高樂氏 (CLX) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Clorox Company First Quarter Fiscal Year 2018 Earnings Release Conference Call. (Operator Instructions) As a reminder, today's call is being recorded. I would now like to introduce your host for today's conference, Ms. Lisah Burhan, Managing Director of Investor Relations for The Clorox Company. Ms. Burhan, you may begin your conference.

Thanks. Welcome, everyone, and thank you for joining us. On the call with me today are Benno Dorer, Clorox's Chairman and CEO; Steve Robb, our Chief Financial Officer.

We're broadcasting this call over the Internet, and a replay of the call will be available for 7 days at our website, thecloroxcompany.com.

Let me remind you that on today's call, we'll 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.

Reconciliations 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 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.

With that, I'll cover our Q1 business performance, discussing highlights in each of our segments. Steve will then address our financial results as well as our updated outlook for fiscal year '18. Finally, Benno will close with his perspective on the business, followed by Q&A.

For the total company, first quarter volume and sales each grew 4%, with sales growing across all 4 segments. Sales in tracked channels remain healthy, and we continue to see very strong growth in non-tracked channels, particularly in e-commerce and club.

I will now turn to our results by segment. In our Cleaning segment, Q1 volume and sales each grew 5%. Sales growth this quarter also include less than 2 points of benefit from shipments related to the recent hurricanes.

Cleaning segment's strong top line growth was led by Home Care, which grew by high single digits, on top of double-digit growth in the year-ago quarter. We're very pleased by the continued momentum of our largest SBU, especially as the growth continues to reflect broad-based strength across the Clorox equity portfolio, with all-time record shipments of Clorox Disinfecting Wipes as well as our recently introduced Scentiva wipes and sprays.

Consistent with these results, Home Care delivered its 13th consecutive quarter of market share gains. In Laundry, sales and volume grew mainly behind shipments of Clorox Liquid Bleach as retailers stocked up for hurricane-related purchases. The quarter's results also reflect continued growth in our premium Clorox Splash-less bleach resulting in share gains on total Clorox Liquid Bleach.

Lastly, within the Cleaning segment, our Professional Products volume and sales were flat, reflecting the divestiture of the Aplicare business in late August. The balance of Professional Products business is performing strongly.

Turning to Household segment. First quarter volume increased 7%, and sales grew 5%, with broad-based growth across all business units.

Starting with our Glad Bags and Wraps business. Sales growth was driven by ongoing success from our premium OdorShield trash bag, especially in e-comm and the club channel as well as slight gain from hurricane-related shipments.

In Charcoals, volume grew slightly while sales declined slightly due to unfavorable mix as well as higher trade promotion investments to support our business. We continue to feel good about our plans for this business going forward, and the category is healthy.

Cat Litter volume and sales each grew by high single digits behind our Fresh Step innovation and strong merchandising support. We're pleased with the strong momentum we're seeing on this business as reflected by 4 consecutive quarters of market share growth.

Finally, turning to RenewLife. Q1 was the first full quarter lapping the acquisition. We're pleased to report high single-digit sales growth behind distribution expansion leveraging our sales capabilities. Additionally, we started distribution within the club channel in October.

In our Lifestyle segment, volume increased 2%, and sales grew 4%. Burt's Bees delivered double-digit sales growth this quarter, behind the introduction of our new natural cosmetics line and first-ever distribution expansion of lip care in the club channel. Burt's Bees grew share in the quarter, and we're very pleased with our share gains in the lip color category.

In our Brita business, volume and sales declined as gains from innovation behind our new Stream pitcher were more than offset by lower club channel merchandising and a strategic choice to rationalize a lower-margin part of our portfolio.

That said, the Stream pitcher is performing well 6 months after launch and is now the #2 pour-through item behind our Brita legacy pitcher, which is the market leader.

To wrap up Lifestyle, food volume and sales grew behind strong merchandising in club and grocery channels for bottled Hidden Valley dressings. Consumptions remain very strong, and we're especially pleased that our Hidden Valley brand delivered 11 consecutive quarter of share growth.

Finally, turning to International. Volume was down 2%, although sales grew 1%. Sales growth reflects the benefits of pricing and innovation, partially offset by unfavorable mix and weaker volume in Argentina due to macroeconomic conditions, and in Puerto Rico from the impact of the hurricane. We continue to focus on our Go Lean Strategy to drive margin improvement, while selectively investing in Burt's Bees, RenewLife, Laundry and Home Care.

