高樂氏 (CLX) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Clorox Company Fourth Quarter and Fiscal Year 2018 Earnings Release Conference Call. (Operator Instructions)

As a reminder, this call is being recorded. And I would now like to introduce your host for today's conference call, Lisah Burhan, Vice President of Investor Relations for The Clorox Company. Lisah, you may begin your conference.

Thank you, Vicky, and 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 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 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 press release.

Please also recognize that today's discussion contains forward-looking statements. Actual results or outcome 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 filing with the SEC and our other SEC filings for a description of important factors that could cause results or outcome 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 turn to our top line commentary. I'll discuss highlights in each of our segments. Kevin will then address our financial results as well as our outlook for FY '19. Finally, Benno will offer his perspective, and we will close with Q&A.

For the total company, Q4 sales grew 3% and full year sales also grew 3%, with growth in 3 of our 4 segments.

I will now go through our results by segment. In our Cleaning segment, Q4 sales grew 3% and full year sales also grew 3% on top of strong 5% growth in prior fiscal year. Cleaning segment growth was driven by the continued strong momentum in our largest business unit, Home Care, which saw high single-digit sales growth in both Q4 and full year as well as share growth for the fourth consecutive year.

Within Home Care, Clorox Disinfecting Wipes grew sales double digits in Q4 following our price increase, demonstrating the strength of our equity. Pass-through of our November 2017 price increase and competitive reactions are all generally in line with our expectations. Also contributing to Home Care's growth this quarter was the expansion of our successful Clorox Scentiva line into new bath aerosol and toilet cleaning products. The Scentiva innovation platform continues to be well-received by consumers.

In our laundry business, sales were about flat for the quarter and the year. We continue to shift the mix of this business to the premium segment and are pleased to see Clorox Liquid Bleach grow share for the quarter and for the year. In May, we launched new powerful bleach advertising, which inspires consumers to use bleach by focusing on unique moments showcasing bleach as the solution.

Lastly, within the Cleaning segment. Our Professional Products sales declined for the quarter and for the year due to the Aplicare divestiture, which we will lap during this month of August. Excluding the impact of Aplicare, sales grew strongly for the quarter and for the year following price increases on about 1/3 of the portfolio.

Looking ahead to FY '19. We're in the process of executing additional pricing actions across another significant portion of the portfolio.

Before moving off discussion on this business, I want to mention that one of the areas we're especially pleased with and that's the strength and potential of our -- of the Total Clorox 360 system innovations, which we introduced in late March 2017. This system uses an electrostatic technology, allowing disinfectants to reach even the hardest-to-reach areas in the facilities. Market response to Total 360 has been very positive, with more than 25 professional sports teams having adopted it for their athletic facilities as well as hundreds of schools and other commercial facilities.

Turning to the Household segment. Q4 sales decreased 3% on top of 4% growth in the year-ago quarter. On a full year basis, Household segment sales came in flat on top of strong 5% growth in FY '17. Sales decline in Household was largely driven by Charcoal. Q4 sales were down, driven in part by cold weather earlier in the quarter as well as lower merchandising levels at several retailers. Full year sales also declined.

For perspective, Q4 is our largest quarter in this business, and in combination with Q3, makes up more than 2/3 of the year's sales. Looking ahead, we're focused on continuing to extend the grilling season in partnership with Major League Baseball as well as partnering with retailers to optimize merchandising strategies to grow the category and attract new users, along with expanding our premium tier of products.

In our Cat Litter business, Q4 sales grew double digits on top of double-digit year-ago sales growth, driven by core strength and our new Clean Paws innovation. Clean Paws has been one of our biggest litter launch out of the gate and continues to perform very well.

The Cat Litter business continues to have strong momentum, as reflected in 7 consecutive quarters of market share growth as well as high single-digit sales growth for the year. As you may remember, during our May earnings call, we announced a price increase on this business effective July 1. We're pleased to report that pass-through is on track and higher prices are already reflected at shelf at several major retailers, including the largest retailer.

In our Glad Bags and Wraps business, Q4 sales declined slightly, but were about flat for the year. This is mainly driven by lower sales of food bags and wraps as well as the strategic price rollback we implemented on a portion of our trash bags business earlier this fiscal year.

Importantly, we continue to grow sales strongly in our premium trash segment behind a continued stream of innovation on our OdorShield scented trash bag platform as well as capitalizing on new patented dual-layer technology.

Our new ForceFlex Plus advanced protection trash bags introduced earlier in the year are performing well in market. In FY '19, we will complete our conversion to this new dual-layer form of trash bags, which is now part of our overall strategy to deliver patent-protected, consumer-preferred products that use less resin.

Finally, turning to Renew Life. Sales decreased this quarter, partly as we made changes to our supply chain to address the challenges we discussed with you last quarter. We're midway through these changes, which we expect to complete this fall, and customer service levels are currently tracking back at targeted levels.

Q4 sales were also impacted by higher trade spending to support several trial building programs. Sales were about flat for the year, reflecting strong growth in the first half, offset by declines in the back half of the fiscal year due to the challenges I just discussed. Looking ahead, we expect to return to sales growth as we continue to build distribution on our new organics line, expand distribution of our core products and further increase our e-commerce presence.

In our Lifestyle segment, Q4 sales increased 21%, reflecting gains from the Nutranext acquisition. And on a full year basis, sales increased 8%, largely reflecting the benefit of Nutranext.

Brita sales grew for the quarter, reflecting lower trade spending and strong e-commerce growth. Sales for the full year were up slightly, reflecting the continued success of our Stream pitcher innovation, and Brita Stream continues to be the #1 selling pitcher on Amazon.

Burt's Bees sales grew for the quarter and for the year. We're especially pleased at the health of our core Burt's Bees business, with our lip balm assuming the #1 market share position for the last quarter in the total lip balm category for the first time, contributing to a record quarter in shipments for lip care. In the meantime, our cosmetics launch continues to perform well in market, and new liquid lipsticks are now shipping and available in select stores. This form of lipstick makes up about 20% of lipstick category today, and it's growing at a very strong double digits rate.

Wrapping up the Lifestyle segment. Food sales declined for the quarter, but increased for the year. Q4 results reflect timing of merchandising at a large retailer. At the same time, we're pleased that our total Hidden Valley equity grew share for the 14th consecutive quarter. In particular, our dry dressing business grew behind a focus on extending use as a seasoning and a recipe ingredient.

