高樂氏 (CLX) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Clorox Company first-quarter fiscal year 2017 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, Mr. Steve Austenfeld, Vice President of Investor Relations for the Clorox Company. Mr. Austenfeld, you may begin your conference.

Great, thank you. Welcome everyone and thank you for joining Clorox' first-quarter conference call. On the call with me today are Benno Dorer, Clorox's Chairman and 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 insight to 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, 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 with that said, turning to our prepared remarks, I will cover highlights of our first-quarter business performance by segment. Steve Robb will then address our financial results and our updated EPS outlook for fiscal year 2017. And then finally, Benno will close with his perspective as well as open up the call for Q&A.

So let me start with our topline results. This quarter's results highlight the investments we have been making behind innovation and marketing continue to drive topline growth as we saw 8% volume growth in the quarter and 4% sales growth. And as we noted in August when we provided our initial financial outlook for fiscal year 2017, we plan to spend about 10% of sales in advertising and sales promotion this fiscal year which is consistent with our spend level last year in fiscal year 2016.

It is also important to remember that this high level of support is consistent with our 2020 strategy objective of spending more behind our brands. As a result in a number of our categories, we benefit from a very high share of voice meaning Clorox brands are often the only one speaking to the consumer.

In addition, in the first quarter just ended, we increased trade promotion spending at a double-digit rate versus the year ago quarter both to support defensive activities in a few key categories against some competitive brands but also in support of recent innovation. As a result as noted a moment ago, first-quarter volume was up 8% and sales were up 4% which included about 2 points of growth from our Renew Life acquisition which closed in early May.

Steve will talk in a moment to the specific drivers of sales growth but big picture it is worth noting that all of our US segments grew sales in the quarter as did our international business on a currency neutral basis and importantly this quarter's 4% sales growth was on top of 3% growth in the year-ago quarter.

Additionally, our currency neutral sales growth this quarter which was 6% was on top of 6% currency neutral growth in the prior year's first quarter. But fundamentally we feel our businesses are performing extremely well.

Now turning to market shares, our US 13-week share in tracked channels -- and I want to emphasize this is only in tracked channels -- decreased 0.2 point versus the year ago quarter ending at 23.6%. This modest share decline reflects continued competitive spending in a number of categories including Brita, Glad and cat litter. But it is important to note that the tracked channel data just cited does not reflect the significant gains we have had in untracked channels including home care in the club channel, online sales across our entire portfolio but in particular Brita and Burt's Bees, continued growth in our professional products business and the great results we have seen in charcoal over the last few years in the home hardware channel.

Looking at category growth in the US, our categories were up about 0.2 point in the quarter which is lower than our long-term planning assumption of 1% to 2% growth. In great part, we believe this is due to extensive promotions by competitors which is restricting growth rates in some of our categories. In response, we remain focused on investing to drive category growth through innovation supported by marketing investments and with the intention of driving trial and awareness.

So with that, I will review our first-quarter results by segment. Starting with our cleaning segment, first-quarter volume increased 13% and sales grew 7% behind higher shipments of home care and professional products. In home care, which is our largest US business, sales increased double digits. The gain was driven by growth in nearly all segments of our home care business with Clorox branded products performing particularly well as we continue to invest behind the total Clorox equity.

Clorox disinfecting wipes reflected record quarterly shipments as volume was up double digits and that was even beyond the recent club distribution gains we have discussed. Further, our toilet cleaning business also saw record volume. Broadly speaking, we saw great support by retailers behind back-to-school merchandising. Consistent with these results, home care achieved healthy market share growth in the quarter and has now achieved more than nine quarters of market share gains.

In professional products, we saw volume and sales growth across all segments of the business and as in our retail business, Clorox branded products are performing particularly well in both the professional cleaning and the healthcare portions of the business.

Turning to our laundry business, sales declined in the quarter behind decreases on Clorox 2 Stain Remover and Color Booster. However, our bleach market share did increase in the quarter behind gains on our regular and Splashless sodium hydrochloride products. Splashless, which is margin accretive to our overall bleach lineup, is performing well and is growing household penetration which is a key objective across the Company's portfolio. This is a great example of leaning in on a margin accretive product to drive profitable growth.

Looking at our household segment, we delivered 6% volume growth and 3% sales growth in great part reflecting the benefit of the Renew Life acquisition.

Starting first with cat litter, first-quarter volume and sales both increased behind merchandising activity and the new Fresh Step with Febreze innovation we launched earlier this calendar year. While competition in this category remains intense, we are pleased to have seen a second consecutive quarter of market share growth for the scoopable Fresh Step franchise.

