The Clorox Company

Good day, ladies and gentlemen, and welcome to the Clorox Company Second Quarter Fiscal Year 2020 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question and answer session. If you'd like to ask a question, you may press star 1 on your touchtone pad at any time. If anyone should require assistance during the conference, please press the star 0 on your touchtone pad at any time. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Ms. Lisa Burhan, Vice President of Investor Relations for the Clorox Company. Ms. Burhan, you may begin your conference.

Thanks, Sharon. Welcome, everyone, and thanks for joining us today. On the call with me today are Ben Odor, our Chairman and CEO, and Kevin Jacobson, our CFO. We're broadcasting this call over the Internet, and a replay of the call will be available for seven days on our website, thecloroxcompany.com. On today's call, we may refer to certain non-GAAP financial measures, including but not limited to free cash flow, EBIT margin, debt-to-EBITDA, organic sales growth, 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, 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 expectations and plans. I would also direct you to read the forward-looking disclaimers in our quarterly earnings release. Please review our most recent 10-K filing with the SEC and our other SEC filings for a description of important factors that could cause results or outcomes to differ materially from management's expectations and plans. The company undertakes no obligation to publicly update or revise any forward-looking statements. With that, I'll start by covering our top line commentary, discussing highlights in each of our segments. Kevin will then address our financial results as well as outlook for fiscal year 2020. Finally, Benno will offer his perspective and we'll close with Q&A. For the total company, Q2 sales decreased 2%. These results are on top of solid sales growth in the year-ago period. Organic sales were flat. I'll now go through our results by segment. In our cleaning segment, Q2 sales were flat for the quarter as gains in professional products and home care were offset by a decline in laundry. In home care, sales were up behind strong volume growth across a number of product lines including Clorox disinfecting wipes, Clorox toilet bowl cleaners, and Clorox Scentiva, particularly in non-track channels. Our Scentiva innovation platform continues to show robust growth even three years after its initial launch. We remain focused on driving superior consumer value through meaningful innovations like our Scentiva wet mopping cloths, which are doing well and continue to build distributions. A new scent across the platform, Tahitian Grapefruit, will start shipping this month. Additionally, we were pleased to deliver record second quarter shipment growth of Clorox Disinfecting White. However, our shares in this category continue to be down as a result of higher competitive merchandising activities. As we expect these activities to continue in the back half of the fiscal year, we're increasing our investments to support the long-term health of our brands. We're doing this in two ways. First, we're strengthening our merchandising plans with higher trade investments. And second, we're increasing our marketing investments behind Clorox compostable cleaning wipes, which have had a positive early reception from both retailers and consumers. Laundry sales were down for the quarter, driven primarily by distribution losses among select retailers, which continued from last quarter. We expect improvement going forward as we start rolling out a full line of compacted bleach products this month. Our plans this fiscal year also include a new laundry sanitizing innovation platform, which started shipping toward the end of 2019. We're supporting this innovation through strong marketing investments to drive awareness and trial. Lastly, within the cleaning segment, professional products continues this momentum and delivered another quarter of robust sales growth, with broad-based growth across all channels and product lines supported by innovation. Turning to the household segment, future sales were down 8%, with declines in all businesses. In bags and wraps, future sales were down due to ongoing distribution losses and select portions of the portfolio and increased competitive activity. While we continue to make progress and have seen sequential improvement in both volumes and sales, we've seen a further increase in competitive activity consistent with what we've seen in past periods when there was a pullback in resin price, even on a temporary basis. We expect these competitive price reductions and higher promotional activities to continue in the back half of the fiscal year. With a keen focus on consumer value, We're further increasing our investments in GLAD and coupling that with a number of innovations to drive long-term profitable growth for our brand and the category. As expected, grueling sales were down double digits this quarter. While consumption was strong, it was more than offset by lower shipments as we finished working through high retail inventory from a weak 2019 grueling season, an effort that started in Q1. We expect to return to normal retail inventory levels as we enter the new grilling season. As a reminder, Q2 is a relatively small quarter for this business, representing about 10% of annual shipments. Going forward, we remain focused on executing our strategy in three areas. One, enhancing the consumer experience. Two, implementing the right trade and pricing structure. And three, investing in innovation including our core charcoal products and alternative fuels such as pellets. As noted in our press release, we've changed the name of this strategic business unit from charcoal to grilling to reflect our broadened strategic view of the category. In Renew Life, which represents about 1% of total company sales, sales declined by double digits due to the continued category and competitive headwinds. However, We're encouraged by the early signs of progress we're seeing, with two of our three biggest customers now showing growth. As a reminder, a full brand relaunch will occur in the first half of FY21. Finally, our cat litter business was down slightly due to higher trade spending and lapping strong double-digit sales growth in the year-ago quarter, which benefited from price increases. The fresh-set CleanPos innovation platform which saw a double-digit increase in shipment this quarter, continues to show promise, and we're investing behind this momentum in the back half. In our lifestyle segment, sales grew 4%, reflecting volume growth across all businesses. Burt Fees delivered a record quarter of sales, driven by continued strength in its core categories of lip care and face care. In lip care, Burt's Bees achieved a market leadership status in 2019 as the number one overall lip balm in the United States for the first time ever over a 52-week period. Burt's Bees lip balm has grown shares for 20 consecutive quarters or five years in a row. This success was fueled by a strong pipeline of innovation such as the watermelon and hemp flavors. In face care, masks, The restaged sensitive skincare line and core cleansers all had double-digit consumption growth. Food sales were up again this quarter, supported by higher merchandising level, driving strong shipments of Hidden Value Ranch products. On the innovation side, our ready-to-eat dip platform is expanding to include French onion, fiesta ranch, and a deluxe cheese and ranch dip. while a new Hidden Valley Ranch secret sauce line, which was launched in January, is continuing to help unlock new Hidden Valley Ranch eating occasions. Hidden Valley Ranch extended its streak of chevros to 20 quarters. Brutus sales were up strongly behind higher shipments of our premium filtering bottles and long-last filters and water filtration systems. New products, including large-capacity plastic and stainless steel bottles, are expected to enhance the filtering water bottle innovation platform even further, building on consistent volume growth in Brita that now dates back more than a year. Finally, sales for Neutronex were down slightly this quarter, reflecting double-digit decrease in our non-strategic brands, partially offset by solid growth in our strategic brands. We're encouraged by the success of our strategic brands, which was fueled by higher demand creation investments, and we're increasing those investments further to drive additional awareness and trial in these emerging and fast-growing categories. The decrease in non-strategy part of this portfolio was driven mainly by our decision to continue rationalizing the lower margin part of this business that came as part of the acquisition. Lastly, turning to international, sales were down 2% for the quarter, reflecting eight points of foreign currency headwinds, mainly from Argentina, partially offset by the benefit for price increases. Organic sales in the segment grew 6%, consistent with our Ignite strategy that aims to improve profitability in international. We're continuing to invest selectively in profitable markets and growth platforms to keep yielding returns on businesses like Burt's Bees, Cat Litter, and the product's equity. Now, let me turn it over to Kevin, who will discuss our Q2 financial performance and our updated outlook for FY20.

