高樂氏 (CLX) 2018 Q3 法說會逐字稿

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

Thanks, Stephanie. Welcome, everyone. On the call with me today are Benno Dorer, our Chairman and CEO; and Kevin Jacobsen, our CFO.

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.

On today's call, we will refer to certain non-GAAP financial measures including, but not limited to, free cash flow, EBIT margin, debt-to-EBITDA and economic profit.

Management believes that providing insights on these measures enable 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 on our website as well as in our SEC filings.

In particular, it may be helpful to refer to tables located at the end of today’s earnings release.

Please also recognize that today's discussion contains forward-looking statements. Actual results or outcomes could differ materially from management's expectations and plans. I would also direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to the impact of tax legislation. Please review our most recent 10-K filings 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, let me cover our Q3 performance, discussing highlights in each one of our segments. Kevin will then address our financial results as well as updated outlook for the fiscal year. Finally, Benno will offer his perspectives, and we'll close with Q&A.

For the total company, Q3 volume and sales each grew 3%. We grew sales in all 4 segments, offsetting nearly a point of negative impact from Aplicare's divestiture. These results were on top of very strong growth in the year-ago quarter when volume increased 7% and sales grew 4%.

Now I'll turn to our results by segment. In our Cleaning segment, Q3 volume grew 4%, where sales grew 3%. Cleaning segment top line growth was led by Home Care, where volume and sales each grew by high single digits, on top of double-digit volume and sales growth in the year-ago quarter. Volume in Home Care was broad-based with record quarterly shipments of several Clorox-branded products, including Clorox Disinfecting Wipes. Following implementation of recent price increase, our Disinfecting Wipes business still reported double-digit volume growth, emphasizing the strength of the Clorox brand. Contributing to the growth were gains from new product innovation, strong merchandising as well as shipments related to a severe cold and flu season.

Consistent with these results, Home Care delivered its 15th consecutive quarter of market share gains.

In our Laundry business, volume and sales declined, primarily due to softness in the sodium hypochlorite bleach category. At the same time, as we trade consumers up to higher-dollaring items in this category as well as other bleach-based products in our Home Care business, we're pleased to see continued share gains in Clorox Liquid Bleach behind our premium Clorox Splash-Less bleach as well as the launch of new Clorox Performance Bleach with CLOROMAX.

Lastly, within Cleaning segment, our Professional Products sales declined due to the Aplicare divestiture, which occurred in August 2017. Excluding the impact of Aplicare, sales grew double digits from new product innovations, strong e-commerce growth and incremental shipments of Cleaning products behind the cold and flu season.

Turning to Household segment. Q3 volume grew 3%, and sales grew 1%, with growth in Cat Litter, largely offset by a decline in cold due to poor weather throughout the quarter.

Starting with our Cat Litter business. Volume and sales grew double digits, driven by core strength in the business as well as our new Clean Hoff innovation, which we're now also supporting with a national marketing campaign. This business continues to have strong momentum behind our Fresh Step with Febreze innovation platform, and this was our sixth consecutive quarter of market share growth.

In our Glad bags and wraps business, volume and sales grew, primarily driven by strong trash bag volume in the club channels. Consistent with our strategy on this business, we saw all-time record shipments of our premium OdorShield offerings, reflecting our focus on driving profitable growth in this higher-margin segment.

In February, we turned on advertising for our new ForceFlex Plus Advanced Protection trash bags, which feature a reinforced bottom, leak guard technology, superior strength and guaranteed 7-day odor control.

In our Charcoal business, volume and sales decreased, driven by the coldest and snowiest January through March in the last several years. Simply put, it was the snowiest March in 25 years, which is certainly not favorable for Charcoal, especially in the early spring. This issue negatively impact the entire Charcoal category, driving consumption down double digits for the quarter. For perspective, this resulted in nearly 1 point of negative impact to our total company sales in Q3.

Since then, we've seen a challenging start to the Charcoal business in Q4, given retailer inventory carryover from Q3 as well as the continuation of poor weather into April. That said, we're focused on executing our plans for our fourth and largest quarter of the year. We're leaning into a new partnership with Major League Baseball, turning on our marketing programs for the grilling season, and we're working with our retail partners to add additional in-store events, notably around key holidays.

Finally, turning to RenewLife. Volume and sales decreased this quarter due in part to challenges driven by significant orders towards the end of Q2 that depleted our inventories, and from a temporary supply challenge resulting from a product tax size conversion. We fully anticipate returning to sales growth in the fourth quarter, and we remain excited about the progress we're making in the e-commerce channel as well as many innovations in the category, such as our new organic and kids line.

In our Lifestyle segment, volume was flat, and sales increased 2%, with gains in Food and Burt's Bees partially offset by declines on Brita. Burt's Bees delivered volume and sales growth in Q3, largely due to record quarterly shipments of lip care products behind strong consumption and innovation as well as record quarterly shipments of baby care products behind innovation and distribution gain.

We're continuing the multi-quarter rollout of our new color cosmetics line, and we're encouraged by the power of Burt's Bees' equity and the consumer's desire for natural products and makeup. Food volume and sales grew, driven by all-time record shipments of Hidden Valley salad dressings. Consumption is healthy as the franchise delivered share gains for the 13th consecutive quarter.

To conclude the Lifestyle segment, Brita volume and sales declined following last quarter's double-digit volume and sales growth. The decline was partly due to a merchandising event shift and lapping the launch of Stream pitcher and Longlast Filter innovations in the year-ago quarter.

Finally, turning to International. Volume was up 3%, while sales grew 4%, mainly reflecting the benefits of pricing. We continue to focus on our Go Lean Strategy to drive margin improvement in our International business. At the same time, we're selectively investing in portions of our Laundry and Home Care businesses as well as RenewLife and Burt's Bees. These are businesses that are margin-accretive, have tailwinds and where we believe we have a strong right to win. We're pleased to see the areas we're investing in growing, such as Burt's Bees, which reported double-digit volume and sales growth this quarter.