Finally, turning to International. Q4 sales decreased 2%, mainly reflecting unfavorable FX headwinds, primarily due to the devaluation of the Argentine peso, which more than offsets the benefit of price increases. On a full year basis, International sales grew 2%, despite FX headwinds of about 2 points.

We continue to focus on our Go Lean Strategy to drive margin improvement while selectively investing in margin-accretive portions of our International portfolio that have tailwinds. We're pleased to see the areas we're investing in growing, both in absolute and as a percent of our International business, such as Burt's Bees, which reported double-digit growth again this quarter.

Now I'll turn it over to Kevin, who'll discuss our Q4 and fiscal year performance as well as outlook for FY '19.

Thank you, Lisah. We're pleased with our fourth quarter and fiscal year results. We continue to make solid progress in a challenging environment, delivering strong sales and earnings growth while continuing to generate healthy cash flow.

Turning to our financial results for the fourth quarter. Q4 sales grew 3%, driven by 3 points of benefit from the Nutranext acquisition, partially offset by about 1 point of unfavorable foreign currency, largely driven by the recent devaluation of the Argentine peso, and nearly 1 point of negative impact from the Aplicare sale.

Fourth quarter sales also reflect volume growth, supported by innovation as well as 1 point of pricing benefit, which was offset by about 1 point of unfavorable mix. Gross margin for the quarter came in as expected at 44%, a decrease of 170 basis points compared to 46% in the year-ago quarter.

Fourth quarter gross margin included about 130 basis points of unfavorable commodities and about 100 basis points of logistics costs, partially offset by the benefits of 120 basis points of cost savings and 50 basis points of pricing. As previously communicated, fourth quarter gross margin also included about 60 basis points from charges related to the Nutranext acquisition.

Selling and administrative expenses increased about half a point to 13.5% of sales, largely driven by costs related to the Nutranext acquisition, partially offset by lower employee incentive compensation costs and progress from our ongoing productivity initiatives.

Advertising and sales promotion investment levels for the quarter came in at about 9% of sales.

Our fourth quarter effective tax rate came in at 28.7% versus 31.7% in the year-ago quarter, largely reflecting the benefits from U.S. tax reform. Net of all these factors, we delivered diluted net earnings per share from continuing operations of $1.66, an increase of 8%.

Now I'll turn to our results for the full fiscal year. Sales grew 3%, which included about 3 points of growth from innovation and about 1 point of benefit from the Nutranext acquisition, partially offset by about 1 point of negative impact from the Aplicare divestiture.

Gross margin for the fiscal year came in as expected, down 100 basis points at 43.7% compared to 44.7% in fiscal year 2017. Fiscal year gross margin results included 130 basis points of higher commodity costs and 90 basis points of logistics pressure, partially offset by 140 basis points of cost savings and 40 basis points from pricing.

We're proud of our strong track record of delivering annual cost savings of more than $100 million, which we achieved for the 11th consecutive year in fiscal year 2018.

Selling and administrative expenses for the full fiscal year came in at about 13.7% of sales, essentially flat versus year-ago. Advertising and sales promotion as a percentage of sales for fiscal year 2018 came in at about 9% of sales, with U.S. Retail spending at slightly above 10% of sales.

For the full fiscal year, our effective tax rate was 21.8% compared to the year ago rate of 31.9%, primarily reflecting the benefit of U.S. tax reform. Net of all these factors, our fiscal year diluted EPS from continuing operations was $6.26 compared with $5.35 in fiscal year 2017, an increase of 17%.

Turning to cash flow for the fiscal year. Net cash provided by continuing operations in fiscal year 2018 came in at $974 million versus $871 million in the prior year, an increase of 12%. At the end of fiscal year 2018, our debt-to-EBITDA ratio was 1.9x, slightly below our target range of 2 to 2.5x.

Now I'll turn to our fiscal year 2019 outlook. We expect fiscal year sales to be in the range of 2% to 4%, reflecting about 3 points of growth from innovation, about 2.5 points of benefit from the net impact of the Nutranext acquisition and the Aplicare divestiture, and about 2 points of negative impact from foreign currency exchange rates, primarily driven by the recent devaluation in Argentina.

Turning to gross margin. We expect fiscal year gross margin to be about flat to up modestly, reflecting the benefits of pricing and a strong cost savings pipeline, partially offset by the continuation of higher costs related to commodities and logistics.

In the second quarter, we should start seeing the full benefits from our recently announced price increases and the comparison to the significant cost run-ups that started in the second quarter of fiscal year 2018, leading to gross margin expansion in the back half of fiscal year 2019. We expect fiscal year advertising and sales promotion spending to come in at about 10% of sales.

As we mentioned in the press release, selling and administrative expenses are expected to come in at about 14% of sales, reflecting acquisition-related investments and more normalized levels of performance-based incentive compensation.

We expect fiscal year EBIT margin to be about flat, reflecting increased investments in our brands and Nutranext-related costs. Our outlook also includes the ongoing benefits of U.S. tax reform, with the assumption that our fiscal year tax rate will be in the range of 23% to 24%, slightly higher than our fiscal year 2018 rate as we lapped a number of one-time benefits in the second quarter of fiscal year 2018 as a result of U.S. tax reform.

We expect free cash flow for fiscal year 2019 to come in at about 11% to 13% of sales, consistent with our recently updated long-term goal. Importantly, recognizing our strong track record of generating healthy cash flows and the strength of our balance sheet, we will continue to invest in the long-term health of our business and reward our shareholders.

As a reminder, in fiscal year 2018, we acquired the Nutranext business, further expanding our portfolio into health and wellness. We also increased our quarterly dividend by 14%, marking the 42nd consecutive year we have increased our dividend, and we initiated a share repurchase program of up to $2 billion. And we currently plan to repurchase about half the full amount in fiscal year 2019.

Net of all these factors, fiscal year diluted EPS is expected to be in the range of $6.32 to $6.52, which includes our previously communicated estimate of $0.08 to $0.12 of EPS dilution from the Nutranext acquisition. Fiscal year diluted EPS also includes about $0.05 to $0.07 of negative impact from the recently enacted tariffs, which are affecting a couple of our business units.