Thank you, Lisa, and thank you, everyone, for joining us today. I'm pleased with the progress we've made in Q2 as we delivered sequential improvement in organic sales, our fifth consecutive quarter of gross margin expansion, and another quarter of strong cash flow. I'm also encouraged by our continued progress in bags and wraps and grilling business units and expect to see continued sequential improvement on these businesses in the back half of the fiscal year. As you saw in our press release, I've updated our outlook, which I'll discuss in a moment. Turning to our second quarter results, sales decreased 2%, reflecting two points of unfavorable foreign currency headwinds. On an organic sales basis, second quarter sales were flat. Gross margin for the quarter increased 40 basis points to 44.1% compared to 43.7% for the year-ago quarter. Second quarter gross margin included the benefits of 150 basis points from cost savings and 100 basis points from pricing. These factors were partially offset by 90 basis points of higher trade spending and 80 basis points of higher manufacturing and logistics costs. Second quarter gross margin also reflected ongoing cost variability in commodities, partially offset by the impact from foreign currency headwinds. Selling administrative expenses as a percentage of sales came in slightly higher at 14.5% compared to 14.3% in year-goal quarter due to reduced operating leverage. Year-over-year selling administrative spending for the quarter was relatively flat. Advertising and sales promotion investment levels as a percentage of sales came in at about 10% of sales, or about equal to the year-ago quarter, with spending in our U.S. retail business coming in at 11% of sales. Our second quarter effective tax rate was 21%, compared to about 19% in the year-ago quarter. Net of all these factors, we delivered diluted net earnings per share of $1.46 versus $1.40 in the year-ago quarter. an increase of 4%. Turning to year-to-date cash flow, net cash provided by operations for the last six months of the fiscal year came in at $498 million versus $449 million in the year-ago period, an increase of 11%. The year-over-year increase was primarily due to lower working capital, partially offset by the timing of payments. Now we'll turn to our fiscal year 2020 outlook. As we mentioned in our press release, we've confirmed our fifth-year sales outlook of down low single digits to up 1%. We are now projecting a lower devaluation of the Argentine peso, which we expect to be offset by increased competitive activity in the bags and wraps and wipes categories, partially driven by resin cost deflation. Our fifth-year organic sales outlook now assumes a range of about flat to 2% growth. Embedded in our organic sales assumption is a more cautious near-term view of our back-to-back sales expectations for bags and wraps, reflecting increased competitive activity. Importantly, we continue to expect our grilling business to return to growth in the second half of the fiscal year. As a reminder, we had previously assumed devaluation of the Argentine peso at about 50%, and now our expectation is closer to 40% devaluation over the course of the fiscal year. Turning to gross margin, we now expect fiscal year gross margin to be up slightly, reflecting our expectations for ongoing cost favorability in commodities and a slightly lower impact on foreign currencies. These factors are expected to be partially offset by a lower pricing benefit in the back half, as we have now lapped the majority of our fiscal year 2019 pricing actions. Our fiscal year gross margin also reflects higher trade promotion spending to address increased competitive activity in select categories. In addition, our fifth-year gross margin outlook continues to anticipate additional supply chain investments to support long-term value creation, including a rollout of Clark's liquid bleach compaction beginning this quarter. We now expect fifth-year advertising and sales promotion investment levels to be slightly above 10% of sales, reflecting increased investments and support a robust innovation pipeline in the back half of the fiscal year. We also continue to expect selling administrative expenses to come in about 14% of sales. We now expect fifth-year EBIT margin to be about flat. Our outlook continues to anticipate our fifth-year tax rate to be in the range of 22% to 23%. Net of all these factors, We now expect fifth year 2020 diluted EPS to be in the range of 610 to 625, which raises the low end of our range by five cents. Before I turn it over to Benno, I'd like to reinforce that I'm pleased with the progress we continue to make on our business. We delivered our fifth consecutive quarter of gross margin expansion with strong contributions from our cost savings program. We also delivered another quarter of strong cashflow. Importantly, we remain on track to return to organic sales growth in the back half of the fiscal year. Looking ahead, I continue to believe Clorox is taking the right actions to deliver results that are more in line with our long-term financial goals as we continue to focus on executing our Ignite strategy to drive long-term shareholder value. And with that, I'll turn it over to Daniel.