In bags and wraps, which is our Glad product line, volume was flat in the quarter although sales did decline as we supported our brands with higher trade spending in an intensely competitive environment. However, even with this quarter sales declined, there are some areas of the business that are performing well. For example, we are continuing to see increases in our premium Glad Odor Shield offerings and as we have mentioned in the past, we continue to focus on driving profitable growth in the trash bag category. So we are pleased to see growth in this margin accretive premium line.

Also our premium food storage bags featuring Disney characters are doing extremely well and we are now extending beyond our initial offerings that featured characters from the popular movies Frozen and Cars to newly launched bags featuring Star Wars characters.

In the charcoal business, sales declined but this was following a very strong fourth quarter in fiscal year 2016. Overall, the charcoal team expects to build on its great run over the last several years. Business remains fundamentally healthy and we look forward to the 2017 grilling season.

Lastly, results in the household segment reflect the contribution of our newly acquired Renew Life digestive health business. For the quarter, it represented about 2% of total Company sales but it is also expected to grow very rapidly. While still early as we've only owned the business for about two quarters, Renew Life is on track with our expectations, integration is going extremely well and we have already realized some of the distribution gains we anticipated when we bought the business.

Turning to our lifestyle segment, volume increased 1% and sales grew 2%. Within the segment starting with our food business, volume was flat reflecting very strong performance a year ago when shipments grew at a high single-digit rate. However in the quarter, sales did increase behind reduced spending compared with a very large promotional event in the year-ago quarter. Positively, market shares on our food business continue to be strong behind all segments of our bottled and dry dressings and our dip business.

Turning to Burt's Bees, volume and sales grew largely due to innovation across our lip portfolio including lipsticks, tinted lip balms and our new strawberry flavored lip balm as well as behind incremental merchandising which supported our strong base business performance. We remain excited about our innovation plans for Burt's Bees as we look to continue to drive sales this holiday season particularly behind lip balm and lip color.

Turning to our Brita water filtration business, while volume was flat, sales were slightly down in the quarter due to slowing sales of our Brita bottle offerings. Importantly however, shipments of pour-through filters which are really the core of our business were up during the quarter as the brand continues to benefit from the great momentum we are building through our partnership with the reigning MVP of the NBA, Stephen Curry, with the Golden State Warriors. Behind ongoing marketing, PR and future innovation, we continue to believe this business will improve over time.

Lastly, looking at our international business, volume for the quarter increased 4%. From a sales standpoint, international was flat which we believe is a really solid result recognizing the continuing negative foreign currency exchange rates. Essentially we were able to offset foreign currency headwinds through price increases as well as investments we have made in certain markets such as in Canada with the Renew Life business and our Burt's Bees business in Asia.

Because of these actions, sales for international excluding foreign currency grew 10%.

In addition, we continue to execute our Go Lean strategy across our international business focusing on margin enhancement which we view to be particularly important given our belief that foreign currency headwinds will continue through the fiscal year at roughly the current level.

So to wrap up, although just 90 days into the fiscal year, we are very pleased with our topline performance. Importantly despite the continuing challenges of unfavorable foreign currency, our topline expectations remain unchanged. We continue to anticipate sales growth of 2% to 4% or 4% to 6% on a currency neutral basis.

Now I will turn it over to Steve Robb to provide more detail on our Q1 performance as well as our outlook for fiscal year 2017.

Thanks, Steve, and welcome, everyone. Well, we are pleased to start the fiscal year with another strong quarter of volume and sales growth supported by ongoing investments behind our brands. And importantly, I feel good that we are on track to deliver solid sales and earnings growth for the fiscal year.

Turning to our financial results for the first quarter, Q1 sales grew 4% on top of 3% growth in the year-ago quarter reflecting nearly 8 points of volume growth including the benefit of the Renew Life acquisition and more than 1 point of benefit due to pricing actions in our international segment. These factors were partially offset by a combined impact of about 3 points from unfavorable mix and higher trade spending and about 2 points of negative foreign currencies.

Gross margin for the quarter was lower than we anticipated reflecting unfavorable mix which came in a bit higher than expected specifically gross margin for the quarter came in at 44.4% from 45% in the year-ago quarter when notably the Company delivered 220 basis points of gross margin expansion. The 60 basis point decrease reflects 140 basis points of cost savings, 90 basis points of favorable commodity costs and 70 basis points of pricing in international. Our gross margins also reflect 220 basis points of higher manufacturing and logistics costs driven by inflationary pressures and strategic investments to continue growing our brands and maintain our cost savings pipeline.

For example, we closed our Chicago bleach manufacturing facility earlier this year as a part of our ongoing productivity efforts to optimize our supply chain. Other negative impacts on gross margin in the quarter included 60 basis points of unfavorable mix that I mentioned and about 50 basis points of negative currencies.

