number one priority will be to keep the base business healthy, to deliver against Renew Life, and then if we can find a good deal, we will obviously take a hard look at that.

Thank you very much. That's helpful.

Bill Schmitz, Deutsche Bank.

What's the path to get the S&A ratio back down to that 12.5%, 13% range you were at previously? I know the international inflation is obviously wreaking some havoc on things, but it sounds like you are spending a fair bit of money on driving productivity down there.

So we are certainly on track for fiscal 2017 to get this number below 14%, and as you say, Bill, historically, if you go back over long periods of time, the Company was closer to the 13%. There have been times, there have been some years where we were actually below 13%. That is when we had the automotive business and so we had a bit of a bigger base and there were some disynergies when we divested the business, although the divestiture was certainly a good move we think for our shareholders.

I think a couple things need to be true. Number one, we've got to keep driving cost savings hard. We have to keep really challenging productivity, which we are doing. And that's why, as we've talked for some time, we've got a glidepath in place over the next three years with every function in this Company to make sure we are being as productive as possible, and I think if we do that, I think if we rebuild the margins in our international business, I do think you are going to see that number continue to float down.

The other thing I would just point out, and this is really consistent with my opening comments on fiscal 2017, we are coming off of two really good years in fiscal 2015 and fiscal 2016. Our compensation programs reflect that. I think we are making an assumption in fiscal 2017 that the compensation will return to more normalized levels, although let's see what happens with the results of the business and we are a pay-for-performance culture so that will obviously adjust. So I think we keep doing what we are doing. It's working. We stay the course, and I think you'll see that number continue to float below 14%, which is a non-regrettable choice for us.

Yes. This is more out of curiosity than anything, but why do use a gross debt to EBITDA metric? I think the banks will allow you to use a net debt to EBITDA if you wanted to and it seems like you continue to generate cash, so it's a misleading metric because you look at how you might use that availability going forward.

To be fair, Bill, we look at a lot of credit metrics. We look at gross. We look at net. We also reflect that we do have some cash overseas that we are holding there for investment opportunities over the long term overseas, so we look at a lot of metrics. I think the important thing to note is we are throwing off a lot of free cash flow. We anticipate 10% to 12% in fiscal 2017 as a percentage of sales. The debt levels are at a level where I think we feel very comfortable and gives us dry powder for deals, and what I've said consistently is over the very long term if we've got excess cash, we will look for ways to get that back to the shareholders if we don't need it to support the base business. But again, lots of credit metrics. We look at all of them.

Okay. Thanks, guys.

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

Thank you. So to sum up, we are very pleased to have delivered such a strong year in fiscal year 2016. Our strategy is working and we are staying the course in fiscal 2017. And I look forward to speaking with you again when we report first-quarter results in November. Thank you.

That does conclude today's conference. Thank you all for your participation. You may now disconnect.