Now I'll turn it over to Steve, who'll provide more information on our Q1 performance and discuss our updated outlook for fiscal year '18.

Well, thanks, Lisah, and let me welcome everyone. We're certainly very pleased with our strong start to fiscal year 2018. We delivered strong sales growth and gross margin expansion across all our U.S. and International segments in what continues to be a tough environment. What's more, we delivered these results on top of strong results in the year-ago quarter.

Turning to our financial results for the first quarter. Q1 sales grew 4%, consistent with volume growth, and our sales results also benefited from about 1 point of price increases in International, which were more than offset by unfavorable mix, primarily reflecting strong club channel shipments. And as Lisah noted, first quarter sales included the benefit of slightly less than 1 point from incremental shipments related to the hurricane recovery. At this point, we don't expect the hurricanes will have a meaningful impact on full year sales.

Gross margin came in at 44.9%, an increase of 50 basis points, reflecting 160 basis points of cost savings and 40 basis points of pricing, partially offset by about 90 basis points of unfavorable commodity cost, particularly in resin, and about 80 basis points of higher manufacturing and logistics costs.

Selling and administrative expenses as a percentage of sales came in at 13.6% versus 13.9% in the year-ago quarter. Our advertising and sales promotion investment levels were about equal to the year-ago quarter, with spending in our U.S. retail business at about 10% of sales to support the long-term health of our brands.

Our effective tax rate came in at 31% versus 32% in the year-ago quarter, reflecting tax benefits from stock-based compensation. Now net of all of these factors, we delivered diluted net earnings per share from continuing operations of $1.46, an increase of 7% versus the year-ago quarter.

Turning to cash flow for the quarter. Net cash provided by continuing operations was $257 million versus $170 million in the year-ago quarter, an increase of $87 million.

Now I'll turn to our updated fiscal year 2018 outlook, which we've updated based on 2 items: first, the sales impact from the Aplicare divestiture in late August of this year; and second, the cost increases from the recent hurricanes.

Our sales outlook now anticipates sales growth in the range of 1% to 3% due to the Aplicare sale, which is expected to reduce fiscal year sales by slightly less than 1 point. And given the timing of the sale, we expect to see the first full quarter impact in our second quarter. Importantly, we continue to feel good about our innovation programs and our expectation for about 3 points of incremental sales growth for the year from new products.

Turning to gross margin. We now anticipate fiscal year gross margin to be down slightly due to the recent hurricanes. Our updated gross margin outlook now reflects an estimated $20 million increase in commodity and logistics costs, most of which is anticipated to occur in our second and third quarters. However, we are continuing to closely monitor commodity costs, which remain volatile.

And as a reminder, our previously communicated fiscal year outlook already reflected elevated costs. Given the timing of the hurricane impact, we anticipate our second quarter gross margin may decrease about 150 basis points versus year ago. Importantly, we believe the hurricane cost headwinds should begin to dissipate late in the fiscal year, enabling gross margin expansion in the fourth quarter.

Turning to our fiscal year 2018 diluted earnings per share from continuing operations. Based on our updated assumptions for sales and gross margin, we now expect fiscal year diluted earnings per share to be in the range of $5.47 to $5.67, a $0.05 reduction versus the previous range of $5.52 to $5.72. As we mentioned in our press release, this updated range anticipates about $0.10 of additional cost from hurricane impacts, about half of which we expect to offset with the strength of our execution and underlying business performance.

Looking to the balance of the fiscal year, we anticipate increased volatility over the next few quarters from hurricane-related impacts on our supply chain costs. We'll also continue to monitor the trends we previously called out, including the continuation of elevated competitive environment, higher supply chain costs and continued challenging economic conditions in International.

The message I'll leave you with today is that we have the right strategy in place to work through these near-term challenges.

First, we will continue investing strongly in product and brand differentiation to keep our value propositions sharp. We feel very good about our strong investments in demand-building, including digital marketing, e-commerce and our product innovation pipeline.

Second, we'll continue leaning into our cost savings and productivity initiatives to support our margins.

And finally, we'll continue executing our Go Lean Strategy in International in order to improve margins through operational efficiencies.

And with that, I will turn it over to Benno.

Thank you, Steve, and hello, everyone. Let me share with you my 3 key messages for today's call.

First, we delivered another strong quarter and start to our fiscal year, which reflects continued broad scale executional strength against our 2020 Strategy. We delivered 4% volume growth on top of 8% in the year-ago quarter. We grew sales and gross margin in every segment, and we delivered 7% diluted earnings per share growth, reflecting our emphasis on good growth: growth that's profitable, sustainable and responsible.