Now I'll turn it over to Kevin, who will discuss our Q3 financial performance and updated outlook for the fiscal year.

Thank you, Lisah. We're pleased to deliver another solid quarter of volume and sales growth with sales increases in all 4 of our segments.

As we mentioned in our press release, we've updated our fiscal year outlook for 2 main reasons. First, our outlook now reflects the impact of the Nutranext acquisition, which closed last month. Second, as we also noted, our outlook now reflects a more favorable fiscal year tax rate. I'll address the details behind our full year outlook and provide additional context on the Nutranext acquisition in a moment.

First, I'll take you through our financial results for the third quarter. Third quarter sales grew 3%, consistent with volume growth of 3% and about 1 point of pricing benefit, which was offset by about a point of negative mix. As a reminder, third quarter sales included a reduction of nearly 1 point from the Aplicare divestiture in August 2017.

Gross margin was down as expected and came in at 42.8%, a decrease of 120 basis points versus year ago. This included about 160 basis points of higher commodity costs as well as 130 basis points of higher logistics costs, which were driven, in large part, by ongoing challenges in the transportation market. Both commodities and logistics reflected the hurricane-related pressures we've previously discussed.

Third quarter gross margin also included the benefit of about 140 basis points of cost savings, continuing our long-standing program of driving out waste. Selling and admin expenses as a percentage of sales were relatively flat at 13.7%. Advertising and sales promotion spending came in at about 10% of sales, with spending behind our U.S. retail business at about 11% to continue supporting the long-term health of our brands. Net of all these factors, we delivered diluted net earnings per share from continuing operations of $1.37, which included $0.09 of benefit from a lower tax rate of 26% versus 30% in the year-ago quarter.

Turning to cash flow. As we mentioned in our press release, year-to-date, net cash provided by continuing operations increased to $574 million versus $483 million in the year-ago period.

Now I'll go over our fiscal year 2018 outlook. We now expect fiscal year sales to grow about 3% versus our previous assumption of 1% to 3% growth, driven by our expectation for 1 point of benefit from the Nutranext acquisition. Our full year sales outlook continues to include about 3 points of incremental sales from product innovation, partially offset by a reduction of nearly 1 point for the sale of the Aplicare business in August 2017.

We now expect gross margin for the full year to be down 100 to 150 basis points, reflecting the impact from onetime charges related to the Nutranext acquisition, including typical integration costs such as inventory step-up. Our fiscal year gross margin expectations continue to include ongoing cost pressures related to commodities and logistics, which we've previously communicated.

Additionally, we now expect fourth quarter gross margin to be down by 150 to 250 basis points, reflecting the onetime charges related to the Nutranext acquisition.

Turning to selling and admin expenses for the fiscal year. We continue to anticipate selling and admin expenses to come in below 14% of sales. Our outlook also continues to include the benefits of tax reform, with an updated assumption of 22% to 23% versus our previous assumption of 23% to 24% for our fiscal year tax rate.

Longer term, we continue to anticipate our tax rate to be in the mid-20s range. Based on our updated fiscal year tax rate, we expect free cash flow for the fiscal year to come in at the higher end of our long-term goal of 11% to 13% of sales. As we discussed in our press release, fiscal year diluted EPS is now expected to be in the range of $6.15 to $6.30 versus $6.17 to $6.37. This update reflects our estimated $0.07 to $0.11 of EPS dilution from the Nutranext acquisition, partially offset by a slightly more favorable tax rate.

As we also mentioned, we strongly believe the Nutranext acquisition brings significant breadth to our dietary supplements offering, building on the May 2016 RenewLife acquisition and expanding our portfolio further into health and wellness. Ongoing, we anticipate Nutranext to represent more than 3% of company sales.

As previously communicated, on a U.S. GAAP basis, we continue to anticipate Nutranext to dilute earnings per share by $0.08 to $0.12 in fiscal year 2019, primarily driven by typical acquisition-related costs. Importantly, we continue to anticipate Nutranext to be accretive to earnings per share in fiscal year 2020.

I'll close by sharing my perspective on the business. First, improving our margins remains a top priority. We're aggressively working to address the significant near-term headwinds from commodity and transportation costs by leaning into our productivity initiatives to drive cost savings and leveraging the pricing power of our brands, where justified.

Next, I remain confident in our 2020 Strategy, and we'll continue investing behind it to keep our value proposition sharp. Importantly, I believe strongly in the capabilities of our team to execute our strategy.

And finally, we'll continue to put tax reform benefits to work with our ongoing focus to support long-term business growth and return excess cash to shareholders. In addition to our 14% dividend increase in February, we'll work with our Board of Directors to identify appropriate actions, including potential share repurchases, in addition to our usual program of repurchasing shares to offset dilution. As always, we'll continue to be disciplined in our allocation of capital, and maintain our debt leverage with our target ratio of 2 to 2.5x debt-to-EBITDA.

And with that, I'll turn it over to Benno.

Thank you, Kevin, and hello, everyone. Let me share with you my 3 key messages for today's call. First, we had a solid third quarter, delivering top line growth in line with targets and introducing several meaningful innovations to market. We're pleased we grew third quarter volume and sales 3% on top of strong growth in the year-ago quarter, with all segments reporting sales gains in the quarter. I feel good about these results, particularly given the impacts from the Aplicare sale and from our Charcoal business due to weather, which have continued into Q4.

With the Nutranext acquisition, which closed on April 2, we've updated our sales growth outlook for the fiscal year to about 3% in an environment where growth continues to be hard to come by. A key factor in our achieving this is our continued ability to deliver strong innovation in an innovation-starved environment.