As we start our new fiscal year, I'd like to highlight a few areas we are aggressively managing. First, we remain focused on executing our recently announced price increases in support of our efforts to drive profitable growth. We have a strong track record of taking pricing, which is supported by our emphasis on delivering superior consumer value behind strong investments in innovation. To date, our pricing actions are progressing in line with our expectations.

Next, we continue to anticipate elevated cost pressures from commodities, particularly resin, as well as the transportation market. And as I mentioned earlier, we expect these headwinds to be more pronounced in the first half of the fiscal year until we lap the significant cost run-ups that began in the second quarter of fiscal year 2018.

That said, we're operating in a volatile cost environment, which could impact the timing of our gross margin progress. While it's early, we assume gross margin expansion in the back half of fiscal year 2019.

And finally, we continue to face challenging economic conditions in international, including the recent currency devaluation in Argentina. Consistent with our 2020 Strategy, we're addressing these challenges head on, with an eye on the long-term health of our business.

We are increasing investments in our brands, including innovation to support brand differentiation, which will help us continue to deliver superior consumer value. We are leaning into our cost-savings programs and productivity initiatives to address ongoing cost pressures, and finally, continuing to execute our Go Lean Strategy in International to partially mitigate the more challenging currency environment we're expecting.

In closing, we're pleased with our solid results in fiscal year 2018. We will continue to drive our 2020 Strategy with an emphasis on creating superior consumer value, which is enabling us to consistently deliver sales growth in an environment where growth is hard to come by. Importantly, we remain confident in our ability to deliver long-term shareholder value.

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

Hi, everyone, and thanks, Kevin. I'll now offer my perspective. First, we delivered another solid year, advancing our 2020 Strategy, while remaining agile and aggressive in our approach to mitigate significant cost headwinds.

We grew sales for the year 3%, including another strong year of innovation at about 3% of incremental sales and about 1 point from the acquisition from Nutranext, partially offset by nearly 1 point of negative impact from the Aplicare divestiture. We feel very good about these results in an environment where growth is very hard to achieve.

We are particularly pleased that all major innovations are doing well in markets, including Fresh Step Clean Paws, the Clorox Scentiva platform, Burt's Bees cosmetics, Glad Trash innovations and our Professional Products, Clorox Total 360 system. And while our focus on traditional retailers remains most important, we continue to make strong progress in e-commerce, and sales in this channel are estimated to be up more than 40% for the fiscal year.

We achieved these results while operating through a volatile cost environment that was significantly worse than anticipated, taking an agile and aggressive approach to mitigate the impact by leaning into cost savings and moving quickly and decisively to announce cost-justified price increases. To put this in perspective, we now plan to take price increases on about 50% of our portfolio in fiscal year '19.

We delivered 17% diluted EPS growth for the fiscal year, and we put our healthy balance sheet and strong cash flow to work, investing in the health of the company, creating a new runway for growth with the Nutranext acquisition and returning cash to shareholders by increasing the dividend by 14% in May 2018, and by entering the market with up to a $2 billion share repurchase program.

Second, for fiscal year '19, we're projecting another year of solid sales growth as we increase investments to support the business and drive profitable growth in our core and our recent acquisitions. Sales growth will be supported by increased investments in advertising and sales promotion, with a focus on digital marketing and innovation. We'll also continue to execute our pricing plans, consistent with our focus on driving profitable growth and category growth for our retailers.

We continue to have a robust margin-accretive innovation plan on many of our brands, including: Burt's Bees, Fresh Step, Glad Trash and Hidden Valley, as well as continued investments to support our successful fiscal year '18 innovations.

We remain confident in the long-term outlook for the RenewLife digestive health business, and we continue to anticipate about 3 points of growth from the newest member of our portfolio, the Nutranext vitamins and dietary supplements business, where integration is progressing in line with expectations.

And from a channel perspective, including Nutranext, e-commerce is now estimated at 6% of company sales, and we anticipate growing strongly in this channel again in fiscal year '19 to an estimated 8% of company sales.

Third, as we decisively address near-term pressures, we will not be deterred from our 2020 Strategy and focus on profitable, sustainable and responsible growth to create long-term shareholder value. We continue to take a long-term view and remain confident in our strategy.

We are continuing to invest for the future, not only through increased brand-building investments, but also in technology transformation, such as with technology-enabled consumer engagement and capital investments to enhance our supply chain and support long-term growth through technology.

All our major brands are seen as superior by consumers versus their competitive brands. And while we have work to do on some of them, I feel good about the health of our portfolio overall and the plans we have in place to support them, and we'll maintain our emphasis on driving superior value through a combination of product performance, price and consumer perception.

We'll continue to lean into the more profitable parts of our portfolio and focus on expanding the core behind health and wellness with Nutranext and RenewLife as the engines. We'll double down on our focus to restore gross margin growth as we aim to extend our track record of delivering 11 consecutive years of cost savings at $100 million or more.

And we will support these efforts by continuing to build a more agile enterprise with our highly engaged employees who are keenly focused on growing our business the right way. So in a difficult cost environment, we continue to have confidence in our 2020 Strategy as the means to create long-term value for shareholders.

Operator, you many now open the line for questions.

(Operator Instructions) And we will take our first question today from Bonnie Herzog with Wells Fargo.

I had a question on your advertising expense. First, it was down a lot in Q4, so hoping you could help us better understand why that was. And then, your guidance for organic sales growth in FY '19 is consistent with what you generated last year, despite your expectations for stepped-up advertising since you're expecting it to go to 10% of sales from 9.3% last year. So I guess I'm wondering if you're finding that you need to spend more to get the same level of growth?

Yes, thanks, Bonnie. First, on Q4, we'll remind everybody that we have always said that there's going to be quarterly variance. We don't manage the business by quarter. We don't manage the spend by quarter. We're focusing on the long term, and there's a reason why our guidance is on an annual basis.

What I will say on Q4 is that part of it certainly was Charcoal, which became clear throughout the quarter was going to be significantly lower in sales, negatively impacting the company by about 1 point because of the inventory hangover we had from Q3, which as you know, was really soft behind the unusually cold weather. And that continued in April, which led to lower merchandising throughout the quarter. And we certainly thought that there is no need to spend into that headwind as much as we did last year.