Hello, everyone, and thank you, Kevin. Here are my three key messages for the second quarter. First, Well, our top-line performance is not yet where it needs to be. I'm pleased with the progress we're making on our business, which is evident in our Q2 results. As I look at the results of our overall portfolio in the quarter, I do feel good about the growth we saw in a number of Clorox-branded products in our home care business, even as I fully expect stronger growth in the wife's category in the future. I'm also pleased about the broad-based strength in our professional products business. In lifestyle, Birdspeed's continued its strong top-line momentum with record quarterly sales, and we saw sustained strength in our food business behind increased merchandising support and also in water filtration behind innovation. And once again, our team in international continues to deliver very good results in currency-neutral terms behind strong execution of our pricing initiatives. I'm also pleased to have delivered our fifth consecutive quarter of gross margin expansion, supported by our strong cost savings program. Importantly, we are continuing our focus on improving our bags and wraps and grilling businesses. On our grilling business, we're pleased to see solid consumption growth, and we feel good about retailer reception to our go-to-market plans for the 2020 grilling season. Now that we're finished working through retailer inventory from the year-ago season, we continue to expect this business to grow in the second half. Now, as Kevin mentioned, we've taken a somewhat more cautious near-term view of our bags and wraps business, given our expectations for continued increased competitive activity. Moving forward on GLAAD, we are focused on driving superior consumer value. We'll do this with a consistent stream of unique innovations, leveraging our superior capabilities in technology and consumer insights, backed by category-leading advertising investments. We believe these focus areas will allow us to sustain our competitive advantage and help engage retailers, leading to strong in-store positions. As I look at the other parts of our portfolio, generally, I feel good about our back-end plans, which reflect our expectation for improved sales behind strong innovation and marketing plans, as well as progress on the distribution front. This brings me to my next message, which is that we have strong consumer and retail plans for the second half of the fiscal year, fueled by increased investments that reflect confidence in our innovation program. Bringing value to our consumers and retailers is the key to returning to growth. Our second half plans emphasize this, and we're executing with a strong sense of urgency, yet also the right way. Our relentless focus on strengthening the value proposition of our brands through meaningful innovation continues with a strong pipeline of new products in the back half, including the compaction of Clorox liquid bleach, as well as the introduction of Clorox compostable cleaning wipes, Clorox fabric sanitizers, Kingsford grilling pellets, and several innovations in bags of wraps, food, and natural personal care. As you saw in our press release, we're leaning harder into supporting awareness and trial behind these new products, with plans to increase year-over-year advertising spending in the second half of the fiscal year. And of course, we'll continue to invest behind the momentum and significant upside opportunity in ongoing innovation platforms, such as Clorox and Teva, Fresh Step Clean Paws, Brita Filtering Water Bottles, and Hidden Valley Ready-to-Eat Dips. As I mentioned last quarter, We expect that our retail engagement in the strength of our innovation programs will contribute to better back half results. I'm very encouraged by the strong retail receptions to our innovation so far, which is part of why we're stepping up our advertising investments. And finally, I'm pleased about our progress to improve distribution trends moving forward. We'll provide another update in Q3 once results are in market. But I do feel good about the constructive conversations with retailers overall, putting us in a position to earn meaningful net distribution gains across our portfolio in 2020. And for my last message, I'd like to reinforce that I have the confidence that our Ignite strategy will guide us in our ongoing pursuit of delivering long-term shareholder value. The focus of Ignite is to innovate across the entire Clorox value chain, earn people's enduring loyalty to our leading brands. We are innovating how we build brands and are on track to begin implementing purpose on all major US brands by the end of this fiscal year, which should significantly boost marketing ROI over time. We are innovating shopping experiences and making good progress engaging customers in strategies to grow their businesses through new and frictionless experiences that can help eliminate shopping barriers in our categories. We are innovating how we work by continuing to invest in digitizing our supply chain to drive productivity, and we remain focused on achieving our new, higher annual cost savings target of about 175 basis points. And finally, we are driving our ESG commitments to create value for all our stakeholders. As we invest in major sustainability-driven product innovations in the second half, we also are accelerating our goal of achieving 100% renewable electricity in the U.S. and Canada to 2021, four years ahead of our original goal. We continue to view ESG as fundamental to long-term value creation and are pleased with our progress to integrate ESG even further in our business strategy. Operator, You may now open up the line for questions.

If you have a question, please press star 1 on your touchtone telephone. Your first question comes from Steve Powers with Deutsche Bank.

Great. Thanks. Hey, guys. Maybe first, Kevin, just a quick cleanup and clarification on Argentina. Are you getting incremental pricing in that market? I just asked because I think your October outlook presumed you would not. I just wanted to understand what the current state was.