Second, this strong execution and the fundamental health of our business are helping us partially offset the temporary cost headwinds we're facing. While gross margins will be pressured the next 2 quarters from the impact of the hurricanes on our cost structure, our business remains fundamentally strong and healthy, as demonstrated by our Q1 results. It is fundamentally strong and healthy because we have differentiated products consumers love and a solid innovation pipeline that aims to deliver 3 points of incremental sales growth in fiscal year '18. We'll be sharing more about our second half new product plans when we speak with you next quarter.

Our business is also fundamentally strong and healthy because we're investing in our brands, and we're investing disproportionately in our growth brands behind demand creation focused on innovation and digital marketing. And with strong ROI, we expect to spend about 50% of our working media budget on digital in fiscal year '18. And the result of our focus on differentiated products, innovation and investing in our brands means we're winning with consumers.

How do we know? We know we're winning with consumers because the majority of our strategic brands are seen as superior in value as measured by our consumer value measure, or CVM, a combination of product experience, brand equity and pricing. We use CVM to fine-tune pricing across our portfolio, and we feel confident about our pricing strategies and execution.

We also know we're winning with consumers because of the strong progress we're making in growing household penetration, with 72% of our portfolio having growing or stable household penetration, up from 31% just 4 years ago.

Third, we are continually evolving a strategy that has been working, and that continues to give me confidence in our ability to create shareholder value over the long term. To evolve, we will lean into the key value drivers of our 2020 Strategy. We will lean into the prioritization of strong investments in our brand-building programs to drive superior value behind innovation and purpose-driven brands. We will lean into the acceleration of portfolio momentum as we maximize profitable growth and optimize investments between our growth brands and fuel brands. We will lean into the reduction of waste in every aspect of our business, so that savings can be reinvested to fuel growth and to support margin expansion. And finally, we will lean into the continued high engagement of our people as business owners to drive a consumer-centric growth culture.

So in summary. In Q1, we delivered strong results across our portfolio. Our business is healthy, and we have plans in place to manage the short-term cost pressures we face. And we're evolving our 2020 Strategy off of a strong foundation, as we discussed with you at our Analyst Day last month. All of this gives me confidence that we will continue to deliver growth that's profitable, sustainable and responsible and create shareholder value over the long term.

Now before I open the call up for your questions, I do want to take a moment to recognize the work our teams have been doing across the company to provide humanitarian relief by donating Clorox Bleach and Cleaning products, Glad trash bags and other products to help support hurricane victims here in the U.S. mainland and in Puerto Rico, as well as for the victims of the Northern California wildfires, the recent earthquakes in Mexico and flooding in Costa Rica. Our disaster relief programs are an important part of our company's heritage and identity, and it's tremendously gratifying to have products and highly engaged people that can be of help to so many people.

And with that, operator, you may now open up the line for questions.

(Operator Instructions) We'll take our first question today from Kevin Grundy with Jefferies.

I wanted to start with the sales growth guidance for the year. So all in, now 1% to 3%, down from 2% to 4% previously, and that includes the 1 point drag from Aplicare. But setting that aside and then setting aside probably, I guess, let's say 20, 25 basis points or so from the hurricane benefit, was there any change to the 3% to 5% organic sales growth guidance for the year within that range? And then, I guess as part of that, Benno, what is the expectation for industry growth within your guidance? And I guess I ask that within the context that your market share performance has been great, I guess, with the exception of trash bags, which I know you guys are addressing, but the category growth has been kind of flattish, at least in Nielsen channels. And I know I understand it's higher than that outside of non-tracked but still not great, seemingly, based on the syndicated data that we have. So 2 parts to the question. One, any change within the 3% to 5%? And then, two, if you could comment on industry growth guidance within your overall outlook and whether that's changed at all?

Kevin, this is Steve Robb. Let me start off. First, just to reground everybody, our previous outlook that we had communicated in early August was for sales growth in the range of 2% to 4%, okay? The latest outlook that we're sharing with everyone today is 1% to 3%. The only reason we're making an adjustment to the outlook is to reflect the divestiture of the Aplicare business in late August, which will reduce sales growth by slightly less than 1 point, okay? All other assumptions, there's puts and takes, but generally, all other assumptions remain the same. And we certainly feel good about our first quarter sales growth of 4%. Now I do want to make one additional point about first quarter sales growth. We delivered 4%, slightly less than 1 point was related to hurricanes, but I would also remind everybody, we have the divestiture of Aplicare in the first quarter. That was slightly less than 0.5 points. So you kind of have to bring the 2 together to really understand it. And then, finally, just as a reminder, all of the numbers that we're sharing today are on a GAAP basis.