What I will tell you, though, is that for fiscal year '19 as you noted, we're committed to be about 10% level, which is in line with our target. So there's no news here. We're staying the course, managing the business for the long-term. And as you related to the sales guidance, what I would ask you is certainly to keep in mind that what we have communicated is that, as we take pricing, it typically takes a few quarters for consumers to get used to new price points.

We've also commented on the fact that there might be, temporarily, bumpiness as it relates to merchandising as we're working through this with retailers. And all of that is reflected in what we think is a really balanced outlook that reflects the upside and the risks that we see in the fiscal year pretty appropriately.

So fiscal year '19, it's going to be back to 10%. We'll invest in innovation. That is going to contribute another 3%, in line with our targets. And we'll also continue to shift our spend towards digital, which, as we've noted in the past, accounted for about 50% of our advertising sales and promotion spend in fiscal year '18 and is expected to contribute about 55% to 60% of our total spend in fiscal year '19, all based on the strong ROIs that we have.

So 10% is the right level now and ongoing. And the 2% to 4% sales guidance that we have given for the fiscal year appropriately reflects what we're seeing in the marketplace and certainly also reflects the fact that it's early in the year and the environment is somewhat volatile.

And the next question will come from Wendy Nicholson with Citi.

First question is on Glad pricing, which I know it made a ton of sense on, whatever, I guess 9 months ago to roll back that pricing because of the competitive positioning and the competitive activity in the category. But obviously, on -- the input environment has changed dramatically. So how are you thinking about Glad pricing now? Is there a hope for more positive pricing? Or when do we lap that? Maybe a little bit more discussion about that.

Yes. Thank you, Wendy. So what we did, as noted in the past, was take a price cut on about 40% of the Glad Trash pricing last fall, just to set the table as we anticipated strong innovation in the back half of last fiscal year and get that value right.

As I think is evident in the really strong progress in volume and sales on that business, that's achieved its objectives. And we're pleased with the success of the innovation out of the gate.

I'm also, today, announcing that we will take pricing on Glad Trash. And I think that should tell you 2 things. First of all, that we believe in the value of the brand and the products that we offer on Glad, as is evidenced by the continued shift towards the more profitable premium end of the business, which now accounts for north of 2/3 of the entire portfolio in trash.

But the second thing that tells you also is that our pricing efforts overall are going in line with plan, as is perhaps evidenced by the first business that we announced pricing on in the last quarter, which is Cat Litter, which was first out of the gate. And as Lisah mentioned earlier, the higher prices are now visible at shelf at several major retailers, including our largest retailer.

So Glad will take pricing as well, bringing the total percentage of our portfolio that we will take pricing on to 50% globally. And that, of course, also includes more of the professional business, where we took about 1/3 -- pricing of about -- on about 1/3 of the business in the last fiscal year, and we're now adding another about 40 percentage points, bringing the total amount of the PPD business where we're taking pricing to about 75%.

So strong cost-justified case on pricing. Our brands continue to offer superior value, and we don't expect that to be affected by these price increases. This is a strategic case of allowing us to keep investing in innovation and advertising and sales promotion to grow categories. And we'll do a lot of that in fiscal year '19, and it's all going in line with plan.

That's hugely helpful. And if can ask one follow-up, kind of just higher level. Clorox was one of the first companies, obviously, in the group to start raising prices given the commodity environment. And I'm just wondering if, generally, I know you said that the response competitively and from retailers was kind of as expected.

Did you notice any difference in terms of on your price increases going through online versus offline or in traditional channels? Is there -- I mean, this is the first time online has been a big factor and you guys have been historically very strong online.

So is there any nuance in terms of, hey, given the retail environment has changed, we need to think about pricing or the time it takes effect or the competitive response, anything like that any differently?

So no 2 companies are the same, so I can't speak for the industry. But for our company, there's no difference.

And we'll go to Stephen Powers with Deutsche Bank.

So to build on what Wendy just said, I agree, you've been at the forefront of the industry's effort to drive price these past several months, and you seem pretty determined to carry that forward into '19. I'm just hoping you could maybe step back and provide a few more details on what your experience has been thus far.

And any color as you look forward on what percentage of list price increases you expect to really show up in the market as incremental pricing, net of kind of promotional offsets. And whether you expect that incrementality to differ materially across different product categories as you push for list price.

I'm just curious. I have no doubt you're going to push the list prices through. I'm just -- my question is really about how much of that will drive true incrementality to the fiscal '19 P&L?

Yes. Thanks, Steve. So can't comment on individual percentages because those vary by category and because we're still talking to retailers. But 2 things perhaps are helpful. First of all, the increases that we're seeing on Cat Litter are precisely in line with our plans.

And then perhaps, to your broader point, we are not spending -- we are not planning to spend any of those price increase dollars back in trade, and we also did not do that in fiscal year '18. So our expectation is that the pass-through, while pricing certainly is at the discretion of retailers, will be in line with our plans.

Okay. And then, if I could on guidance. Back of the envelope math, but just given what you said about SG&A and A&P each moving higher, the '19 outlook really seems dependent on pretty reasonable gross margin improvement, as I look at it, if you can get to the midpoint of your guidance and/or a pretty front-end-loaded buyback financed on favorable terms.

So maybe can you, Kevin or Benno, just react to my back of the envelope conclusions? And then, in that context, just talk a little bit more about your confidence in seeing true gross margin expansion next year versus GM -- gross margins just kind of leveling off. And then, any detail you could provide on how you plan to finance and time the buyback would be great.

Yes, Steve, this is Kevin. I can try to answer some of those questions. So as it relates to gross margin, clearly, I would say a couple of things. First, the work we're doing on cost savings, I'm very pleased with. We have one of the most robust cost-savings pipelines planned for '19 that I've seen in quite a while. And that's obviously what we attack first to offset the commodity environment we're seeing.

Additionally, as Benno talked about, with our pricing actions on about half the portfolio, that's the other piece of the model that will allow us to be flat to up modestly. We control those 2 elements, and we feel very comfortable about the work we're doing. What is not directly in our control is the commodity environment and the transportation environment.