Yeah, hi, Steve. Good morning. Yes, we are getting pricing benefit from Argentina. Maybe just a little more background there. As you saw, we've updated our expectations for devaluation. We had assumed 50%. We've seen the currency hold up pretty well in our second quarter, and so we revised that to 40%. But additionally, we get out pretty early with pricing in Argentina. So we took a number of price increases in the first quarter that are certainly benefiting the overall profitability you may have seen in our international segment.

Okay, perfect. And then a second clarification. I think despite the competitive challenges, the flat organic result this quarter came in a little better than you telegraphed in October. You know, was there a particular driver there? And in the context of the full year coming down, that implied second-half reversal. Is that just bags, wraps, and grilling staying the same? weaker than planned for a bit longer, requiring more work? Or are other areas showing less resilience versus what you hoped? Or is it, you know, I think it's the former, but I just want to clarify that.

Sure. So on the first part of the question, yeah, it did come in a little bit better than we anticipated. And there's really two areas. The first was FX. While it's still about a two-point drag, it was a little bit better than we anticipated in the quarter. And then the other area was our lifestyle segments. that was really strong performance. And the performance was really broad-based. We saw every business within that segment perform quite well and exceeded our expectations. And then as we look out over the full year, what I'd say the two areas that we've highlighted is we are seeing increased competitive activity in two categories, our wipes category and our bags and wraps category. So because of that, we will increase trade spending to defend share in those categories. And And specifically maybe the bags and wraps, I tell you, not surprising. We've seen this before. When you see this type of resin deflation, we typically see manufacturers invest more when that occurs, and so we're going to have to spend some money to defend there. And then, Steve, on your question on grilling, we continue to feel very good about grilling. It's on track with our expectations for the full year. We fully expect to return that business to growth, and so that business is very much on track.

Okay. And if I could, maybe for Beno, In addition to the promotional investment, you're also, as you discussed, stepping up the A&P investment. My guess is that that's targeted at different businesses than the promotional spend. So can you confirm that? And I guess what's really motivating the uptick? Is it just that you have more funds given the FX environment, so you feel like you have the flexibility to spend? Or is there something you've seen that's giving you more confidence in the ROI now versus three months ago? Thanks.

Steve, the step-up in investment really reflects our confidence in our plans. That's the sole motivation. It certainly does include a strong retailer reception to our innovations. Also, in a few cases, strong initial consumption results out of the gate on some of the innovations that we launched in January, which includes compostable wipes. So, you know, we're leaning into this innovation to lean into the momentum that we all see and Of course, three months ago, six months ago, we would have said that we're taking a more realistic view of our spending, given that we're still cycling through distribution losses. And now, of course, in the back half, we are lapping those distribution losses. We expect, given the productive discussions that we have with retailers, solid results on a distribution front. So it's really driven by the confidence that we have in our plans. The spending will go into innovations that we launched in the back half, but also innovations from previous years, and I mentioned some, like Clorox Sativa, which is still showing robust growth. Clean Paws and Fresh Step, which grew double digits last quarter. Brita Filtering Bottles, which is showing nice, continued progress. ready to eat dips on Hidden Valley, which we're supporting with more innovation going to back half, we feel really strongly and encouraged about all the back half plans, and we're not afraid to invest behind it. A question that maybe could come up in the context of it that is maybe worthy of addressing up front is, do we expect a change in our midterm outlook on how much we will spend in advertising and sales promotion? And the answer to that is no. This is really an increase that is really related to the backup of this fiscal year. We certainly commented in the past that we think that an average level of about 10% of sales per fiscal year is the right level, and we continue to believe that.

Perfect. Thanks again.

Next question comes from Steve Strykula with UBS.

Hi, good morning, or good afternoon. So, Benno, just a very straightforward question. Wanted to understand, you know, the back half sales is a relatively wide range, and just wanted to understand, based off your retail conversations, what seemed like they went well. What takes us to the low end versus the high end, you know, whether it's the distribution clarity or maybe the consumer pull-through and responsiveness to some of the innovation? Thank you.

Yeah, so it's a combination, Steve. You know, certainly what we, you know, first of all, I have to say, you know, there's six months left in the fiscal year, but, you know, several things can make up for the range. First of all, competitive activity, right? We cannot predict that, and we have commented that certainly in two categories we're seeing the promotional and merchandising environment increase as those categories tend to be more sensitive in spending towards the, in particular, resident environments, which, as you know, is a little more favorable at this point. So cannot fully predict competitive activity, but that can have a major impact. Distribution outcomes, you know, so we know quite a bit, of course, on what distribution outcomes are, but we don't know everything. We also know from the information that we have about decisions that retailers may have taken as it relates to our brands, but not competitive brands. That's still ahead of us. And then, of course, you know, coronavirus, cold and flu, you know, there hasn't been a factor in Q2. And, you know, so far we're not seeing an uptick, but it's a rapidly evolving situation. So, We're certainly watching that and we're getting ready to be able to supply our customers and also our health care institutional customers with products should they need that to help consumers combat the virus. So these are three pretty important swing items that could lead us to the lower or higher end. But all in all, we feel like, you know, the midpoint of the range is would point to a 3% sales growth in the back half on average, which, of course, is very much in line with the ongoing algorithm. And because we're investing in items that don't just have a short-term impact but drive our brand equities and have a long-term impact, we feel like those investments also set us up nicely for a solid fiscal year 21.

Thank you.