At 13.9% of sales, selling and administrative expenses increased about 0.5 point versus a year ago and primarily due to the impact of the Renew Life acquisition and increased performance-based compensation costs. For perspective, excluding the impact of Renew Life, selling and admin came in at 13.7% of sales and we continue to anticipate fiscal year selling and administrative expenses to come in below 14% of sales.

Advertising and sales promotion as a percentage of sales was essentially flat versus year ago while our US retail spending came in at about 10% of sales reflecting continued support behind our brands.

Our effective tax rate for the quarter was 32% versus 34.5% in the year-ago quarter. The decrease was driven mainly by a 2 percentage point benefit to the Company's effective tax rate in the first quarter of fiscal 2017 from the adoption of a recently issued accounting standards update. As previously communicated, the benefit realized from the adoption of ASU 2016-09 could vary significantly given the inherent uncertainty in predicting future share-based transactions. And while this year's first-quarter tax rate was lower than year ago, it was higher than we expected as first-quarter option exercises were well below those in the year-ago quarter and historical levels.

Net of all of these factors, we delivered diluted earnings per share from continuing operations of $1.36, an increase of 3% on top of a 20% increase in diluted earnings per share in the year-ago quarter. First-quarter net cash provided by continuing operations was $170 million compared with $135 million in the year-ago period. The year-over-year increase reflects higher tax payments in the year-ago period.

Free cash flow defined as net cash from continuing operations less capital expenditures which came in at $59 million this quarter was $111 million or 7.7% of sales. For the full fiscal year, we continued to estimate free cash flow as a percentage of sales in the range of 10% to 12%.

Now turning to our fiscal year 2017 outlook, we continue to anticipate sales growth in the range of 2% to 4% reflecting our unchanged assumptions for growth and continued investments in innovation. Excluding the anticipated negative 2 point impact from unfavorable foreign currencies, we continue to expect fiscal year 2017 sales to grow between 4% and 6%.

Turning to margin, we now anticipate gross margin to decrease modestly versus our previous assumption for gross margin to be about flat reflecting firming commodity costs and somewhat greater pressure from unfavorable mix. While we benefited from lower commodity costs in the quarter, as previously communicated, we continue to anticipate commodity favorability to dissipate as we go through the fiscal year.

We continue to anticipate fiscal year EBIT margin expansion in the range of 25 to 50 basis points with growth expected to be seen later in the fiscal year from lower selling and administrative expenses driven by ongoing productivity initiatives and more normalized levels of performance-based incentive compensation costs. In addition, we will be lapping a number of items including one-time integration costs related to Renew Life acquisition and distribution expansion of Clorox Disinfecting Wipes in the club channel.

Now I will turn to our fiscal year 2017 diluted earnings per share from continuing operations. As noted in our press release, we now anticipate our effective year tax rate to be between 32% and 33% reflecting a 2 point reduction versus year ago from adopting the accounting standards update compared to the previously anticipated 4 point reduction. As I just mentioned, there is an inherent uncertainty in predicting future share-based transactions and our updated outlook for the fiscal year effective tax rate reflects the lower than anticipated exercises of Clorox stock options in the first quarter and the Company's revised outlook for the full-year stock option exercises.

Moving forward, we continue to anticipate more variability in our quarterly and annual tax rates as a result of adopting this updated standard.

Net of all of these factors, we now anticipate fiscal year 2017 diluted earnings per share from continuing operations to be in the range of $5.23 to $5.43 which reflects our updated assumption of $0.10 to $0.15 of benefit from the adoption of the accounting standards update versus the prior assumption of $0.25 to $0.30. Importantly, excluding the impact of the updated accounting standard, we continue to anticipate fiscal year 2017 diluted earnings per share to be in the range of $5.13 to $5.28.

In closing, we are pleased with our start to the fiscal year. We are growing sales on top of strong sales growth in the year-ago quarter. As we look to the remainder of the fiscal year, we will continue to drive the following priorities.

First, we will stand of course in investing strongly behind our brands to drive our innovation programs and defensed against competitive activity we are seeing in select categories.

Second, we plan to step up our productivity and cost savings programs to support our margins in the US and in international in light of ongoing inflationary pressures impacting manufacturing and logistics costs and our expectations for firming commodity costs.

Finally, we remain committed to delivering value to our shareholders over time. I'm pleased with our near-term actions to support this commitment including increasing capital expenditures in the first quarter behind growth and cost savings opportunities. Importantly despite these investments, we continue to believe that we will deliver fiscal year free cash flow in the range of 10% to 12% of sales. Bottom line, we will continue to invest behind our brands, focus on the long-term margin expansion and deliver against our 2020 aspirations.

Now I will turn it over to Benno.

Thank you, Steve, and hello everyone. Here is what we hope you will take away from today's call.