We certainly expect to see inflation continue in fiscal year '19. I would say, as it relates to commodities, our expectation is the inflation rate will be fairly similar to what we saw in '18. And then, as it relates to transportation, my expectation is while we'll see inflation in '19, it won't be to the same degree that we saw in '18, so moderating a bit.

And so, overall, our belief is that we will be flat to up. I think what's also important, though, is to think about the phasing. What I really expect in the front half of the year, we really haven't lapped the significant upcharges we saw in fiscal year '18.

So I would expect the front half of the year to look more in line with what we're seeing in the back half of fiscal year '18. But by the back half of '19, we'll see the benefits of cost savings. We'll see the benefits of pricing playing through our P&L. And that's really where I expect to see sequential improvement throughout the year with gross margin expansion in the back half of the year.

And then, your other question was share buybacks, related to share buybacks. I would tell you, I won't provide a quarterly outlook on the phasing, but we are planning currently to exercise about half our authorized amount of $1 billion, and we'll do that based on criteria we've set internally over the course of the year.

And next is Steve Strycula with UBS.

Two-part question. The first part would be, can you give us some color between the volume and the price mix on an organic basis for -- I think you've answered it already, but for the fourth quarter, and how we should think about it for the full year and how we might have broken out by segment? You've done that historically. We just kind of want a little bit of a better feel as to how the underlying businesses are doing on a volume ex acquisition and price basis?

Steve, this is Kevin. I'll speak to the fourth quarter and full year for '19. In the fourth quarter, as we mentioned in our prepared remarks, we saw about 3% growth from Nutranext. We had volume growth on the base business, and then the headwinds we saw were FX was about a 1 point headwind as well as the Aplicare divestiture, keep that in mind, was about 1 point as well. And then, pricing was a 1 point benefit, offset by unfavorable mix in assortment.

As I look forward to fiscal year '19, our expectations are, as we mentioned, innovation will drive about 3 points of growth, the net impact of the Nutranext acquisition and Aplicare divestiture will be about a 2.5 point benefit. And then, we are looking at fairly significant devaluation in International, about a 2 point headwind, primarily related to the Argentine peso devaluation we experienced in May and June.

As it relates to pricing, expectation right now is pricing will have limited benefit on the sales line. You'll have the benefit of more revenue per case, but that will be offset by the elasticities on volume as consumers adjust to the new pricing.

And so what I expect to see in fiscal year '19 is our volume growing more in line with sales. Typically, our volume tends to grow a little bit faster than sales, but I think in '19, you'll see those growing more in line.

So the second piece would be, Benno, if we went to the midpoint of your organic sales guidance for the full year and we just thought about the different moving pieces with pricing coming through, what would really drive the sensitivity from the low end versus the high end? And can things really go your way versus things not go your way? What would be the 1 or 2 variables that you would think are most in flux as we think through the balance of the year?

I mean, look, there's a number of things, right? So I would certainly point to FX as one, right? That's a 2-point drag. And obviously, that's very much driven by the Argentine peso, but FX continues to be a headwind. So I would point to that. And then, I would certainly point to the success with the consumer around pricing as the second one, right?

So clearly, as I pointed out so far, it's going in line with our expectations. The good news about that is that, historically, we've been able to model the impact of pricing on volume with the consumer extremely precisely. And what I mean by that is within plus/minus 2% variance.

So our modeling historically has always been good, but pricing on 50% of the portfolio is a significant undertaking. And hence, the 2 point range, coupled with the FX uncertainty seems very appropriate, but I would point to those 2 things.

And we'll now go to Ali Dibadj with Bernstein.

So I want to follow up on a couple of questions. One is back to the EBIT being flat. So gross margin is flat to up modestly, which were the words you used. The S&A is going to go to about 14%, which is 40 basis points. The A&P goes up by about 70 basis points to roughly 10%. How do you get to flat EBIT margins? Unless R&D is coming down a lot or modestly means not modestly in terms of gross margin? Or there's something else going on that I don't understand?

Yes, Ali, this is Kevin. What I would say is, obviously, it's still very early in the year, so these are -- the outlook we provided, there are ranges around each of those estimates. We'll have to see how the commodity environment plays out.

We certainly provided a range around gross margin accretion, and we'll have to see where that plays out as well as our admin spending. We said about 14%. Part of that is driven by the Nutranext acquisition and the integration spending we're doing as we're integrating our people, process and systems. And so I would take those as ranges, and we'll have to see how that plays out, and we'll clearly update you folks as we move through the year.

So just to build on that because, clearly, gross margin is a little bit of a -- I mean, there wasn't a number given. There's a little bit of moving parts, obviously. It's, as Benno said, a huge undertaking to take price around 50% of your business.

And I think you said -- I think maybe it was you Kevin just a second ago that you expect volume to be roughly in line with sales for 2019. And if that's right, how does that jive with taking pricing on 50% of your portfolio?

Does it go back to the question of, for now, you're going to promote a lot of it back, so we're not actually going to see the pricing, it's going to be a lot of promo spend initially to ratchet it down? Or is there something else going on? And again, I say that in the context of I'm trying to put your guidance together here and it's just not working for me.

Yes, I can speak to that, the trade spending, Ali. As Benno just mentioned, our plans are not to increase trade spending.

But -- so how is sales in line with volume?

Well, here's what I'd say, typically, when you have high FX, like we're projecting for '19, you'll see volume growing faster than sales. And if you look back at our history, that's been very true. This year, in spite of the high FX, you will have a dampening effect on volume based on elasticities in the near term, and so that's why you'll see volume and sales growing more in line.

And perhaps, Ali, if I may add, so if you think about Q4, for instance, so at 5% volume growth leading to 3% total sales growth, which included 1% negative impact from FX. If you look at the fiscal year '19 guidance, you see 3% volume growth. And if you take out FX, that's at the midpoint, would be 5% of sales. So I do think you -- once you take FX into account, you'll start seeing the difference.

Got it. Okay. And then, just on another point, you mentioned you're taking on the International challenges head-on, I think, was the word you used. You mentioned a little bit more kind of leaning out of that business.

Are there things more dramatic that you could do to that business? It's clearly been a disappointment. Sometimes, there's progress. Sometimes, there's not. Oftentimes, it's not the fault of that business unit, given the FX exchanges, et cetera, now Argentina. Do you still think that fits in the portfolio? Or are there other things you could do to that business that are more dramatic?