Yes. Your second part, Kevin. Categories, I would say, overall solid, no change, and we don't expect that to change in outlook. We think that the future will behave more like the past. And I would say, the current situation is characterized by 3 things. First of all, tracked channels are actually quite solid. They're now growing at about 1%. Historically, they've grown 1% to 2%, in line with population. So that's about at the low end, but not bad, to be quite honest. Keeping in mind that tracked channels only account anywhere between less than 50% to 80% of our total category, varying by category and SBU. So tracked channels, overall, pretty solid. The second thing we're seeing is that volume is still tracking ahead of dollars in our categories and particularly in tracked channels. Why is that? It's the continued elevated competition, as Steve has noted earlier. That's been elevated for a while, particularly characterized by heavy merchandising. No change versus what we've communicated in the last quarters, also don't expect any change in the future. And then third, we're continuing to see particularly strong growth in non-tracked channels. Our performance has been strong there for a while. Many of our customers in non-tracked channels are growing double digits. In Q1, just to dimensionalize, about half of our total company sales growth came from non-tracked channels. E-comm is leading the way with the largest e-commerce customer up more than 70% in Q1. So feeling particularly good about the profitable growth in non-tracked channels. So overall, steady, and we expect the future to be about the same.

We'll go next to Jason English with Goldman Sachs.

Two questions. First, a small one. Steve Robb, I think you mentioned that you reminded us that your results are GAAP results, which we always appreciate the cleanliness of that. Are there any unique costs related to either the hurricane, divestments that you would call out that you think most other companies would have pro forma-ed this quarter?

As it relates to the hurricane, no. We didn't -- the only thing I would call out with respect to the hurricane that was unusual for us was, one, that we picked up some incremental volume late in the quarter associated with shipments. Two, I would remind everybody that our International results were negatively impacted associated with Puerto Rico. This is a business that we're back up and running, but obviously the country is not where it needs to be. That's certainly weighed on International results. And then third, I think the only other thing to note, and this is related to the Aplicare divestiture, we did, as a part of the divestiture of this business, we did take a charge in the first quarter of approximately $0.03, and that's included in our first quarter earnings per share.

That's helpful. And then Benno, a quick question for you. You mentioned everything that you're leaning into to drive growth. One thing that you've leaned into since you've taken the helm has been a slightly more aggressive posture on M&A, both obviously with Aplicare kind of shrinking out of it, RenewLife adding into it. I was hoping you could update us on where your appetite sits today in terms of M&A. And as we think about the forward -- the bolt-ons that you pursued, is that the right context, or if an opportunity for something more needle-moving were to surface, would there be interest on your end?

Thanks for that, Jason. So in order of priority, first priority always will be to keep the core healthy. And I think, Q1 results demonstrate that we're doing that well, and we want to continue to do that. The second priority will be to continue to grow RenewLife. That's a category and a business we're very committed to, and we want to drive for the long term, and we feel good about RenewLife. We've obviously had a strong first year after acquisition, grew in the high single digits in Q1. And in Q2, we'll start expanding in certain -- with certain club customers. So we want to continue to make that successful as priority #3 -- 2. And then three, of course, is because we are in a position where our cash flow enables us to put that cash to use for shareholders, whether that's by serving dividends or buybacks, but also by continuing to look for ways to grow the business. So we've always said that we can do more in M&A but that we don't have to do more on M&A because we have a healthy core, which allows us to be disciplined. So we are looking. We are continuing to look in the spaces that we communicated, in particular in the health and wellness space and in areas around our core businesses. We look at companies, small and big, anything that can add value to our shareholders. As Steve has noted often, it continues to be the case that we like those bolt-on acquisitions, and RenewLife is a good example of that. But we're not afraid of looking at bigger things if we think that they can add value to our shareholders. But importantly, we'll stay disciplined. So we've made one acquisition over my 3 years in tenure. I don't know that I would characterize that as more aggressive. I'd call it disciplined. Importantly, we have shown that we can integrate an acquisition well and add value. And we certainly can do more, and we're looking. But we'll only strike if we feel like we're getting the right business at the right value.

We'll go next to Joe Altobello with Raymond James.