First, we are very pleased with the continued strong topline growth particularly in an environment where growth is so hard to come by. A key focus for Clorox remains driving good growth, growth that is profitable, responsible and sustainable for the long-term. Driving good growth is important because it means we are winning with the consumer, we are winning with the customer, we are running an operation that is effective and efficient and we are creating shareholder value.

We have been keenly focused on doing just that through innovation, distribution expansion and incremental demand building investments behind our brands.

We have significantly increased our marketing support across digital, trade promotion and other marketing mediums to nurture our growth plans and drive our right to win. And our strong Q1 growth on top of strong year-ago growth is the direct outcome of this deliberate and strategic approach.

Second, in the midst of an intensely competitive environment, we have momentum on our brands and we are staying the course. In the US, our business is healthy and we intend to continue driving it by offering superior value to consumers supported with excellent retail execution which is something that is a hallmark for us.

Notably and very consistent with our strategy, we are particularly pleased to have completed Q1 with more than two-thirds of US net customer sales growing household penetration. Increasing household penetration is a strong indicator of healthy business growth.

In international, we are staying the course. We are spending headwinds from foreign exchange and inflation with our Go Lean strategy. We are taking a long-term view of this business to improve profitability while making select investments in key growth markets and I feel very good about the future of our international business recognizing the fundamental strength of our brands in many countries.

Finally, we are taking a long-term view to invest in growth that is profitable and sustainable and to continue to deliver strong ROIC and cash flow to create long-term value for our shareholders.

Examples include that we are investing in value-added innovation and have a robust collection of launches teed up for the second half of this fiscal year. We also remain focused on smart investments with solid ROIs ensuring our demand creation dollars work harder for us every year. We will continue our focus on productivity and cost savings to fund our investments, improve our margins and reduce selling and administrative expense.

And while only a few months in, we feel very good about our Renew Life acquisition (technical difficulty) opportunity we have to make a difference to the business through our 3D brand building capabilities and through the brands' scalability and distribution expansion potential.

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

(Operator Instructions). Wendy Nicholson, Citi.

Good afternoon. Could you talk about -- one of the comments you said at the beginning, Steve, was category growth was unhealthy in your words I think due to the higher level of promotional activity. But can you talk about how that is driving volume or velocity if you will among those categories? Because I guess what I am wondering is number one, if oil prices are headed higher, what do you expect or have you started to see any changes in that competitive activity?

But number two, do you think there has been pantry stocking on the part of consumers because there has been so much promotional activity? Just if you are talk about that comment maybe a little bit more, that would be great.

Wendy, this is Benno. Just to put it in perspective as Steve noted, category growth was somewhat lower over the last 13 weeks due to the promotional activity that we are seeing. Recall that, commodities were still somewhat of a tailwind for us this quarter and therefore it didn't surprise us to see promotional activity across several of our categories in particular perhaps Glad Trash and the disinfecting wipes to be higher and depress that category growth somewhat.

We did not see any particular pantry stocking so that is again, I expect that this promotional activity is going to subside over time as we expect commodities costs to firm up later on in the fiscal year. And what Steve also did was to point towards the particularly strong growth that we have seen in non-tracked channels. So again, this is an example of where category growth in tracked channels really just tells part of the story of what has happened this quarter given that we have seen such outsized growth on a number of our brands in non-tracked channels. And Steve mentioned some of those and they include but are not limited to disinfecting wipes, Brita, Burt's Bees so we are feeling good about the total topline momentum that we have as is evidenced by the strong volume and sales growth in the last quarter.

It just strikes me as strange that category growth is lower than you would expect because there is a higher level of promotional activity. In other words, the discounting of the price promotions are that high that it is not being compensated for by higher volumes. That just intuitively usually there is acceleration in category growth when there is a lot of promotional activity.

Recall, Wendy, that a lot of our purchases in the categories that we are in are routine purchases so people are not necessarily buying more trash bags or buying more bleach just because it is on sale. What it therefore does do is keep volume somewhat unchanged and depress the sales growth and that is exactly what we have seen in tracked channels.

It also gives us certainly ammunition to continue the conversations that we have with retailers that price promotion as we have noted to you and certainly to retailers in the past don't really add value in our categories and that over time we expect the promotional spend in our categories to subside and our competitors to return to perhaps more rational behavior that drives our categories the right way which is certainly something that we are focused on. And the right way means investing in our brand equities and investing in value-added innovation.

Fair enough. And then just a second follow-up question I had is on Burt's Bees specifically. Can you remind us the lifestyle segment has been a little bit volatile over the last couple of quarters, when are you lapping the launch of lipsticks? Because I know that was a big deal for that brand, it is a small brand but still I think it was a big initiative. When are you launching that and where are we in terms of how much more distribution is there for that product and brand extension if you will? Thanks.