Perhaps, I'll give you the broader context, and Kevin will add some perspective on Argentina. So if we think about the International business as a whole, we have as many #1 brands in International as we have in the U.S. We have solid plans to offset the cost inflation, and we've done that well operationally.

We're performing very well, as evidenced by fiscal year '18, where for the second year in a row, we've shown sales and profit growth. So it's not where we want it to be, but given the FX headwinds, actually performing quite well.

So we're optimistic about that business, which is why we're investing into it. But what we've talked about is that we're shifting our investment spend to the more profitable parts of the portfolio. We have 4 growth vectors in the International business, and they now account for 30% of our portfolio. And that's up significantly from previous years.

So we're shifting the category country mix quite attractively towards parts of the portfolio that aren't just margin accretive to the International business, but margin accretive to the company. The setback right now and the foot on the brake is Argentina, and I'll let perhaps, Kevin, comment on the specific things we're doing in Argentina.

Sure. Yes, Ali, as it relates to Argentina as we've talked about, the 2-point headwind from FX, that's primarily driven by Argentina. And as I mentioned in my opening comments, we've seen a 30% devaluation in the Argentine peso in the month of May and June. So as you can imagine, we'll have to lap that over the first 10 months of this year.

Additionally, our belief is we'll continue to see the peso depreciate versus the dollar marginally over the balance of the year, in addition to what's already occurred in May and June. And so it's certainly a challenging environment in Argentina.

What I would say, though, is we've operated in Argentina for quite a while, over 30 years, and we have a very experienced team who is very knowledgeable about how to operate in this environment. And so the team knows exactly what to do in a highly inflationary environment. We're very much focused on protecting profit. There's less you can do about the top line, but certainly, our focus are on protecting profit. And I think the team has developed some nice plans for '19 to do just that, in spite of the challenging currency environment.

And we'll go to Olivia Tong with Bank of America Merrill Lynch.

Wanted to talk a little bit about mix because you, obviously, this quarter, had -- the mix was negative in all the divisions. So trying to understand what -- first, what do you have embedded in terms of the impact of mix next year? And what are the key things that are driving that down this year? And does that improve over time?

Olivia, this is Kevin. I can take that one and speak a little bit about mix. A little bit different drivers for each of our segments. If you think about the Cleaning segment, we continue to have very strong Club performance. And as you know, with the larger size, there's a little bit of negative mix there when you're growing significantly in Club.

In Household, as Benno mentioned, we've had a weaker Charcoal business this year. Charcoal is very profitable and high-revenue business for us, so that's created that some unfavorable mix in Household.

And then, Lifestyle is a bit interesting. Nutranext has a lower revenue per case for us, but it's margin accretive to the company. So while it's a little bit of negative mix on the top line, we're very happy to have that negative mix in the Lifestyle segment as it relates to Nutranext.

And so we've got a few different drivers. As I look forward, clearly, Charcoal is not something we expect to see continuing on in fiscal year '19, but I would expect to see some of that in the Nutranext or Lifestyle segment, given the mix of that business.

Got it. And then, on the price increase, it's great to see that 50% of the portfolio is being helped by that. But I have to ask what's going on in the other 50%? Perhaps a portion of that just doesn't need pricing, but how much of that are areas where you just wouldn't be comfortable pricing because of the competitive positioning or market dynamics?

Well, keep in mind that the 50% is our new price increases. What's not included there is the PPD portfolio that we took pricing on in fiscal year '18 and also CDW, and that takes you to about 70% of the total portfolio. And I think that, on pricing, our glass is more than half full, and I'd love to focus on the 70% that we're taking pricing.

I'd also say that pricing continues to be something that we review constantly on all the businesses, and that's up to the general managers to make the right decisions as far as whether they take pricing or not and when to take pricing. And we certainly, as we contemplate pricing moves, keep cost justification in mind very strongly. We want to make sure that we are on solid ground there. And we keep the value proposition that we offer to consumers in mind as well.

We have talked for several years now about our deep commitment to offering products and brands that offer superior value to consumers. And in the face of pricing, that's when that commitment to value is being tested. And what I can tell you is that that commitment is as strong after the price increases as it is before the price increases.

And with help from strong brand investments, with help from innovation and marketing plans that engage consumers, we're confident that The Clorox Company's brands will continue to offer better value to consumers, no matter whether we take pricing on 70% of the portfolio or not at this point on 30% of the portfolio.

Fair enough. If I could just ask one last thing on -- just a quick one on manufacturing and logistics. Do you think the worst is over because that was a nice sort of lifting of the pressure relative to -- in Q4 relative to Q3?

Yes, Olivia. What I would say is, certainly on transportation, we think we saw the high watermark in fiscal year '18. While I do think it's still an inflationary environment, I don't expect to see the type of rate increases we saw in '18. I would expect transportation in the mid- to high single-digit rate increases. And last year, we were experiencing high double-digit increases.

And so I think we've done some nice things to get to a lower level of inflation on transportation. And then, on manufacturing as well, manufacturers can -- manufacturing expense can move around by quarter as we invest in our supply chain, but I'd expect a similar amount on an annual basis to what we saw in '18.

Next is Jonathan Feeney with Consumer Edge.

Two questions. First, where -- both in terms of where you are now and what you're expecting for 2019, can you give us an update on the Burt's Bees cosmetics rollout? Where you are in distribution, kind of growth rates? Or maybe at least characterize how that is relative to your expectations? And how it's contributing and how that paces over 2019?

And secondly, I wanted to follow up, I probably asked this question 5 ways in my career, maybe I'll get it right this time. But a combination -- a comment that Kevin made about the pacing of cost savings plans caught my ear. And I guess, I'm just kind of wondering, like how -- you have a great pipeline you mentioned.

I'm wondering, like is that pipeline discretionary at this point, where you feel like you have more -- like you kind of pace that out to kind of manage any kind of inflationary pressure you might see in the future? Or is it the case that you're pushing as hard as you can and there are some real kind of mechanical business factors that prevent you from getting all that cost savings all at once?