In Q3, we launched or expanded several innovations, including the second wave of our successful Clorox Scentiva platform, which now offers bathroom and toilet Cleaning products in a new scent; Fresh Step Clean Paws Low Track Cat Litter, which, while still early, is thus far exceeding expectations; Glad ForceFlex Plus Advanced Protection trash bags with leak guard, our best Glad bag ever; and Burt's Bees cosmetics, which launched in Q2, and continue to expand distribution and grow velocities in Q3.

Second, we remain committed to keeping our business fundamentally strong and healthy by taking aggressive, decisive and principled actions to address the headwinds that are affecting Clorox and our industry.

Let me highlight 3 of the actions we're taking. First, we are taking pricing. We're pleased that the increase we took last November on Clorox Disinfecting Wipes is going well, and we delivered double-digit Q3 volume and market share growth even in the face of it. We also took pricing in our Professional Products business consistently throughout the year, including the most recent one in Q3, and we've now taken pricing on about 1/3 of this business fiscal year-to-date.

In addition, in April, we announced the price increase across nearly our entire Cat Litter business, and we now are finalizing plans to take additional pricing more broadly across a significant portion of our company portfolio. Importantly, we believe we are in a solid position to take pricing. Why? Because we have a unique portfolio of market-leading brands, because we support these brands with strong marketing investments and innovation, and the majority of our brands are seen by consumers as providing better value. Because of this, price sensitivities on our brands are even better today than they were 3 years ago, especially compared with the industry norm and, as I believe we made clear, because these price increases are cost-justified.

But we won't stop there. We'll also lean into the more profitable parts in our portfolio. As always, we seek to grow our portfolio with margin-accretive innovation, such as with the Q3 new product introductions I just mentioned, and also with exciting new items like Burt's Bees liquid lipsticks that started shipping on Monday of this week.

And we'll continue our plans to build a more profitable mix in International by selectively investing in our International growth businesses, including portions of Laundry and Home Care as well as Burt's Bees and RenewLife, which, in aggregate, now account for 25% of the International portfolio.

And the final action I'll highlight is leaning even further into our strong cost-savings programs and other margin improvement initiatives, such as with continued transformation of our supply chain, including with our new Atlanta West facility, which expanded our self-manufactured Home Care capacity, and our Go Lean cost reduction and productivity improvement strategy for International, which is starting to produce year-on-year profit improvements on this business consistently.

My third key message is that we remain confident in our 2020 Strategy and our ability to grow margins over time. We remain focused on good growth, growth that is profitable, sustainable and responsible. And in doing so, we'll focus on the right balance between taking aggressive action to address these near-term headwinds without losing sight of what has worked well for us over the long term; investing in the superior value of our brands behind innovation and technology transformation; evolving our portfolio, as we have with Nutranext, which expands our business even further into the health and wellness space; and counting on a highly engaged workforce to execute with excellence and consistent with our core values.

As Kevin said, we're pleased to put tax reform to work for our shareholders, while continuing to invest to support our brands and grow our business by investing in our infrastructure, and by investing in our people, such as with the new global training program focused on enhancing our culture of inclusion and diversity.

So in summary, we remain focused on a balanced approach of investing for long-term profitable growth, while aggressively and decisively taking action to address near-term headwinds. We continue to have confidence in the competitiveness of our 2020 Strategy as we aim to create shareholder value over the long term.

And with that, I'll open it up for your questions.

(Operator Instructions) We will take our first question from Wendy Nicholson with Citi.

Could you talk a little bit about the private-label trends you're seeing in some of your bigger categories? Some of your other competitors in the HBC Group have talked about more headwinds. And I'm curious, just because you've historically had more exposure there, on what you're seeing specifically. And then second thing, can you just address the share repurchase program? I know the comments you just made said that you're willing and open to buy back more shares, but I'm kind of surprised we haven't seen you step up the pace of the repurchase activity yet.

Yes. Thank you, Wendy. I'll let Kevin comment on share repurchases, and I'll briefly address your private-label question. As everybody recalls, we compete with private label largely in 3 out of our 9 main categories. Our shares are stable. Our business is healthy in these categories. We're not seeing anything that would cause an increased level of concern as it relates to private label relative to what we've commented on in the last few quarters. We're always mindful of private label, which is why we're investing in our business, which is why we're keeping the value sharp, which is why we have innovation in those categories that we're competing with private label in, and which is why our businesses are generally doing well. So private label is something that we're always mindful of, but there's no change to a stable status quo. And with that, Kevin, maybe you can comment on share repurchases.

Sure. Wendy, in regard to share repurchase programs, just as a reminder, we have 2 authorized programs with our board. One is called our evergreen program, which we use to manage stock option dilution, and we've consistently been in the market over the last several years repurchasing shares. The other program is our open market program, which we're authorized up to $750 million, and we have not leveraged that program to date. What I would tell you is we have a very disciplined allocation of how we apply our cash. And we'll continue to pursue that. And so, for us, as we think about our priorities, first and foremost, we're using our cash to invest back in our business, including targeted M&A, and that's very consistent with our recent Nutranext acquisition. Secondarily, we're going to continue to focus on our dividend. We know that's important to our investor base, and we'll continue to look at our dividend payout ratio. And consistent with that priority, as you folks saw, we just recently accelerated our dividend increase from May to February, and took an outsized increase of 14%. Our third priority is we'll continue to manage our debt. Currently following the Nutranext acquisition, we're sitting nicely within our range of 2 to 2.5x debt to EBITDA. And then finally, as we've always said, if we have cash pooling up on the balance sheet, and we do not have good uses for it, we'll certainly look for ways to return that to shareholders, and certainly open market share repurchases would be the primary way to do that. And so I would tell you, going forward, as you know, Wendy, Clorox generates a significant amount of cash flow. Tax reform has certainly increased the cash flow we generate as a company, and we'll continue to pursue these priorities going forward.