So first question, just want to go back to something you mentioned, Benno. I think you just said that your categories, at least in the tracked channels in the U.S., are growing about 1%, and I thought your guide for this year was based on flat growth in those tracked channels. So is that part of the $0.05 offset that you guys called out this morning in regards to the hurricane-related commodity inflation?

Joe, this is Steve. Our -- a couple of things. Our sales outlook contemplates categories that will be flat to up slightly over the course of the full year. Keeping in mind it's still early days, let's see how the quarters unfold as we move through. But that's essentially what we had for the sales outlook.

Okay. So the 1% is consistent with that?

Correct. Flat to up slightly, yes.

Got it. Okay. And then secondly, on Burt's Bees, you mentioned it was up double digits, I guess an acceleration from last quarter. And I guess part of that had to do with the initial sell in for cosmetics and the expansion of lip into club. So if you could quantify for us what that business was up ex those 2 items, that would be great.

I don't know that we, Joe, that we give details with that specificity. As you noticed, clearly, the lipsticks, the cosmetics launch last quarter has helped. But we're also pleased to say that our core categories have grown share and have grown. Lipsticks continues to be a growth driver as well as the core lip balm. So it's a combination of all those factors that led to double-digit sales growth last quarter.

We'll go next to Ali Dibadj with Bernstein.

A couple of questions. One is if you could talk a little bit about pricing. We've certainly been hearing that it's been hard to take pricing to offset commodities given competitive and retailer pressures. Is that consistent with what you're seeing and what you've done from -- although slightly lowering your pricing guidance for the year, can you, in answering that, give us an updated sense of what percent of commodity cost increases you're offsetting now? And look, I totally understand your philosophy of not changing the pricing on short-term commodity spikes, but we're seeing that it's much more difficult to take pricing and I wanted to see what your observation is about that.

Ali, this is Steve, let me try this. I would say, the pricing environment is never easy, which is why we try to marry it up with innovation and we try to be smart in terms of where we take pricing. We've been very successful in taking pricing over the last couple of years, primarily building International, where we're seeing higher rates of inflation. As you know and as we communicated at our last Analyst Day, we are looking to make some pricing adjustments. We're taking an increase on Disinfecting Wipes and other businesses. That's in our second quarter, and we're just in the process of rolling that out. So I would say, over the very long term, we're confident in the strength of our brands and the investments we're making and the ability to take pricing. So time will tell, but I think right now, things are playing out about as we expected.

Yes. And then, Ali, we did talk about our price increase on Disinfecting Wipes at Analyst Day. That's being implemented as we speak, this quarter, and we'll give a more detailed and specific update in our Q2 call in February, but we expect that price increase execution to be done well. And importantly, it's just part of an overall program that, on the back of pricing, allows us to continue to support innovation on that business. And as you know, our Scentiva platform has been particularly successful lately on wipes and also sprays, which is why we're continuing to expand with new innovation as we speak. So that's an example of recent price increase that is disciplined and strategic and consistent with our approach to deliver better value for consumers.

And so why is your pricing guidance actually a little bit lower? Is it the price reduction that you told us at your Analyst Day on the midsized trash bags? Is that what it is? Or why has the guidance been lower a little bit from a pricing perspective in this quarter versus what you'd said last quarter for the year?

Thanks for the clarification, Ali. I think what we had said in the previous quarter is that our pricing guidance would be about 1%. I think we're now saying slightly less than 1 point. I wouldn't overthink it. Foreign currencies are also moving a bit as well. And as you know, in International markets in particular, we've tried to price to recover not just inflation but also currency effect. So I would say, when you look at the combination of pricing and foreign currency together, it's about what we would expect. And again, we need to get through the next couple of quarters and see how things play out. But no substantive changes there.

Okay. And the other question was around just kind of leverage from top line to bottom line, 4% top line, 7% EPS this quarter looks pretty good. But going forward, it looks like there's less leverage between the top line and the bottom line. I guess some of that is because of the gross margin and the commodity pressures the next quarter or 2. I get that. But even when you gave your guidance for 2018, there's less leverage between the top line and the bottom line, and I'm just trying to understand why that might be.

Yes. So the short answer is there's really 2 things, one of which you've already called out. If you look at the commodity forecast that we have in inflationary pressures in '18 versus fiscal '17, it's quite a bit higher, particularly in our second and third quarter. And so I think that's the biggest driver I would call out is margin pressures driven by higher commodity costs, which are being further exacerbated by the recent hurricanes. I would also just remind people that in fiscal '17, we adopted a new accounting update around how taxes are treated with share-based compensation. As a result, our tax rate in fiscal '17 was lower than in fiscal '16. We're seeing that normalize a bit as we get into '18. So there's a little bit of leverage on the tax line as well. So margin pressure is tied to commodities. Tax rate, a little bit less leverage there.