Jonathan, this is Kevin. I'll take the cost savings, and I'll let Benno talk to the Burt's Bees question. As it relates to cost savings, what I'd tell you is that I'm very pleased with the program we have in place for fiscal year '19. In fact, it's one of the strongest cost-savings pipelines I've seen over the last several years. And that's really needed as we're facing a fairly challenging commodity environment.

We are leaning into cost savings. That's both a combination of all the good work we do within the supply chain and also part of our admin productivity initiatives. And so we have a long track record of delivering cost savings. We are absolutely leaning in this year to offset the headwinds, and I'm very pleased with the progress we're making for the year. Benno, do you want to talk Burt's?

Yes. For a moment, I thought you'd take the Burt's Bees question which would've been entertaining. The cosmetics launch is performing well. As Lisah has noted earlier, this is a launch that's building over multiple quarters, which is driven by 2 things. First of all, retailer shelf resets, timings but also our commitment to be disciplined in this.

We don't want to get hung up in some of the industry dynamics in cosmetics. We want to make sure that we're disciplined and that we're driving this based on solid SKU velocities and with the right amount of SKUs and complexity.

But one way, perhaps, how you can see that we're confident in this future platform is the launch of liquid lipsticks now, which we're really excited about because it's a fast-growing segment and one where we have a great product. I feel good about the consumer receptivity and the reviews online, which you can see. So we feel like we have a nice multiyear growth platform in cosmetics.

We'll tell you, though, that as we've always said, that the Burt's Bees discussion wouldn't be complete without us mentioning that it's only one growth runway. The biggest and most important thing on Burt's Bees continues to be lip and face, and those businesses continue to do extremely well.

And as Lisah noted earlier in her remarks, we're particularly proud that for the first time in Q4, our lip balm, after 20-plus years in the market, is now #1 in the overall lip balm category. And that's a sizable accomplishment. But it's still a pretty fragmented market, and we think that there's a lot more growth to be had there.

And we've also commented on International as a profitable and attractive growth platform, growing double digits in Q4. So in Burt's Bees, I would want to make sure that we always keep in mind that we have multiple growth platforms and that we have confidence in all of them, with lip balm still continuing to be the biggest single opportunity we have in this business, which is why a substantial amount of the investments will still go again to lip balm.

Next is Jason English with Goldman Sachs.

A few housekeeping items to kind of run through quickly. You mentioned expectations for manufacturing logistics for next year. It stepped down quite a bit just in terms of magnitude of headwind in the fourth quarter. Anything notable changed there?

No, Jason. This is Kevin. I wouldn't identify anything notable. I think as we called out, we did have some investments in the supply chain back in Q2 for our new Home Care facility, so it was a little bit elevated in Q2. But as I said, it can move from quarter-to-quarter based on timing of our investments.

Okay. The volume growth for next year, the roughly 3%, how much is the M&A component in that? In other words, what's your organic volume expectation?

We don't provide that, Jason, so I would stick to our overall growth rate that we provided. But we don't break it out that way.

Okay. In terms of Charcoal sales, you're kind of attributing, I get the unfavorable weather early on. I have a harder time wrapping my head around why category sales would be so weak on weaker merchandising. It doesn't seem to be such an expandable or contractable consumption category or impulse-oriented category to me. Help me understand that dynamic a little bit more. And can you give us a little more context as to why retailers may have pulled back on the category, even after the weather turned?

Yes, good point, Jason. So actually, it is expandable, which is the whole premise of the category. So you see a display in store and it makes you want to grill, and you buy Charcoal. And while you do that, you also buy a whole bunch of other things, whether that's your beverage of choice or meat and chips and things that you want for a family afternoon. And that's why retailers have been and are so interested in supporting this category. And that's been the hallmark of our strategy to continue to provide more occasions for grilling and extend the season so that passionate grillers can spend more time grilling. And we get more volume from those. So less merchandising in the category, right? So not just a brand, but in the category, has led to category softness. And that's certainly something that's -- if I categorize this for you, and if I look at the quarter, the bulk of the volume softness was weather and the inventory hangover from Q3, which was also weather-related, so just to put it in perspective. But the less merchandising contributed, and that's because of the lower merchandising levels at several retailers. That's not something that's new. We see changes in retail or merchandising strategies every single year. And sometimes they work like gangbusters, and sometimes they work less well. And this certainly is a year where the changes have been less successful, which is why we're focused on 3 things. First of all, the basic premise of extending the season and making sure that people have a chance to grill year-round with the weather conditions in many parts of the country continues to be the right strategy for a business like coal. And since this season, we've had a partnership with Major League Baseball in place around games and tailgating and online marketing that connects, if you will, Americans -- America's favorite charcoal with America's favorite pastime. And MLB baseball has its peak in October, and we'd love for charcoal grilling -- for that to be true for charcoal grilling as well. We are working with retailers on the right merchandising strategies. Again, that's not something that's new to us. It's something that we're very comfortable with. We need to get that right and do better for next season, and I think that's something that retailers understand. And obviously, there's a mutual benefit for that. And then, we're also focusing on millennials, where we see an opportunity to educate them on grilling because there's somewhat of a barrier. You don't want to look foolish, and you want to look like somebody who is knowledgeable grilling. And when you're just learning how to grill, there's a little bit of a barrier and we're helping people through education, mainly online, to cross that barrier. If I put that all in context, certainly, coal needs to do better. Feel good about the rest of the portfolio, as I mentioned in my earlier remarks. And I'd look at this perhaps as while it's something I can't control because of weather, the continuation of what we saw in Litter, which 2 years ago was a real problem child, and is now, if not the most performing -- best-performing business, one of the most best -- one of the best-performing businesses, for sure. Last year's problem child was Brita, and we're pleased to see that return to growth. And it looks like this season, it's the Charcoal. So feel good about the portfolio even though it's not perfect. But to be honest, if everything was perfect, we'd have nowhere to go. And I'd rather have a few clear action steps that we know how to address, and coal is the one this year.

And we'll go to Lauren Lieberman with Barclays.

Just had a question about kind of retailer dynamics, right? So part of the big conversation across the industry, of course, has been retailer receptiveness to pricing, not just the consumer impact. And you guys have long talked about the idea that for companies that are innovating and driving growth, that the retail relationship can be in a good spot, as it has been for you the last couple of years. Anything that you can share now on how that may have evolved as the ask for pricing across the industry is getting a lot broader. More companies asking for it, even those that maybe haven't been quite as innovative or driving as much category growth. Anything you can offer on that broad industry perspective in terms of retailers and the understanding of the price that needs to be showing up on shelf would be great.