Okay, got it. That's very helpful. But can you just clarify, specifically on the Charcoal business, Benno, just vis-a-vis private label? It sounds like there are just some weather headwinds and all those sorts of things. But in terms of your share, all of the incremental promotion you're going to be doing at retailers to stimulate some demand there, is your share in the way you measure it still competitive, and no issues there with private label gaining share in Charcoal?

Yes. No concerns on Charcoal and private label. There's always some variation in share, particularly in the short term and in the periods that is less heavily promoted. What matters to us more is what shares look like in the late spring and the summer. The big news for us on Kingsford this quarter is that the weather, obviously, in Q3 has been very bad for this business. And we can influence a lot of things, but weather, we cannot. And Q4 certainly, in April, hasn't started much better. So weather and the overall category declined. As a result of it is the topic, which has led to a material impact in Q3, and we expect the softness perhaps also to impact Q4. But in terms of overall share, we feel good about this business. We're working with retailers on catch-up merchandising events to make up for some of the lost sales due to the weather earlier this year. We've just launched several innovations, new flavors and natural lighter fluid. We've kicked off a partnership with Major League Baseball, which we're very excited about, which includes customized baseball packaging. And we have new advertising in a category where we continue to have 100% share of voice. So fundamentally, this is a good business. It's delivered a lot of value to the company and to shareholders for many years. The basic underlying dynamics, as millennials love barbecuing, and they love barbecuing with charcoal because of taste and the experience that charcoal gives are very favorable. We're dealing with the short-term weather issue, which frankly, makes for an easier comp next year, but that's about it. Business is stable and good, and we're feeling optimistic about it once we've been through this weather issue.

Our next question will come from Andrea Teixeira with JPMorgan.

I just want to zoom in more into the pricing commentary. Obviously, we all appreciate a more rational environment for pricing, but I wanted to kind of, if you can -- obviously, when you had the Analyst Day in New York a couple of quarters back, you were saying, which is a fair comment, that it's tough now to take listing pricing increases. And obviously, we never knew commodities would stay elevated as they are right now. And then on top of that, transportation. So on your conversations with retailers, like how are you intending? And is it embedded in your guidance for -- the revised guidance for margins? Is it embedded that you're taking these list price increases? And how much of that is already negotiated into the trade?

Yes, Andrea. So I can't comment on specific retailer conversations, as always. But what we have said is that, obviously, we have taken some price increases already. We have newly announced a few minutes ago that we have started to announce a price increase on Cat Litter. And as I also commented, we will finalize plans shortly to take additional pricing. Now you will appreciate that there's a lead time, and that this will not affect this fiscal year anymore. And we'll comment on how it will affect next fiscal year when we give our guidance in August, but there's always a 60 to 90 days lead time on when price increases become effective. And like I said, we're finalizing plans right now. You took us back to the Analyst Day in October. I would certainly say that what we've commented then on is that we're always looking at pricing, when justified. The cost environment has changed very significantly versus last October, and now we're putting the pricing power that we have on our brands to action. We have leading brands. More than 80% of our brands are #1 or strong #2. We believe our advantaged portfolio gives us confidence. Market leaders generally tend to lead pricing, and we have many of those market leaders. We remain committed to offering brands that give consumers superior value, but we've always said that the majority of our brands does just that, which is why we're expanding household penetration over the majority of our brands. We're investing in our brands. Our price elasticities have been lower. We have innovation on all of our brands. So we feel like the fundamental health of our business, the dynamics of our brands as well as the experience and the track record that we have, having executed many price increases over the last decade, successfully take hold here, in particular in an environment as we're seeing it today where these price increases are principled, they're cost-justified and they generally do work for our categories. So pricing is never easy to execute, but we have experience, and they're justified. And what we've certainly seen of the recent price increases on Disinfecting Wipes and on our Professionals business and International, we know how to take pricing, and we're just putting that back to work. What I will say, and I've hinted at that, is that we're staying committed to value. So I don't expect these price increases to negatively impact the superior value perceptions that our brands have among consumers because that's the lifeblood of our business, and that's how we've been successful over the last few years. So we're taking all of these price increases that we're announcing today, and that we will continue to announce in the next quarter, with an eye on staying committed to value for consumers. So not easy, but the right thing to do. And we have a solid case here, which is why we're putting it to work.

And just to follow up, Benno. There is no effect now, as it had, with the wipes, with the trash bags, right? So net-net, you're still going up, and you're not seeing opportunities on the value segment at this point, right? It's -- the movement is actually up, net up?

I mean, you've seen Disinfecting Wipes had another great quarter. That's a business that's been running from strength-to-strength. It's been growing double digits, and that's because we're not just taking pricing. We have a lot of innovation in the market, and we're investing in marketing campaigns that resonate with consumers. So wipes has done exceptionally well in the face of pricing. But we're also seeing the Glad trash bags as a result of the pricing action that we took, which, as you will recall, was a price decline end of last year on about 40% of volume. The business has responded very well. Total Glad business grew volume and sales in Q3. The trash business grew volume high single digits in Q3. The strategic, most strategic business in trash bags, which is our OdorShield business, grew double digits. And Glad Trash has now returned to share growth in tracked channels, which was something that we're pleased to notice. So those 2 pricing actions have gone exactly in line with plans, which is again consistent with a message that we've conveyed to you over many years, which is that we are able to model based on strong analytics what our price increases, and in the Glad case, the price decreases do to our business very well and very reliably. And we'll certainly update you and the rest of the community on specifics and how it will impact our fiscal year '19 in August. But what we've commented on is that we're optimistic that in the midterm, we're able to grow profitably, meaning growing sales and margins, and we continue to be optimistic about that very thing.

Your next question will come from Bonnie Herzog with Wells Fargo.