We'll go next to Wendy Nicholson with Citi.

First question is following up on that question regarding pricing. On the trash bags, have you seen competitors respond to your price reduction, particularly in light of the commodity environment? I wonder if other people aren't lowering their prices to follow simply because they're dealing with the commodity pressure that you're seeing as well. So that's the first question.

Yes. Too early to say on that, Wendy. We'll have a better update for you in Q2. That's being implemented as we speak. We've certainly seen the first customers take pricing down, as intended, on our volume, and we're seeing the positive impact from that, but a little too early to call what will happen on the competitive side.

Okay. And then two other just quick follow-ups. Number one, on the shipments related to the hurricane, are you confident that, that extra shipment volume that you saw late August, beginning of September has actually sold through? Or is there a risk that some of those extra tax or whatever are still sitting on the shelf? So does that impact the outlook for the second quarter at all? And then just second thing, just on RenewLife, I know distribution expansion is a big part of the story, and it sounds like you're making great headway there, but can you just give us an order of magnitude how far, like sort of an ACV-type measurement, are you at 30% ACV? Do you think you can get to 80%? I'm just wondering for how long are we going to hear about distribution expansion because it's all good, but I just wonder how much growth it can add to the business.

Wendy, let me take the first question. I'll have Benno address the second question. Regarding your first question, which is the incremental shipments associated with hurricane, there's no question that some of that is likely sold through to consumption and then used in the hurricane cleanup efforts. But what's also true and it's hard to quantify, so the short answer is we don't know exactly, is that likely some of that may have gotten into the trade inventories as customers were stocking up in anticipation of the hurricane, and that may partially offset in the second quarter. So as we look to our second quarter, volume and sales growth, and sales in particular, the things we're watching carefully is what happens with the hurricane and do some of that reverse out in the second quarter. Of course, we've got Aplicare. That'll be the first full quarter where we have the divestiture in the numbers. And so for a large reason is we look at the outlook for sales growth on a full year of 1% to 3%. I think if I looked into the second quarter, I think it's possible we'll be at the lower end of that just because of the Aplicare divestiture and also just because there may be some offsets to the hurricane. But we're 30 days into the quarter. We need to kind of get through and see how that will unfold.

Sorry for interrupting. And then on RenewLife distribution expansion, there's room, at least through the end of the fiscal year, to keep going on that. We're not done yet for a while. We're obviously in the natural channel. We have some room to grow in food, drug mass, and obviously, club is being expanded as well, but there's still room even within club customers. But then what I would say is, beyond that, the real opportunity here is to go from quantity of distribution expansion to quality of distribution build. What I mean by that is if you look at stores and you look at shelf placements, you look at clarity of merchandising, quantity of merchandising, all the things that we do so well in our established categories, there's tremendous room for us. And what's required to keep building that, which is a long-term strategic approach, is to work with customers on category management, as we typically do so well, guiding them on their strategies to grow these categories and then also innovation, of course, which will help us expand distribution and placements within the customer groups that we're already in. And we will see our distribution machine turn on in the calendar year 2018, and we'll give you an update as we go a little bit further into the fiscal year. So distribution expansion was a big reason why we thought we can add value to the RenewLife business. It's been playing out as planned so far, and we still have quite a ways to go.

We'll take our next question from Andrea Teixeira with JPMorgan.

My question is regarding gross margin. So I was hoping, and I appreciate, Steve, your comment about 150 basis points impact on the quarter, on the coming quarter, but then what makes you believe that this is going to improve as we go? I think you alluded to Wendy's question on potentially some of the impacts that we saw in the pricing movements you've made. Is that something you're embedding in terms of pricing recovery at some point, pricing pass-through? Or are you just hoping or just banking into your margin -- not margin, I'm sorry, market share gains through the balance of the year?