Next question comes from Andrea Texaria with JP Morgan.

Hi, thank you. So I understand you have these.

Andrea, you're breaking up quite a bit. Should we go to the next question and never try again? Hey, operator, maybe we move on to the next question and try to have Andrea call back.

Next question comes from Wendy Nicholson with Citi.

Hi. Good afternoon. A couple of quick ones. First thing, Kevin, maybe just to clarify, the trade spending in the quarter, I think you said, was 90 basis points of gross margin pressure. But if my memory is right, I think it was 180 basis points in the first quarter. So is that just a – Timing issue, I would have expected higher spending this quarter as you try to regain distribution, et cetera, et cetera, and see more gross margin pressure from that. But curious if there's any commentary on that.

Yeah. Hi, Whitney. Good afternoon. You're right on your memory. It was 90 basis points this quarter. It was 180 basis points hit the margin last quarter. The biggest change from the first quarter is less investment in charcoal as we cycle through the bulk of the season, as I think Lisa mentioned in her prepared remarks. Q2 is a pretty small quarter for us, so we have less investment in the category in Q2. And as we also said, what we're really working on with the trade spending is working through higher retail inventories. We had a poor season year 19, and we want to make sure we're set up for a strong season year 20. And so we've been investing in trade in that business, both Q1 and to a lesser extent Q2, and we feel like we're in a good position as we head into season year 20 that we've got retail inventories right and we're ready for a much stronger season.

Got it. Got it. That makes sense. On the bleach compaction that I think you said was shipping this month, what's your expectation for competition? Do you think they follow the same degree of compaction? Do you think there's going to be incremental promotion? How much of a price increase are you embedding? Maybe if you could just talk a little bit more about that, that would be great.

Yeah, Wendy, so compaction is starting this month, as you rightly said, and will take until the end of the fiscal year. There's no pricing. It's a straight conversion. Typically, with initiation of retailers, we see a whole category move. So, of course, we have yet to see that because that's really well outside our control. But if this compaction wave mirrors previous compaction waves, then what we're typically seeing is the whole category to move because This really is an initiative that's certainly good for the manufacturers. It's good for retailers. It's good for the category. It's also good for the planet. So it's a win, win, win, win. And there really isn't a reason for the category not to move. Consumers, of course, are getting a more convenient product. And again, there's no performance tradeoff for consumers either. So we are optimistic that this will be an initiative that will see the whole category move and will provide an update after Q3.

Got it. Fair enough. And then my very last question is just on trash bags. You know, in the Nielsen data that we saw today, and I know Nielsen, you know, doesn't tell the whole story or even close to the whole story, but still, you commented on a higher level of trash competitive activity in the bags category. On the trash side in particular, it looks like Private Label is the one who's actually doing more of the promotions, but their market shares aren't increasing. So I wondered if you could just comment kind of on your read, where the promotion is coming from, what do you see in the broader universe, and whether you're more worried about the branded side of the competitive dynamic or the Private Label side. Thanks. Thanks.

Yeah, it really varies by category, Wendy. On the GLAAD side, we see what you see that, you know, if I take us back a few months ago, what we said is that we are spending in trades to address price gaps. That really worked. We saw price gaps move down, and we saw a significant increase in momentum on our business. What we've seen more recently in a more benign resident environment, is that in particular from private label, we are seeing more activity and we see price gaps increase again. Now, we also see what I think you hinted on, and that is that that's really not working for the category. The category trends are softer. We've always commented that people are not buying more trash bags if they're cheaper, and that's pretty much how it's playing out. And what that really does is give us optimism that in the long run, rational behavior will prevail and that we're going to see a continued balance in the category that will allow premium brands to grow behind innovation and delivering value that consumers see as superior, and that's certainly our focus in this category.

Got it. Thank you very much.

Next question comes from Andrea Texeria with JPMorgan.

Thank you for taking me back. Sorry for before. So I was hoping to go back to the cadence of the second half for organic. So I understand what you said in terms of in the past of regaining distribution in trash to one, I believe one large customer. Is that something that we should be looking more into the fourth quarter, building with what you mentioned to Wendy earlier, And then on the gross margin, just a clarification in terms of the gross margin bridges that Kevin was talking about, is our commodities actually getting better, like, for the second half? Or I understand you're going to lapse some of this improvement by the fourth quarter. So I just want to know if, embedded on that, you're actually having a better outlook for commodities than before. Thank you.

Sure. Hi, Andrea. It's Kevin. I can take both your questions. On organic progression, what you should assume is we continue to demonstrate sequential improvement as we move through the year. And so, as you recall, in Q1, organic was down about 2%. It was flat in our most recent quarter. And if you take the midpoint of our organic sales outlook, it would suggest three points of organic sales growth in the back half of the year. And I would expect to continue to see sequential improvement as we move through the back half of the year. much of the distribution benefits will have a bigger impact in Q4 than they will in Q3. And so that's what I expect to progress. And then maybe it's also, you know, as we think about our organic sales goal for the year, the 0% to 2%, you know, I would just offer I'm much less concerned about the average for the year and much more focused on the momentum we're creating as we head into fiscal year 21. So I feel very good about the progress we're making and where I believe we'll end up in the fourth quarter as we head into 21. And then on gross margins, in terms of the commodity environment, what I'd tell you is if I set resin aside, commodities are pretty much playing out as we expected, which is slightly inflationary, generally in line with broader inflation in the economy. That's pretty consistent with what we expected. What we are seeing is while we expected resin to be deflationary, we certainly saw a bigger movement in the second quarter than we anticipated. I still think it'll be down in the back half of the year, but to a lesser degree. Typically, what we see is the manufacturers go down for planned maintenance in the spring, and that usually puts a little upward pressure. Now, I think what we have to balance out right now is with what's going on with the coronavirus, and it's certainly reducing overall global productivity. We'll have to see what that does to global demand for resin, but for right now, my expectation is it continues to be favorable, but not to the same degree we saw in the front half.