All right. I wanted to circle back to private label in your categories, Benno. I was hoping you could give us a sense as to how private-label competitors have been responding to your price increases, and the pressures they're also facing from higher commodities and manufacturing costs.

Yes, Bonnie. Again, the only price increase that's been out for a while now is on Clorox Disinfecting Wipes, where we have not seen much pricing from private label, where we also didn't count on any pricing from private label. But I think the results on sales, again, double-digit growth last quarter, speak for themselves. So I can't comment yet on how private label will respond to other price increases because we haven't announced any other price increases other than litter just yet, but that's not been effective in the -- I can give you certainly a more detailed outlook and report back when we talk again next quarter. But generally, what we do is we make very specific assumptions based on market dynamics. We don't always count on private label to respond. Clearly, to your point that you made in your question, the cost -- the increases that we see are cost increases that retailers see, too, that private label manufacturers see, too. Everybody in our industry is affected by them. And historically, what we've seen is that, many times, when we took pricing, private label have followed. In some cases, they haven't, but that doesn't negatively impact the materiality of the positive impact that pricing has on our business and the general success of our price increases. So more to come in Q4.

Okay, that's helpful. And if I may just also ask a little bit of a follow-on question on the pricing. I know we're talking a lot about it, but I think it's important. But I'd like to hear more on elasticity or the impact on your volumes, what you might be seeing from what you've put into the marketplace already. And has that elasticity changed in the last year? And then in terms of volume, is it fair to assume that your volume should accelerate in Q4, given you've really lapped the tough comps now?

Yes. I can't comment on Q4. We don't typically do that. When I think about the rest of your question as it relates to elasticities, again, I can speak to Clorox Disinfecting Wipes. No change to elasticities post the price increase, even though it's early. It takes a while until we have reliable data on that. But again, double-digit gains. So you can see that, that business continues to do well because we match up price increases with innovations and with the right investments. And we certainly have every intention to continue to do that, too. I commented on a new price increase on Cat Litter, which comes on the back of a double-digit growth quarter on that business because we are investing behind Clean Paws, which is off to a really fantastic start. So we know how to take pricing, and what we would expect is that price elasticities aren't fundamentally harmed. What we have commented on last quarter, which I want to reemphasize is that our price elasticities over the last 3 years actually have gone down. And you all know that lower price sensitivities is better, and they've gone down significantly. Whereas for the rest of the industry, the price elasticities have gone up. So we are perhaps somewhat of a unique case in this industry. I know that other companies have perhaps commented that the pricing environment is more challenging. But again, I would point to the strength of our portfolio, the strength of our investments, the strength of our innovation program and the facts and the data behind growing household penetration, having brands that offer superior value, lower price elasticities that all make a very solid case that we have pricing power on Clorox brands.

We'll move next to Kevin Grundy with Jefferies.

Kevin, a question for you on cost savings. Clorox Company's done a tremendous job on this front over a long period of time. But clearly, in this environment with higher input costs and pricing difficult to come by, it's even more important. Two questions for you on this front. What are the biggest areas of focus? And then number two, how do you think about the opportunity relative to the 150 basis points per year that you've delivered now over the past several years? How should we think about that contribution now going forward?

Yes. Thanks for the question, Kevin. What I'd say overall on cost savings is -- your first question was, where is our focus? Our focus consistently has been looking at every area where we spend money. And the way I describe Clorox very simplistically is $6 billion in sales. We spend about $5 billion on all aspects of the company, and we generate about $1 billion in profit. We are focused on attacking the entire $5 billion spend. So I have no one area that I focus on, but we have a program that looks at that entire spend. And every year, we're trying to deliver 2% productivity across that spend. And as you mentioned, Kevin, we have a very strong track record of doing that. And I have strong confidence that going forward, we'll continue to be able to deliver that type of savings.

And Kevin, can you help us just frame the potential magnitude in that front just from a modeling perspective? I mean, as we look at the headwind from freight and commodity costs, pricing will hopefully come through and stick. But can you do help us at all frame the potential favorability from upside above and beyond what you've historically delivered, given that it's sort of a -- takes on greater urgency?

Yes. I would say, Kevin, you guys should be considering that we'll continue to pursue 150 basis points of EBIT margin expansion through cost savings. We've done that historically very consistently. And going forward, again, I feel very comfortable we'll continue to be able to do that.

We will take our next question from Stephen Powers with Deutsche Bank.

Can you hear me?

Yes.

Okay, great. Sorry. Benno, I guess, a big-picture question for me. The sector is broadly under a lot of duress, and there are a lot of factors at play, but it really seems to me that we're seeing just a shift in the historic balance of power within the CPG value chain away from incumbent big-branded CPG companies and towards new niche players, towards retail, inclusive of Amazon and private-label brands and, ultimately, towards the consumer, resulting in this perceived lack of CPG pricing power and perceived risks for long-term market share and margins. So I guess, the question is, what's your perspective on that? Do you agree that such a shift is happening? And if so, why is Clorox in a more sustainable position than others? You clearly are performing on the top line, but can you afford to maintain both market share margins over the longer term against what I think it feels to many like a structurally more difficult backdrop going forward?