Yes, thanks, Andrea. Well, we're not hoping. We have good plans in place to drive our margins. Obviously, we're very pleased with the 50 basis points of gross margin expansion in the first quarter. But as I indicated in my opening comments, I do think the second quarter gross margins will be challenged, likely down 150 bps, although it could be a little more, a little bit less than that. Why? Well, number one, it was always going to be the most challenging quarter that we had because we had rising commodity costs in that quarter. And when you add the impact of the hurricanes, it's even further challenged, both in commodities as well as manufacturing and logistics costs. That's the bad news. Now the good news is what we believe, and at least what we've seen in history over time, is these elevated costs tend to go on for a couple of quarters. So our belief is that the challenges will peak in the second quarter. They'll continue into the third quarter but perhaps a bit better, okay? So margins will be under pressure in the third quarter but a bit less. By the time we get to the fourth quarter, we think that these hurricane-related costs, most, maybe not all, but most of them should have dissipated. As a result, our cost savings, the pricing that we've got planned, the Go Lean efforts in International combined with our margin-accretive innovation, that all of that should enable us to get back on track to get gross margin expansion. So that's our outlook as we know it today. As I did indicate, there's going to be variability across the quarters. Certainly, commodity markets today are fairly volatile. But we think we've got good plans in place, and we'll see what happens as we go through the next few quarters.

But just to be clear, you're not putting on the guidance, including in the guidance, any price increase beyond the wipes, right?

We have always planned for pricing in International. As we previously communicated, we've got wipes pricing. Beyond that, I won't comment, other than to say I think we've got good, robust plans in place, and the biggest single driver of margin expansion will be the cost savings programs, which we continue to feel very good about.

We'll go next to Jonathan Feeney with Consumer Edge Research.

Two questions. First, when you talk about the net impact of the hurricanes at about $0.10, does that include whatever profit impact, and forgive me if I missed this, from the increased Cleaning sales in the current quarter? And if you can give us a bit about how you went about the process of determining what's hurricane impact and what's not because it seemed like the lift in maybe August and September were pretty substantial, but there might be some other stuff going on there. And the second question was on the advertising, 2 of the 4 segments you called out specifically increased advertising and promotion. Just returns you're getting on that, is that more shifted towards digital? You've been leaders in moving into advertising towards digital. Are you getting -- is lift getting better? Worse? Any comment about that spend level and anticipated returns?

Jonathan, let me take the first part of the question. I'll have Benno address the second. As it relates to the impact of the hurricane, these are our best estimates. It's very hard obviously to know exactly how much the hurricane impacted us, but we do have advanced analytics. We spend a lot of time trying to understand volume drivers. And so the numbers that we're providing reflect our best estimates as to what we think the impact was in the first quarter for sales growth. Again, we're going to watch and see how much of that may reverse out in the second quarter. In terms of the earnings impact from the hurricane, I don't think we specifically communicated it, but it would be in the typical margin that you would expect from businesses like bleach and Glad and businesses that benefited from that lift. Although, again, I'll quickly point out, at least in the first quarter, we did take a $0.03 charge associated with the divestiture of the Aplicare business. So I think you need to look at, when you talk of hurricane in the first quarter, you need to look at the impact of the hurricane on top and bottom line, but you also need to contemplate that we divested a business, which obviously impacted growth and had a modest impact or a small impact on earnings. And again, how this plays out over the coming quarters is something we're all going to watch very carefully.

And Jonathan, your question on advertising and sales promotion, if I put it in strategic context, the strategic choice we've made is to be very aggressive about costs on a business that does not matter to the consumer, take that cost out and then reinvest it into our brands to create a profitable growth and do so with discipline and with a strong eye on ROI. And the increases in spend that benefit digital falls squarely into that camp of pursuing profitable growth with discipline and on strategy. We are pleased with the returns that we see in digital, but returns generally are better than in other media channels, whether that's TV or others. The returns are also getting better year-on-year every year, which is attributed to our focus on continuous improvements, the capabilities that we're building and, of course, the partnerships that we have with other companies here in the Bay Area and on the West Coast. So we like what we do in digital, which is why the spending this year is going to be about half of our total working media budget, which is, yet again, up from last fiscal year and also quite substantially higher than what our peer group is doing.

We'll go next to Chris Carey with Bank of America.

So just a bigger picture perspective on dynamics you've seen at U.S. mass retail and how these have sort of evolved over the course of the year because, clearly, destocking in the U.S. impacted some at the start of the year but not as much for you. But growth in those channels have remained somewhat sluggish into this quarter. So can you talk to your relative outperformance here and maybe comment on dynamics around shelf space. So the total amount of shelf space maybe not expanding, but the mix or amount of SKUs you're consolidating? And then somewhat related, like kind of how have retailers approached to more premium brands evolve this year as maybe they've given a bit more support to private label. So those two.