Lipsticks was launched in Q3 of fiscal year 2016 so it will take a little bit until that laps. But keep in mind that we are continuing to drive innovation on that business and we certainly also have innovation planned for the back half of this fiscal year.

Specifically your question on lipsticks, that continues to do very well. As we speak we have started to do TV advertising for this brand and the early returns are really strong and we expect that initiative to continue to grow in its year two and year three post its launch. We view cosmetics in general as a potential growth platform for the Burt's business and we will invest behind that.

And lipsticks in particular has been very well received by consumers but also by the press. Notably we have gained two Lipsticks of the Year awards by two leading magazines, Cosmopolitan and Allure, and consumers really follow the recommendations that publications like those two make. And we are feeling good about this launch and think that doing TV advertising as we are doing now is another down payment in the long-term success not only of Burt's Bees cosmetics but the Burt's Bees franchise as a whole.

Terrific, thank you.

Stephen Powers, UBS.

Great. First, you may have disclosed this somewhere and I just missed it but on Renew Life, can you just confirm that it was roughly equal contributor to both sales and volume in the quarter and maybe doing so highlight for us what volume growth was in household excluding Renew Life?

So Renew Life contributed about 2 points to both volume and sales growth for the Company as a whole. Turning to sales on Renew Life for the household segment, it contributed about 6 points to sales growth for the household segment.

Great, thank you. And then pivoting to gross margins, you mentioned the negative mix of the commodity dynamics but I wanted to focus also on the inflationary pressures impacting manufacturing and logistics. Was there any timing factor there or should we expect that drag to continue at an elevated rate?

Separately, as you factor in competitive activity plus your own innovation pipeline, can you just frame a little bit on the trade spending line over the balance of the year? It sounds from Benno's comments like perhaps we should expect it to remain elevated year-over-year in the nearer-term and then perhaps tapering off toward the end of the year as you lap the investments of late 2016. Just wanted to make sure that was a fair read?

So just starting with the trade spending, we do plan to continue to invest in trade to kind of support the innovation particularly our second half innovation that we are pretty excited by. So those numbers will continue.

Regarding manufacturing and logistics, in the first quarter it was about a 220 point drag on gross margin. Now I would not have you project this forward for the full year because included in the 220 points in addition to inflationary pressures in international and the US which we do expect to continue, it also includes some one-time investments we are making behind our cost savings programs and our growth initiatives. And to be specific, that is about 60 basis points and we are feeling good about the investments we are making, we think they're going to generate nice returns going forward.

But I think that number is a bit elevated in the first quarter just because of these investments we are making.

Okay, that helps a lot. Then maybe just stepping back, Benno, you mentioned at the end of your prepared remarks the increases in household penetration that you realized in the quarter. I was hoping you could maybe pinpoint which businesses were most incremental there. I'm assuming wipes just given the growth that we saw and Renew Life given that it targets seemingly different customers in different channels from your core business. But were there any other businesses to call out in terms of where you are reaching new consumers and new households?

Yes, for clarification what I said is two-thirds, more than two-thirds of our US volume or US net customer sales grew household penetration and it is really broad-based, Steve. Notably it does exclude Renew Life because we do not know what the household penetration was last quarter, last year, sorry.

But really, really broad-based with a skew toward our growth businesses which is what you would expect and also tells you that our portfolio momentum accelerator which is to eventually invest in those businesses that have a stronger right to grow is really paying off well. But broad-based certainly disinfecting wipes continues to grow, household penetration but I would point out that the Clorox brand as a whole is perhaps the shining star here and that is not limited to disinfecting wipes but also includes toilet bowl cleaners and sprays.

We have grown our Clorox brand into four million more households over the last year and that is really unique in an environment like this when so many brands in our categories competitively are struggling to gain new households. So we feel good about our ability to connect with consumers based on innovation, based on the change in our marketing approach and the increased focus on digital and the investments that we are making in our brands with a particular focus also on offering superior value to consumers. So really broad-based and feeling good about that.

Broad-based, when I say that, maybe a last word, also does mean that it includes our fuel businesses. As you know, we have differentiated the way we classify our portfolio into fuel and growth businesses and we see notable household penetration growth also on our fuel businesses which tells you that also fuel businesses have a right to grow and we are certainly focused on growth in those businesses as well.

Thanks for that. Appreciate it.

Ali Dibadj, Bernstein.

So just to go back on a couple of things topline and margins. If you go back to excluding obviously currency but also Renew Life, and then also the expansion of wipes into Costco, just to kind of level set, would Q1 growth would have been in 2% to 3% range? And can you give me the analogous number relative to your fiscal year 2017 2% to 4% range? So excluding the Renew Life which you do, currency which you do but then also the Costco wipes expansion?