Thank you. I appreciate it.

Sure.

Next question comes from Lauren Lieberman with Barclays.

Great, thanks. I just wanted to go back to distribution because, Benno, I think the specific language you used was that we've positioned ourselves well to earn back distribution. So I just wanted to get a sense for how much visibility you do have at this point for both things building and kind of the traditional reset timeline of this quarter and then even going into Q4.

Yeah, so obviously wording carefully chosen because, you know, as always, and as all manufacturers, we have to earn distribution from retailers, right? Because they have to believe that our products are value added. Said that, two things are going on. First of all, as you remember, there are a number of distribution losses post-pricing that we're now laughing in the back half. So, you know, that should play in our favor. And then, you know, realize that you'd all like a very detailed update, but the reality is not all decisions are made by retailers, requiring us to be respectful here. There are, of course, also competitive implications because this is all sensitive. And like I said earlier, we know quite a bit of our distribution results for the back half, but not all. This will play out with implementation in Q3 and Q4. But clearly, I think, as you also saw us talk about the conversations that we have, we feel good about them being constructive and productive. We have a lot of innovation. Innovation generally is effective in driving distribution. And, you know, our sales outlook for the back half you know, wouldn't be doable without generally a more favorable environment on distribution. So, you know, I think this is probably the appropriate way for us to characterize where we are. There'll be a further update in Q3, but, you know, the fact that we're investing more in our brands is based on confidence, as we've all said earlier, and certainly how we feel about the conversations that we have with retailers, an indication that we may get should they materialize the way we think they might. We feel positive about what we'll see in that environment. And then more update in Q3.

Okay, great. Thanks. And then just continuing to another question on the BADs and RAPs category, So one thing that's changed, you know, very recently is now your competitor, right, is public. So we've got a lot more visibility into dynamics in that category, and I think many of us sort of understood in the past. So, you know, one of the things that was interesting to me in that process was, seeing the innovation in particular with UltraStrong, sort of a bag that's a real competitor to Force West, and that it's actually been on – it's been capacity constraints there. So it's just you're looking forward as you're thinking about competitive dynamics, thinking about your branded competitors, thinking about innovation there, thinking about that they were capacity constrained while you were losing distribution – just anything more you can offer on this build back, right? Is there a lot of innovation in your plan? Is there adjustments in your pricing structure that kind of helps you regain leadership positions, you know, as a total in that business?

Thanks. Yeah, Lauren, of course we're following that closely, even though I will tell you that, you know, many of the things that you quote were news to us. I certainly don't want to speculate about what might happen, but There are two things perhaps that are most important here. The first one is that generally publicly traded companies care about the top line and also margin growth. And what that does is drive productive and rational behaviors. So we just leave it there. And then second, we remain confident in our right to win in these categories, which really isn't affected by them going public. First of all, we have common denominator superior innovation capability. you know, that we continue to have with the joint venture that we maintain with Procter & Gamble. I just point to the more than 100 patents and patent applications that we have over the last five years, and that compares to less than 10 for the said company. And then, you know, as we think about our brand building efforts, the fact that we continue to be a leading investor and a consumer in this category, along with our commitment and superior consumer value. That's been a robust right to win for sure a decade and a half now since we've had the joint venture. And the proof will be in our continued innovation. And without getting into details, all I can say is that we have a lot of confidence in not just our back half innovation on this business. And as you know, there's quite a bit. But in the long-term innovation, as we manage innovation with a minimum three-year timeframe, we know, obviously, about the innovation that we have coming on to the business. And we're pretty happy with the innovation platform that we have on GLAAD. And we're pretty confident that we can get this business back on track once we've cycled through the well-documented issues, which we continue to characterize as short-term.

Great. Thanks so much. Next question comes from Olivia Tong with Bank of America.

Great. Thanks. I wanted to go a little bit on your commentary around competition spend and why you think that about 10% is still the right number. Because if competition is spending more and you feel good about your lineup, why wouldn't you look to invest more heavily over a longer-term period? Or is it just that you prefer to keep that flexibility in between trading support between promotion and advertising? Thanks.

Yeah, Olivia, we've always commented that we're not afraid to spend more should there be an opportunity. And right now, certainly there's an opportunity. And spending, of course, is also broadly defined, right? Whether that's in advertising sales promotion or capital spending and initiatives that deliver growth. So we will always prioritize the long-term health of our brands. We will always manage this business for the long-term versus for the quarter. So all those things that I know you're used to from Clorox, they remain true. Said that, we think that the overall spending level in advertising sales promotion isn't going up. So as a general rule of thumb, we like the 10%. Part of why we're taking it up in the back half is that in the front half, we spend less than 10% because we have waited for our back half innovations to come on, and certainly the fact that our margin situation is slightly more positive gives us a little bit of room to do so. But 10% continues to be the right number. We'll always take a look at that, but that's been the right number for a while, and we don't see any reason why we should move off of that.