Yes. Thanks, Lauren. I could speak for Clorox perhaps more so than for the industry. Several things are important in order to do pricing effectively. The first thing is, as I said earlier, it's got to be cost-justified, right? So all our price increases are cost-justified. And we're pretty transparent with retailers and truthful, of course, with retailers because they see what we see in terms of cost. The second thing that matters certainly is to have leading brands that offer better value for consumers. If you have that -- pricing discussions with retailers, which are never easy because they want to make sure that you're doing the right thing. But they are going to be more productive than in situations where you perhaps don't offer better value, where you don't have leading brands and where your place in the -- spot in the market is less clearly defined. More than 80% of our portfolio are #1 brands. The majority offer better value, so we're in a pretty good shape there. Lastly, though, I think retailers understand that not taking pricing simply isn't an option for a company like Clorox in this cost environment, and that there's a fundamental choice between either not taking pricing and then cutting spending, and that leads to a downward spiral that I think is evident to all of us from some of the industries in our space. That's not going to lead to long-term success. The alternative for Clorox, and we think the only right alternative is to be able to continue to invest in your brands, to be able to continue to invest in innovation and to take pricing as a means to afford that. And as we talk to retailers about our pricing plans, we spend a large amount of time to also talk about our plans to grow their categories, our plans to have innovation in the categories that we take pricing in. And I would certainly look at that as a big part of what makes pricing discussions with retailers productive.

Okay. Great. That's really helpful. And the last bit was, just to be clear, and I apologize if you feel like you've already answered this, but the pricing you've talked about, the 50% of the portfolio in '19, how much of that has been announced to the trade, so just in terms of the absolute visibility with what's built into the outlook?

Just to make sure, Lauren, so your question is how much of the 50% has been announced to the trade?

Yes. Just to make sure -- like I mean, I have no doubt that you're going to -- that this pricing will show up on shelves as you've planned and intentioned, but I just wasn't sure how much is still like on the come for you to discuss the specifics with retail partners versus your very good visibility on how that comes to shelf and when and so on vis-a-vis the outlook.

Yes. So internally, we have very good visibility as to when that comes, when that will be visible at shelf, and we've commented on the fact that Litter was the one out first. But in general, given that many of the discussions are still going on with retailers at this point, I'd prefer not to comment on specifics on percentages. But we'll just have to let it play out in market and hope you can understand that, Lauren.

And next is Kevin Grundy with Jefferies.

Question, Benno, on the sales growth guidance. So it seems to imply organic sales growth of about 2.5% at the midpoint, excluding FX and acquisitions and divestitures, relative to the company's 3.5 -- excuse me, 3% to 5% long-term target. So understanding that the composition is going to be -- start to embed more price than we saw in fiscal '18, can you talk about underlying category growth implied in the outlook? Any sort of market share ambition that's implied there and how that compares to fiscal '18? And I guess, I ask that in the context that the Nielsen category growth weighting based on the -- your product category suggests something sort of flattish at the moment. And I'd make a couple points, number one, Charcoal is probably at least 0.5 point drag. And I know the hope is that, that's going to get better. And I also understand we're not capturing online and non-track including Club. But it would seem to imply perhaps an acceleration relative to what we saw in '18. So any commentary there on the guide and market share outlook would be helpful.

Yes. So I don't know that we reconcile it with that detail, Kevin. But, in general, what we're seeing is that category dollars are pretty constant if you look at track shares -- track channels, sorry, so we don't expect any change there. We also continue to see faster growth in non-track channels, and I wouldn't expect to see any change there. So in terms of categories, they're pretty robust. And we expect that to continue. No change. In terms of market shares, look, it's our ambition to grow market shares, right? It's one important metric for us. It's not the only important consumer metric to us. You've also heard us talk about our Consumer Value Measure and about household penetration as a really important metric that we're doing well on. What typically does happen in a year when you take pricing is that, temporarily, you will give a little bit on market shares and that's as consumers are adjusting to price increases. That's also recognition of the fact that, as was noted by some of you earlier, we've been out front on pricing and I think in all of our categories, so there's a little bit of a time lag. Perhaps if competitors follow, until they follow and until that shows up in market, all of that will create some noise on market shares, but we're very committed to growing market shares in the long run. I'd expect us to grow market shares. What that will look like over the next 12 months, we'll have to see. But expect our categories to continue to do pretty well. We've historically not seen much change in categories post price increases, and we don't expect that to be the case this time of year.

Okay, Benno. So it sounds like implicitly your 2.5% underlying organic sales growth is relatively close to what you think the industry is going to do. Is that fair?

I guess I struggle saying yes or no because I haven't done the math. I mean, if you try to pinpoint to a blanket statement, I would say yes. But I would give that a qualifier. Is that okay?

That's good enough.

And that question will come from Andrea Teixeira with JPMorgan.

So just a clarification on the volume and the mix effect for Nutranext. And if you do the math, I mean obviously, you gave us the components. But just if you have to assume any mix effect for Nutranext going into next year, like for this following fiscal year. And also related to that in some ways, like I remember like RenewLife had a lot of distribution gains. How far are you from that? And if you can also embed Nutranext in that comment.

Andrea, this is Kevin. I can certainly take your question on Nutranext mix. We don't provide mix at the SBU level. But what I'd tell you is what we saw in Q4 as it relates to Nutranext, I'd expect to see a consistent impact as we go forward. That business is still relatively small in the overall portfolio of Clorox. It won't be that material to the company.

Okay. And on the distribution gains, like should we embed it in the 2% to 4%? And the 2.5% organic that we discussed just now, that is embedding some distribution gains for Lifestyle and for digestive health? Or not much?

Obviously, we -- one of the premises that we had when acquiring the Nutranext business was that, through our strong sales capabilities, we would be able to expand distribution. So that's very much the plan, Andrea.

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

Yes. Thank you, everyone, and hope you'll have a good rest of the day. And I look forward to speaking with you in November, when we share our first quarter results. Thank you.

And thank you very much. That does conclude our conference for today. I'd like to thank everyone for your participation, and you may now disconnect.