Yes. Thanks, Steve. Certainly, not an easy environment for all the reasons that you said. We remain confident that we will be able to grow and grow profitably, meaning sales and margin going forward. And we have a lot of things that perhaps aren't very common these days. We have increased our brand investments over time. We are leading our industry when it comes to engaging consumers online. We have innovation in an environment where little innovation exists, and we have built a relatively wide moat around our businesses through innovation, through technology, through manufacturing capabilities. So we do feel like our business fundamentally is healthy, and I think our top line results show that. We're dealing with heavy headwinds, which hopefully will be temporary, and which everybody sees. And that's what we're addressing, but we do feel like we're in a relatively unique position because our brands are strong. And if I look at our fundamentals, they're really healthy. You mentioned customers. Last quarter, we grew volume with 15 out of our 20 top U.S. customers, which includes the very largest customers. So while, philosophically, I can appreciate how retailers are in a position of power, how retailers certainly like the profitability of private labels, at the end of the day, consumers are the ones who decide whether companies are successful or not. And we are serving consumers extremely well and better than we ever have, I might add, which is why, fundamentally, our business is healthy. We have a short-term margin issue. We're addressing that margin issue aggressively, mostly through pricing. And that's why we remain confident in our ability to not just grow profitably, but also on the back of a really strong balance sheet, continue to add a lot of value to shareholders. So it's a dynamic environment. But this environment will have winners and losers. But we, at Clorox, look at this as a time to lead and as an opportunity. And today, we're winners, and we have every right to be confident that it will continue to be like that.

I'll leave it there. Welcome to the call, Kevin.

Thank you.

We will take our next question from Olivia Tong with Bank of America.

My first question's around gross margins. First, for the quarter, that 70 basis point benefit from other, is that primarily revenue mix? And then on the outlook, how much would the outlook have changed on gross margin, excluding Nutranext? Or said another way, is the $0.07 to $0.11 dilution for the deal, is that all coming in COGS? Because that's a really wide range on the gross margin, given we have only one quarter left in the year.

Yes. Thanks, Olivia, for the question. On the 70 basis points, I'd say that's a combination of revenue mix, as you described. It includes our divestiture of the Aplicare business. It would certainly improve margin. And then on your other question, as it relates to margin, the change in our outlook is solely driven by the addition of Nutranext to our outlook. And so as we've said previously in February, we'd be down modestly, and we described that as less than 1 point. That's still my expectation for the base business as we look forward. But we are now adding in Nutranext to the business. And if you're familiar with the acquisition accounting, we will now have to revalue all the inventory we've acquired to fair market value, which means as we sell through that inventory, we'll generate very little margin or profit on that business. And so I expect that to play out certainly for the fourth quarter, and then likely early into fiscal year '19 as well before we sell through all the acquired inventory.

And maybe last comment in regard to the range, what I'd say there is this is obviously a new business. We've owned it less than 30 days. And so we're still working through trying to understand the implication of that business. I think this was an appropriate outlook for the new acquisition, but we'll see how that plays out the next few months.

Understood. And then just broadly, I would love to understand the rationale for the Nutranext deal. You guys have obviously been very clear in your interest in expanding in areas like wellness. It's obviously growth-accretive, but it's a very fragmented category without -- with no clear leader. So I'm wondering what you guys think that you guys have that will either, a, give you a platform to consolidate share; b, be able to launch some of -- or potentially bring in some of your existing products into new channels or vice versa, bringing that business into channels where you have greater relationships.

Yes. Thanks, Olivia. As you know, we like fragmented categories with no clear leader. We feel like this meets all the criteria of a solid acquisition that we, frankly, have been emphasizing for years. It's bolt-on in nature. It's U.S.-centric. It's in the health and wellness space, which of course we know well, and have expanded into more specifically as it relates to vitamins, minerals and supplements well with RenewLife. It's a really solid fit with our capabilities, and it's profitable and growing. So those are the criteria that we talked about for many years, and this one checks off all the boxes. So we're excited about the prospects. This is a fast-growing business, a profitable business, gives us scale and breadth in vitamins, minerals and supplements. And importantly, we have several #1 brands in differentiated niches. And we love that. We've built our company on the back of precisely such brands. And what Nutranext does is bring really strong capabilities, for instance, in direct to consumers to Clorox. About 1/3 of this business is in direct-to-consumer, and we love that. But this business will benefit from our capabilities, for instance, in marketing, R&D, sales and product supply. So near term, right now, what we're focused on is bringing the 2 companies and organizations together. And they're off to a really nice start, and then we'll go ahead and expand distribution and brick-and-mortar and e-commerce. We'll plug in our marketing capability. We love that we're in differentiated segments here, emerging segments, not single-letter vitamins, but product benefits that are scientifically grounded, and that start to have a really strong following among consumers. We'll create a strong innovation program. We'll choicefully take these brands international and see a lot of opportunities there. And importantly, we'll realize cost synergies as we plug in our operational machines. So this has all the components of an acquisition that we like. For anyone who's listened to what kind of acquisition we like, this meets all criteria, and we're very optimistic about this.

We'll take our next question from Ali Dibadj with Bernstein.

I wanted to tackle a few more things. One is back on pricing. I totally get the commentary that you've made, but very simply, are you taking pricing in line with inflation? Because it looks domestically, at least your pricing might have been down, including trade, spend and everything else, so I want to pressure-test a little bit that topic. And then the second one is around reinvestment. Clearly, marketing spend looked like it was down a couple of -- or 100 basis points this quarter. Can you talk a little bit about the plan there, why that was a good idea for the quarter, and the plan there going forward?

Yes. Ali, I'll take reinvestments, and then I'll let Kevin answer your question on pricing. So as you think about advertising spending, so we have committed and said that about 10% of sales is the right level. We've also said that there's going to be variability by quarter based on timing of initiatives. Q3 was 9.8% of sales. So that's exactly in line with about 10% long-term guidance. And at the end of the day, look, the proof is in the pudding. We grew 3% in volume and sales on top of 7% volume and 4% a year ago despite the headwind in Charcoal and despite a 1-point hit on Aplicare. So to me, this is a nonissue. We remain committed to the 10%. And we have no interest in cutting in particular because we have and continue -- we'll continue to have a very strong innovation program.