Got it. And then just on gross margin, raw materials obviously we can see has been a nice driver, but has there been any change in your expectations in other areas, particularly either cost savings or manufacturing logistics? Last quarter you mentioned a delay in the litter plant. Any other changes in terms of timing a project that might be helping this year, but the expenses will eventually come and, you know, the investments are just further down the line?

Hi, Olivia. Yeah, I would say no real changes in timing or expectations for the year. As we mentioned, we have two large car savings projects, Bleach Compaction, our new litter facility. Those projects both continue to progress. As you know, obviously, Compaction, we're starting this quarter. Litter, we're probably 18 to 24 months out before we bring a new plant online, but those both continue on track.

Thank you. Next question comes from Nick Modi with RBC.

Yeah, good afternoon, everyone. Benno, can you just talk about what's going on in laundry in terms of some of the distribution losses? I mean, is there a plan here to rebuild distribution, or is it just cutting space overall of the aisle? And then on the compaction, you know, how should we think about the margin implications of that as you guys kind of get the full scale of the distribution of that product?

Yeah, thanks, Nick. Laundry was down for the quarter, certainly in volume and share. And, you know, it's not our aspiration for the business. We're certainly not happy with that. The reason is mostly post-pricing distribution losses, you know, sound like a broken record perhaps, but that's, of course, been a known issue on several of the categories and something that we're cycling through. You know, said that, I'll also give the perspective that our past 15 weeks share through November is about 61%. and that's well within the long-term range. And just to name three examples, it's higher than it was two years ago, three years ago, and four years ago. So maybe that's helpful for perspective. Feeling good about back-end plans, obviously on the distribution side, cannot say what will happen to the category. We have seen a little bit of a contraction in overall space that retailers dedicate to this category, which isn't necessarily a bad thing. And generally leading brands and importantly leading SKUs are benefiting from that because there's greater shelf clarity. So we haven't seen a reduction in overall shelf space for the category leads to a reduction in sales or a reduction in market share. It would be our expectation that among compaction perhaps or after compaction perhaps distribution is about neutral. versus what it is today because all we're trying to do is convert the category. We're not using that as an opportunity to build distribution. We're really leveling the playing field with compaction. Margin impact on compaction obviously is positive. What we've commented on in the past is that the last time we compacted, it was a 500 basis point margin improvement to the business. We'd expect this one to be somewhat lower, but still meaningful to the business. So, you know, feeling good about compaction and feeling that this initiative is on track. Also want to point in laundry to fabric sanitizers, which we're launching now and is off to a good start. And that'll be one of the initiatives that we're investing in quite significantly because it's a growing category that's become quite sizable. And it's one, given the nature of the category sanitization, where we feel like the Clorox name has a strong equity with consumers and customers for that matter. And we feel like our products can add meaningful value to that category and its momentum. So feel good about the back half in laundry and expect better results. Certainly not happy with the share losses and also the volume losses in Q2.

Thank you. Very helpful.

Next question comes from Ali Dibaj with Bernstein.

Hey, guys. So I have a few. I would like first to just go back to Lauren's question. You know, we've seen glad volatility based on commodities for a while. It just feels like the market share shifts have been a little bit more severe this time, particularly – and I'm talking back to Matt specifically. Sorry. Particularly – given the fact that you changed your portfolio in tags and wraps and gotten out of the kind of lower-end stuff for the past few years. And so, you know, I struggle with, you know, Reynolds hasn't changed the dynamic of the industry that much, the dynamic for you that much, particularly because, you know, and you guys will remember this. I think a lot of people on the phone will remember this. When Pacted was public, it's not like things were easier. In fact, it felt like they were harder than they were the past few years. So I just want to go back to that question and really get a sense of, whether you really think there's no impact or it's even better that a big competitor is now public. And I say that in the context of a category that just doesn't grow. So to grow your top line, you basically have to grow some market share.

Yes, and profit. So, you know, all I'd say is that I don't want to speculate at this point. And what all I did say is that for a publicly traded company, you know, buying growth and buying market share doesn't necessarily work because margins and profit growth matters too. We'll see how it all plays out. You and I have followed this category for a long time. Obviously, I don't remember it being easier or more difficult when Paktiv was public. The reality is this is a very competitive category. There's no question. We have lost some market share, but You know, if I unpack that a little bit, the market shares are mostly because of post-pricing distribution losses. So it's our own doing. And what I've commented on in the past is that we have taken into account a very conscious tradeoff between short-term and long-term. If you then look at where the distribution losses occur, though, and also the share losses occur, They're mainly in the less profitable base trash segment, as you know, and also in food storage. As you know, we're very focused on trash. If I look at the indoor premium trash bag, which is the heart of our business, and also the largest sub-segment in trash, and as you can imagine, one of the more profitable parts of the business, that part actually grew in Q2. So there's puts and takes on GLADS. Clearly, we're taking a more cautious approach. Clearly, We are in a mode of defending this business, and not everything is rosy while we're seeing green shoots. But what I'd say is that we have confidence in our right to win in this category. The right to win in this category does not change, and we're investing behind it, which expresses our confidence going forward.

So helpful context, do you want to go back to – You mentioned long-term or short-term and just ended on investment. You know, you guys over a while have looked at things like Charcoal strategically and Brita strategically and others that I'm sure you're not going to name strategically. I'm sure GLAAD is in there as well. I guess if you take a step back, why do you own GLAAD strategically?