Let me try to answer your first quarter question and highlight what we had previously communicated. So Renew Life contributed about 2 points of sales growth for the Company in the first quarter which was offset by the way with about 2 points of foreign currency. As it relates to Clorox disinfecting wipes, the incremental distribution at club, the net customer sales was less than 1 point so nice contributor to the sales growth but certainly not the biggest contributor to the sales growth.

Okay, that is helpful. And then according to your always helpful retail pricing actions disclosure in the press release, it doesn't look like you have actually taken any US pricing since February 2015. And a twist on the question from earlier around trade spend, do you think you will be able to take pricing up as (technical difficulty) manufacturing costs granted maybe less than what we saw this quarter but those kind of ramp up and there is inflationary environment that is growing obviously in the commodities directly. Do you think you will be able to take pricing to offset that or do you think it is going to be more difficult going forward?

And depending on your answer there on the other side of the operating margin story, is obviously the (inaudible) bucket which has been great right now it is below 14 is target. How much more fuel is left on the tank there from a cutting on SG&A perspective?

You got a couple of questions in here. Let me see if I can take each in turn. First, starting with pricing, our fiscal 2017 outlook as we previously communicated and this reminds unchanged, we are taking pricing but it is primarily in our international business where we are seeing higher rates of inflation. And importantly where we are taking the pricing, it is sticking in the market. I think longer-term we continue to believe we've got pricing power in our US brand equities given the health of those brands and the investments we have been making.

If inflation does in fact ramp up over the long-term, I don't think we are afraid to take pricing to protect our margins but at this point it certainly would not be our preferred option and let's get through the next couple of quarters and let's just see what happens with some of the inflationary pressures.

Regarding selling and administrative expenses, we continue to believe that will come in below 14% of sales this fiscal year really being driven by a combination of our productivity programs as well as more normalized levels of incentive compensation and most of that benefit you will likely see in the second half of this fiscal year. So as we move through the fiscal year, you should see that number come down.

We've got plans in place to get that number well below 14% over the long-term so short answer is there is more runway there. It is going to take time but we feel pretty confident in the plans we have there.

So this is helpful. Your former answer into the gross margins in particular, can you share your view on what we have been hearing obviously from retailers in the US? So long-term commentary about more private label, clearly discussions about Aldi and Lidl coming into the US much more aggressively. They are 90% plus private label and what the impact is on your business, it has an impact on everybody but an impact on your business in particular. Given some of the categories -- granted not all -- but some of your categories are playing in that area where you would say yourself you are only the share of voice out there. So just that shift that we expect over the longer-term towards retailers that maybe more focused on categories that are private label prone like yours?

I'm going to take that. First of all, I think that whether we are going to see that shift remains to be seen so I would certainly say that we are watching that but we will have to let this play out. Again, I would point to our sales growth so investing in our brands and investing in sales growth and making sure it is profitable is what it is about and I think that is what we are doing particularly well and we are doing that in categories that reasonably are flat more recently and we have shown that we can grow 8% volume and 6% in currency neutral growth in an environment where growth is very hard to come by. And that is because our recipe continues to be to invest in our brands.

Our innovation is as you know margin accretive and we have a lot of innovation out there right now and particularly robust innovation program in the back half. So for us as we look at the pricing environment and the retail environment, it is frankly relatively stable. And what retailers continue to want is growth and they want growth the right way and that is what we are delivering for them which is why as you look at assortment, shelving, merchandising, in-store, we are winning the game with retailers right now and we are investing for the long-term to continue to do that.

Thanks very much for the perspective.

Lauren Lieberman, Barclays.

I was hoping you could talk a Renew Life. You mentioned getting some early distribution wins. What types of retailers those are in, if it is mainstream or still kind of more the natural type channel? And also you made a point of discussing how much it contributed to this quarter's growth but that it is growing very quickly. So should we assume that the contribution to total Company sales growth actually grows through the year? Thanks.

Let me take the first part of that question. Again as we have said, we think Renew Life will contribute about 2 points to sales growth for the full year and it certainly did that in the first quarter and I think over the next couple of quarters you will see something fairly consistent. It is a nice size business but it is not the largest business in the portfolio.

So while it is growing nicely and it is very much on track, I'm not ready to say it will accelerate the growth rate in the short term. I think we need to get through the integration and start driving the distribution buildout, all of which we have plans to do.

And on your distribution question, Lauren, so the first objective we certainly have is to maintain and build on the strength that the brand has and enjoys in the natural channel and we are doing that well. And then the second opportunity is to make stores and food drug mass so our traditional stronghold retailers where as a company we have very strong capabilities and a strong track record of success. We are doing a nice job to expand distribution there and we are starting to see the benefits of that but by no means are we done with that. But we are certainly pleased with the progress. This business is doing exactly what we hoped it would do.