Yes, Ali. And then in regard to pricing, as you look at our pricing, we anticipate about 1 point of benefit to both the quarter and the year. Historically, that's been primarily driven by our International segment. I'd say, though, this year's a bit different with some of the pricing actions that Benno previously talked about. A portion of that is being driven by the U.S. And then as it relates to trade spending, we've actually pulled back a bit on trade spending. And so we've taken pricing in the U.S. and reduced our trade spending.

And so just a follow-up on that and a different question on M&A. Just a follow-up on pricing. I guess, I stay with the question, are you able to take pricing in line with cost inflation?

So Ali, the way we think about it, we certainly price what we describe as the long-term inflation rate. So we won't look at a change in any one quarter, but we price to the long-term view we have of commodities. And so that's certainly the approach we take and we've taken historically.

Okay. And then the second -- the separate question is just in terms of M&A. And I want to pause on that for a moment and try to understand the track record and where you think your skill set is in terms of M&A. You can go back to things like Aplicare. You can go back to -- which you're divesting now clearly. Burt's Bees took a little while, obviously, to ramp up. RenewLife, it sounds like a short-term hiccup, would love more color there, but there is a hiccup going on there now. Can you talk a little bit just about your core competencies that you may have developed over the past little while in terms of acquisition capabilities or any places you think you can improve?

I mean, we feel good about our ability to do M&A. We started as a bleach company, and we built our company based on M&A over 105 years. So I feel good about that. I would clearly call Burt's Bees a successful acquisition for our company. We've divested Aplicare, but you can't win them all. RenewLife has been a real success with a onetime hiccup that will return to normal and back on track in Q4. And now we're going into Nutranext, and feel like this is a great fit with our company. So I feel good about our ability to do M&A, feel good about the ability to create value and feel like we have a solid track record. I don't think any company has a track record of 100%. If that company exists, I would like to know which it is. But I look forward and feel very confident about Nutranext. We've invested a lot in M&A capability and our approach over the last 3 years. It's nothing I want to comment on publicly, but I feel very confident about our capabilities in the area and very bullish about Nutranext.

Your next question will come from Jonathan Feeney with Consumer Edge.

The -- a couple of things. First of all ACV on Burt's Bees cosmetics that were launched in Q2, both today -- where we are today versus target? And how do we think about -- how do you, how would we or even you, looking back a year from now, how -- what would be a success for the size and rollout of that business? And then just secondly, how big did an outsized flu season play? Is there any way of quantifying that within Cleaning? I know it was huge in the scanner data. I want to know how that winds up with shipments and maybe some of the others as well.

Yes. Thanks, Jonathan. I'll take cold and flu first while it's fresh. Clearly, this was a relatively strong cold and flu season, but it actually wasn't as strong as it was presented in some of the commentary that I've read. Cold and flu incidents was up 6% to 8% versus a year ago. The cold and flu season was below the levels of -- for sure, of fiscal year '13 and '15. So it was higher, but not severe. And as a result, we've seen some impact perhaps on our wipes business, but not material. And that's because that particular business, as is our business in general, is less and less dependent on cold and flu. Because what really drives consumption is the planning that we do with our customers year-on-year to merchandise this business very aggressively during the winter season. And we have very strong merchandising plans and consumption regardless of the season, which is why I wouldn't look at cold and flu as a material driver behind our Q3 results in that segment. On Burt's Bees, perhaps more broadly, and to put it in perspective, strong quarter again, with volume and sales growth in the high single digits. I feel good about lip care and the consumption, a little tidbit. It's early, and before we get overly excited, but the last 4 weeks was the first time that our lip balm actually reached the #1 share, market share position in tracked channels ever. So that tells you that we're very focused on continuing to keep the core business very healthy, and it is. But also innovation in face care and in cosmetics continues to do well and has contributed. We don't typically comment on ACV levels, on innovations, but it's still building. And that's driven by retailer, shelf resets and marketing timing. And I would say that on cosmetics, Q2 was the start. Q3 was a significant ramp-up in distribution. But we're not done yet, and we're also not done yet in investing in the proposition. Cosmetics continues to expand velocities, and we're pleased with where we are. And we have just, this week, launched the new line of liquid lipsticks, which continues the strong stream of meaningful innovations, getting into a more cosmetics and lip color type of field. Liquid lipsticks, for perspective, those of you who have less experience or like me with as consumers with the category, it's a form of lipstick, but has the finish of a lip gloss. So it's somewhere in between 2 categories. And it's very on trend. It's a growing category, and we launched this as part of the strategic effort to give consumers beautiful and on-trend products that are 100% natural. So we'll continue to have a very solid stream on Burt's Bees, both on the base as well as in our cosmetics. I'm not in a position to give specific sales targets for initiatives. We generally don't do that. But as you can see from our efforts over the last year, we view cosmetics as a very interesting and strategic field for the brand to play based on what consumers tell us. And we have a number of initiatives that we feel good about already in the market that we'll continue, and we're pretty optimistic not just about optimistic, but Burt's Bees as a whole.

We'll take our next question from Shannon Coyne with BMO Capital Markets.

Just really quickly, back on the pricing. I'm just wondering if you guys -- are you seeing the same or different dynamic in pricing online versus brick-and-mortar? Also, I'm wondering if there are regional differences. So are you finding it harder or retail is pushing back and raising prices in the Southeast, for example, where all the Lidl are opening up a large number of stores there?

Yes. So for us, we have one -- we have a pricing policy that we call fair and equitable. So there's no difference between online and brick-and-mortar. And as far as regional differences are concerned, again, I can't comment on specific discussions that we have with retailers, national or regional. And again, keep in mind that there's just one new price increase out there. And what we've commented is that we will finalize plans to certainly take additional price increases over the next few months. Those will take time. In many cases, the discussions, of course, because we haven't finalized plans yet, have not taken place. So it's a little bit premature. But what I will say is that, again, taking pricing is never easy. Taking pricing always has bumps in the road near term. Taking pricing always, as consumers adjust to new, higher price levels, leads to somewhat lower volumes temporarily for about 12 months or so until consumers have gotten used to the new price points. But we have a strong track record of taking pricing. And we know how to execute it successfully, and I expect that track record to continue.