So in general, the big picture is the state of U.S. mass retail isn't dramatically different from what it's been over the last decade. On your first point, Chris, we certainly haven't seen any destocking. We also wouldn't expect any destocking. We manage our stocks with our customers tightly and electronically and routinely. And if you think about the nature of our products, they are products that are bought on a regular basis routinely. So there isn't a lot of up and down. The broad big picture that I would point you towards is that we're seeing a bifurcation in the marketplace. Limited assortment retailers are winning. Retailers that are focused on offering consumers value are winning and, as a result, private label is gaining more support from retailers and is gaining share. But also market leaders are doing well. And as you know, more than 80% of our portfolio is in market leaders. So we are doing well, too, because what retailers do is as they consolidate shelf space is they know they need market leaders for growth and they need private label for margin. That's a recipe that we've seen for a while. That's a recipe that retailers are pursuing that we're seeing perhaps accelerate, but that creates tailwind for our brands, which is why we are doing so well, not just with some, but with practically all of our major retailers in the U.S. Beyond, I would just point, our outperformance on sales growth back to the fact that we invest in our brands versus hunker down. We have innovation in an innovation-starved environment. We invest in digital and in keeping brands relevant and engaging to consumers. So all the things that create growth right way, meaning in a profitable and sustainable fashion, is something that we do well, is something that we've done for a while and is something that, frankly, we're quite good at, and it's perhaps somewhat differentiated in today's environment, which is why we're seeing results that we're quite proud of.

We'll go next to Lauren Lieberman with Barclays.

This is Shirley Serrao on behalf of Lauren Lieberman. I just wanted to follow up on an earlier question around Burt's. It sounds like it's your first foray into club with lip care line. First up, did you displace another competitor here? Or is this sort of a new focus category for the channel? And then secondly, we didn't really see any mix degradation in Lifestyle the way we saw in Cleaning when you gained distribution in club with wipes last year. So was that offset by something else this quarter? Or just not as significant a dynamic in the category?

Thanks, Shirley. This was incremental, so not a displacement, but certainly a recognition of the strength of the brand in -- not just in club but in general. And the reason why it hasn't shown up as a negative mix is that it's actually a very profitable SKU that we have, first and foremost. We've also just started. We certainly hope that, over the next few quarters, this is going to continue to grow, but I wouldn't expect it to be a significant drag on our margins in this segment because, as I said, this is a very profitable SKU. We, as you know, are very focused on profitable growth. And when we consider expansion opportunities like this one in club, we want to make sure that we do it on based on a position of strength, and this brand certainly doesn't need excessive discounting, which is why we're pleased to see the early success behind this club expansion but also the profitability.

We'll go next to Jason Gere with KeyBanc Capital Markets.

Okay. Maybe sticking on the topic of mix a little bit. You were talking about, in Brita, rationalizing some of the lower margin -- some lower-margin businesses. So I was just wondering, as you look at the portfolio in an industry where it seems like it's very over-SKU-ed and retailers are looking to be more nimble and you guys are driving a lot of innovation. Can you talk about the process of maybe cutting out some unprofitable SKUs or the opportunity to do more of this, which obviously would have a sales impact but also would be margin beneficial. So I was just wondering if you could talk a little bit about that process?

Thanks, Jason. So we do it, as we do everything on our business, systematically and with an eye on the long term, and we built this into our outlook and forecasts. The process is pretty simple. Every business unit leader, general manager has an annual SKU reduction target. And then we have a process in place that essentially looks at how incremental a SKU is, how profitable a SKU is. And then what you always do is cut the tail. What you always do is make other SKUs that are perhaps less profitable, more profitable through cost savings. It's always a source of creativity. And what you do is work with retailers to shift the mix towards the more profitable SKUs. Bleach is perhaps another example where -- and trash where, over the years, we've been tremendously successful to shift the mix also enabled by innovation towards more profitable SKUs. So something that we routinely do and something that you should expect us to do on an ongoing basis. Certainly believe that there continues to be an opportunity not just on Brita but on all businesses to continue to do that. It's good business. Simplification is good, and it's part of our ongoing cost savings and margin improvement program.

Ladies and gentlemen, that concludes the question-and-answer session. Mr. Dorer, I'll turn it back to you for closing remarks.

Yes. Thank you. All I really have to say is that I want to thank everybody who's been on the call, and I look forward to speaking with you again in February when we share our second quarter results. Thank you, and have a good day.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. You may now disconnect.