We are starting with distribution expansion as time goes by, we will then plug in our marketing and innovation machine and we are certainly looking very closely at the international businesses as well. One example that Steve Austenfeld mentioned earlier was the really noteworthy growth we have had in the Canadian business and we think there is a lot more to come. So this is a good acquisition for us that is on track and doing exactly what we hoped it would do for us.

Great. Just one clarifying point on CapEx, I think Steve Robb, you were clear in terms of the manufacturing logistics there is some one-time charges in there given that you are a GAAP reporter. But is that also the case for CapEx the elevated level had to do with some of these investments and plant closures and restructuring activity?

Absolutely. The incremental CapEx we are making is really to drive both the growth in the business but also importantly to drive the cost savings program. And I think as we have said for many years over the long-term, it will probably be very close to the level of depreciation and amortization but we are not afraid to let that float up either on the quarter or the full year if we see good investment opportunities and this is exactly that. We let it float up on the quarter, it is likely it will be a bit higher this year than we have seen in recent years and that is a good thing. It just means that we are finding good opportunities to invest behind.

So you will continue to see us lean in to keep the cost savings pipeline healthy and keep the topline profitable growth going.

Great. Thanks so much.

Olivia Tong, Bank of America Merrill Lynch.

Great, thanks. Just wanted to ask you about spending behind your brands. How nimble are you in terms of changing of the buckets of spending behind promotion advertising? Because you obviously kept your foot on the pedal on promotion but ad spend was flat this quarter after a big increase in the second half of last year. So maybe can you first talk through that?

And then in addition to the nimbleness question, do you think you have a better sense on ROI on your spend and perhaps can you give some examples as it pertains to a few of those categories maybe wipes in particular? Thanks.

So, Olivia, the spend by quarter is certainly going to vary so I wouldn't read too much into Q1. What we said is that for this fiscal year, we think we have about the right spend and we expect advertising sales promotion to be in the 10% range which is consistent with last year and certainly increased versus previous years. So feeling good about the ROI that we are getting across all of the buckets and have a really disciplined process in place that allows our businesses to measure ROI across all buckets including digital on at least a once a quarter basis and then shift dollars around.

And again, the best way for me to perhaps look at ROIs and show that the ROIs are really solid is to go back to the growth that we are seeing in so many of our businesses, which has really been broad-based this last quarter across all US segments and even in international. So feeling good about the ROI that we are seeing. And again, as mentioned perhaps also in the past, we leave it to the general managers to decide where they want to spend based on where they see the ROIs, and that could mean that in the business like Burt's Bees we are investing in television, because driving awareness behind initiatives like Burt's Bees lipsticks deliver strong return.

On businesses like cat litter, we are investing in store to drive awareness behind the Fresh Step with Febreze innovation that has been working well for us in store. And then some other businesses like Hidden Valley and perhaps Brita, we are spending the dollars more online including e-commerce, and we are seeing really solid results there.

So we're feeling good about the ability to be nimble and flexible and shifting be dollars to where we are seeing the ROIs, and again I would point to the strong topline growth as a proof point.

Got it, got it. If we could dig a little bit more on the legacy house business excluding Renew Life, it seems like litter is getting a little bit better; charcoal, the decline make sense after the last couple of quarters. But it seems like we go back and forth on Glad a fair bit. So I get that the premium and is doing well but when do you consider paring back or rationalizing some of the nonpremium businesses?

So if I look at Glad's volume has been flat after really several quarters of solid growth. And I would also point to really a comp matter perhaps on that business because if you look at fiscal year 2016, the first quarter, we had a very strong quarter a year ago with sales up mid to high single digits and profit up very significantly, very highly into the double digits. So I would look at perhaps the year-ago quarter as the main issue here. I certainly expect better results in the coming quarters.

As we have noted, competitive price promotions are depressingly the category and perhaps also the share and what we are focused on is being balanced here. Certainly responding in kind and we are not afraid to invest in the defense of our brands where we think that is the right thing to do to set a strong signal to competitors that we are not letting them steal share at our expense by spending and price promotions. But we are seeing balanced and we are staying focused on long-term profitable growth. So how you see that is that we certainly are expecting -- accepting temporary share losses in particular in the lower profit and lower price segments.

The good news is as Steve Austenfeld noted, the odor shield premium segment is still growing. We have strong innovation plans in place for the back half and we expect the trade promotion activity to subside as commodities firm up over time in the back half.

So if you look at this business over a longer period of time perhaps the last 10 to 12 years, there have been these ups and downs as you noted, Olivia, but if you look at the long-term trends, they have been very favorable and positive and we know how to deal with situations like these where commodities are lower and competitive spend is elevated. But if history is a teacher which we expect it to be, then this will subside and then our balanced marketing and innovation driven strategy will continue to succeed.