Our next question comes from Lauren Lieberman with Barclays.

I wanted to just ask about inventory destocking. I mean, obviously, nothing apparent in your results this quarter in terms of volume growth, but I was curious what you were seeing in terms of inventory levels at retail of any of the destocking that you'd mentioned last quarter, and then I think some other peer companies have still discussed, is something you're still seeing or not really.

Yes. Thanks, Lauren. As you mentioned, we had inventory adjustments late in Q2 in a few of our categories, and we commented on that in our last quarterly call. We also then commented on the fact that we were off to a really strong start in January, leading us to believe that some of it came back. We also commented that we don't -- didn't see a material impact on the year then. And there's really no news to that. So certainly, in Q3, we don't feel like there was a significant impact from inventories. We also continue to believe that this is not going to impact the fiscal year in any material way. We also think that it always evens out in the long run. So we don't think that we're sitting on high inventories that are at risk going forward. So inventories this last quarter was a nonfactor.

Okay, great. And then just one follow-up I still had on Nutranext. So my understanding anyway of the probiotics is there's a lot of medical research. There's a lot of work going on in the probiotics space, and my sense is there probably may be a bit of a difference in terms of clinical studies and things that have gone on in that space versus some of the areas where Nutranext plays. So if you could just talk a little bit about, I guess, the credentials, the medical backing and so on of this new business that you're acquiring is one. And then, two, just a bigger question on cyclicality in the VMS category. I feel like it's a business where it was on trend for several years, and then there's some journal article that tells people it doesn't work or whatever it is. And then there's a falloff, and then it comes back. So is there any concern that you're introducing a level of cyclicality to your business that really doesn't exist otherwise?

Yes. Thanks, Lauren. So when we -- before we become interested in a category, we start with the attractiveness of the category itself. And that includes, in this case, the scientific backing. It also includes the sustainability of a category. And we feel like we've done our homework in this. If I mention 2 of the major brands that we bought. One is around anti-stress and sleep, and that has a lot to do with magnesium levels. If you Google that, and if you do research, there's a lot of scientific research out there. One of their brands, Neocell, is a leader in collagen. Again, a lot of research out there. And if you think about perhaps the third bigger brand, which is in food-based vitamins, there is a trend within multivitamins that people like. They're less synthetic, more food-based multivitamins that also contain super foods and other nutrients. And that, of course, is a more general trend, not just in vitamins, minerals and supplements. So we do think that these are based on solid science. We have a good advisory council of scientists that we use to assess the attractiveness and the scientific soundness of the categories that we're in. And we've always commented, as a company, we build brands for decades, and not just for the short term. And we feel like the businesses that we bought and the categories that we will now be in certainly fall into that category line.

Our last question will come from Jason English with Goldman Sachs.

I want to come back to the pricing question real quick. And I apologize if you already gave this, Benno, but can you give us some color in terms of how the Cat Litter price increase has been received so far? And the broader price moves that you're planning right now, was the decision before those at all educated with some preliminary conversations with retailers? And if so, how did those preliminary conversations go?

Yes. Jason, I appreciate the question. I cannot comment on specific conversations that we have with retailers. As you will appreciate, the litter conversation is still pretty new. As I've commented, we began to announce this last month, so by no means are we through those conversations. And then as we think about what we do to consider pricing, we always look at the competitive set. We look at the retailer dynamics. We look at the strength of our business. We look at price sensitivities. So there's multiple factors that go into the decision on taking pricing. But I would perhaps just point back at my comments from earlier that we know how to take pricing because we've taken pricing many times before, including this fiscal year, and we always get through it. We live in categories where consumers do not buy more if pricing is lower. So we understand. And over the years, it's been proven that taking pricing when justified, as is the case here, it's a key driver to add value to categories for retailers, too. Most of our categories, as you think about volume, have grown modestly, but in terms of value have grown significantly over the years. And a big part of that is trade-up through pricing and through innovation. That's how our categories work. That's what we've built our company on and that's why we're investing in innovation, in marketing and solid value, but that's also why we keep taking pricing when justified. And today's environment is no different than the environment was, for instance, 10 years ago when the economy went south, when it was really hard to take pricing. But we did. So I look at this as a very solid case that's very well considered, and that we'll execute with excellence.

And one follow-up, just on productivity within the gross margin line. Clearly, looking at margin bridges, you guys continue to deliver. But you're leaking all of it, and then some out, through logistics and manufacturing line there. I appreciate there's some logistical cost inflation system right now, but just looking back over the last 5 years in netting cost saves just first logistics and manufacturing netted you to 0, if not a modest deficit. So as we think about cost saves and that net logistics manufacturing line, so effectively a net cost save line, is there a glide path to getting that aggregate to flip positive? If so, what are the drivers? And what could the cadence look like?

Yes. Jason, this is Kevin. What I would say is if you look over long periods of time, and as we've said, we are committed to growing EBIT margin 25 to 50 basis points. If you look back over the last 9 years, I think we've grown EBIT 35 basis points on average per year. That clearly won't be the case in any given quarter and given year. But over long periods of time, I feel very comfortable with our ability to keep growing margins. As we look forward, we're clearly in an inflationary cycle right now and, obviously, you're hearing us talk quite a bit about the pricing because we need to price to recover the cost increases we're incurring. So as I look forward, I have the same expectation that we're still committed growing margins. I feel confident that we can do that because we do have pricing power, and we will execute that pricing power to offset the cost increases we're incurring.

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

Yes. Thank you, and thank you, everyone. We look forward to speaking with you again in August when we share our fiscal year-end results and outlook for fiscal year '19. So have a good day, everyone.

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