Thanks, appreciate it.

Bill Schmitz, Deutsche Bank.

Good morning. Can you just drill down a little bit more on this gross margin bridge for the year? So do you still expect gross margin to be roughly flat for the year? Some of the puts and takes I guess like the Argentina devaluation lapped so that probably helps the international business. But I was surprised that there wasn't more pressure from all that Costco volume because obviously Costco is a lower margin customer. So was sort of curious if that gross margin on that Costco business and the wipes is accretive to the fleet average? And then I have a follow-up as well.

So, Bill, a couple of thoughts. So first of all when we had originally come out with our outlook in August, we had thought gross margin would be about flat. As I said in my opening comments, we now anticipate gross margin will be down modestly on the year. Part of that reflects mix which was a little bit less favorable than we had thought in the first quarter. It was more unfavorable than we had originally expected.

But the biggest change has to do with our expectations for resin prices which we think are firming up a little bit quicker than we had originally anticipated. So at this point we think gross margin will be down modestly. It assumes commodity costs in total are about flat so it will dissipate as we had thought. It assumes that we will still have some drag associated with mix which we have seen for some time.

But importantly, we feel very good about our cost savings. And I would also say that at this point we have got solid plans in place to deliver EBIT margin expansion of 25 to 50 basis points for the full year. And I would just point out, over the long term, keep in mind we are coming off of some very strong gross margins over the last couple of years but I feel very good about our plans to expand gross margins and total margins over the long-term behind our cost savings programs. And also as we lower our S&A costs over time and as we talked, we've got pricing power.

So we are comping a pretty tough number in the year-ago period of 220 basis points of gross margin expansion but I think we are feeling pretty good about the plans we have in place both for the intermediate and long-term.

Got you. So you are not going to touch the Costco question. Can you just tell me what e-commerce growth was in the quarter and what it is as a percentage of total sales now and if you have any targets on that?

As a total percentage of sales, Bill, it is about 3 points even though as we have noted in the past, it is much higher than that on selected businesses like Burt's and Brita and also the professional business. We don't comment specifically on growth rates on specific growth rates on businesses like for any given quarter but it continues to do very well as we invest and as we continue to win with customers be it Amazon or be it Walmart.com or Staples.com, we continue to be bullish about this business.

As you know, we have been able to double the business over the last three years and we think we can at minimum do the same once again over the next three years and we are investing behind that.

Okay, great. Thanks so much.

Joe Altobello, Raymond James.

Thank you. Just a question in terms of promotion spending just curious if you guys are seeing any discernible trend in spending between your tracked and your non-tracked channels?

If you look at the non-tracked channels, really varies category by category. A lot of the non-tracked channels frankly tend to be less promotionally driven, they tend to be more every day low price. So it is hard for me to quantify this in numbers. But off the top of my head what I would say is that there is less price promotion in non-tracked channels. Think about non-tracked channels e-commerce, home hardware, club, it tends to be more everyday low price focused.

But in terms of the trend, that hasn't changed at all in the last couple of quarters?

To be very honest, I'd have to look that up. It is a level of detail that I would need to look at. Certainly I would expect that where in channels where promotional spending happens that are non-tracked, I would think that we are seeing the same phenomenon in non-tracked channels as we are seeing in tracked channels. But it is hard for me to give you any highly qualified perspective on what specifically it was in those channels over the last quarter.

That is fine. If it is not on your radar screen it is probably not a major trend shift I would imagine. I guess in terms of the wipes business, I mean obviously you guys have taken some significant shelf space from a major competitor. I imagine they are not taking that lying down. Have you seen them step up spending obviously beyond what you talked about this morning but more so looking for gaining shelf space outside of the club channel?

Yes, we noted earlier, Joe, that disinfecting wipes is one of the businesses where we have seen more competitive price promotions. I will tell you though that this is a business where we have continued to win in club and beyond and the best way to express that is in the strong share growth that we have seeing in the category over the last quarter and the double-digit sales growth that we have seen even beyond the specific club retailer that you alluded to.

So we are winning because we are investing in gaining household penetration which is working well. We are investing in marketing dollars and we are by far the leading investor in brand equity type of channels in this category and we continue to invest in innovation which has been very successful in particular, Clorox Disinfecting Wipes with microscrubbers continues to do very well and keep growing. So it is a fortress of ours and we are defending the fortress and we are growing it and we are winning in the marketplace in club and beyond.

Okay, great. Thank you, guys.

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

Thank you. In closing, we are very pleased that our investments continue to drive momentum and growth in the first quarter on top of the strong growth we enjoyed a year ago. We remain confident in our strategy and the health of our core business and we remain focused on making investment choices that are right for the long-term. Thank you all for joining us today.

That does conclude our conference call today. Thank you all for your participation.