You know, first of all, I can't confirm that we've looked at certain businesses that you mentioned. So that would be speculation on your end. And I hope you can tolerate me saying that. Why do we own GLAAD? Why do we own GLAAD strategically is, first of all, it's very aligned with our capabilities, first of all. Second, over the long term, it's added an enormous amount of shareholder value. So obviously we want each of the businesses – that we own to add shareholder value in the long term. That does mean that, you know, every now and then there's a business that struggles in the short term. And, you know, whether that was Brita a year or two ago, which is now one of our strongest performing businesses, or, you know, Litter and Charcoal certainly falls into that camp right now as well. That does happen in a highly diversified portfolio. So while we always look at... whether and how we can be the highest value owner of our business. You know, we like this business. We're confident in our plans forward. And it's a very solid fit with our capabilities on multiple fronts. Okay.

Okay. And then the last question maybe for Kevin on the gross margin drivers. If you look at kind of a net price, so price change, and then subtract out the trade spend that you mentioned in the footnote, you know, went negative 60, negative 10. Really, if you go back, it was positive, positive 19, then negative 60, negative 10 for Q1, Q2. Maybe a twist on, I think, Wendy's question earlier, but, like, what should we expect the gross margin impact of net pricing to be as we go forward?

Yeah, there's a pretty big inflection point that will start in Q3. As I'm sure as you recall, most of the pricing we took last year was front-loaded. And so it's driven very nice benefits to margin. You'll see a pretty material change starting in Q3. So if you think about the front half of this year, pricing generated about a 110-bit benefit to gross margin. I expect in the back half of the year you'll see that closer to 20, 25-bit benefit as we now cycle through it. And so what I expect to see going forward is a smaller benefit from pricing, a little bit of international still to go, and then you'll have the impact of trade spending, as we've talked about, some increased competitive activity that we'll address with increased trade spending. And so trade spending will outpace the benefit from pricing as we think about the back half of the year.

Got it. So like the negative 90 base points we saw from higher trade promotion spend in that footnote number four will be even higher than 90 as the price changes will be closer to 20 to 25.

Yeah, I think in terms of net benefit, just because you'll see less benefit from pricing and you'll see ongoing trade investment. Got it.

Okay. Thank you very much. Thanks again.

Thanks, Elliot.

Next question comes from Camille Gajarwala with Credit Suisse.

Thank you, everybody. Benno, you mentioned that you're now happy with inventory levels. Can you give a little more context on the impact that decreasing inventory levels had on your top line over the past couple of quarters?

Yeah, Kamal. Hey, this is Kevin. I can address that one. And I would say we feel very good about the progress we're making on inventory. In fact, if you saw in our prepared remarks, we had very nice growth in cash-provided operations over the first six months. It's up 11%. That's primarily driven by some really good work we're doing on improvements in working capital and specifically inventory. And I would highlight a number of areas. The first is on our Nutri-X acquisition. We've owned that business a little less than two years, and I think we continue to get better at understanding the demand signal and managing inventory to meet demand. So we've gotten more efficient on that business over time. The other two I'd point to is on Brita. If you recall, we moved our supply chain. We're just finishing up moving our supply chain out of China to the Dominican Republic. We started to do that work because of the tariffs that were imposed. But we built up some additional safety stock inventory to manage that transition work, which we're mostly through now. And beyond getting the safety stock out of the system, we also now have moved production much closer to the market and to allow us to keep less inventory going forward. And then the last part of my point, too, is we've done some nice work in our GLAD business. You know, as... As we've recapitalized that plant-based, our new technology, if you recall, ForceFlex came off patent a while back. We've introduced our new patent-protected technology, and we've invested manufacturing assets behind that technology, and we brought some more online recently that's allowed us to reduce overall inventory levels on GLAAD. That's been a very nice benefit that should continue. And so good work to date. What I'd also tell you, though, is as we look forward – and Benno made this comment earlier – We do understand that coronavirus is something we're thoughtful about. We'll see how that plays out with retailers. But we are taking up inventory levels to be prepared for the potential increase in demand for some of our bleach products. And so that's something you'll see in the back half of the year.

Okay, got it. And then you also mentioned in the press release on cleaning some unfavorable mix effect from channel shift. Can you just talk a little bit about what you're talking about there? Is this product specific? Is it margin specific? What exactly is the difference there?

Yeah, pretty simple, Kamil. Thanks for allowing us to clarify. So there's some non-track channels where the net sales per volume sold is lower, right? So think about clubs typically where products are sold at a discount. That shows up as a drag in sales or at least in the volume to sales ratio and That's happened in cleaning where we see, you know, certain parts of our portfolio in part of a non-track channel perform particularly well.

Got it. Thank you.

Next question comes from Jason English with Goldman Sachs.

Excellent. Thank you, guys, for squeezing in. I appreciate it. Two questions for me. First, a pretty simple one on compaction. and start shipping this quarter, should we expect a nice pipeline fill, given the shelf-holding capacity? Should it accommodate many more bottles with a smaller size?

Not really. I don't think it's going to be their material, Jason.

Okay. Like I said, that was a quick and easy one. Now, stepping back, you've mentioned a few times the broad-based distribution losses that you've suffered in the wake of the price increases. I step back, and I I rewind the clock to the time where you were taking these prices, and you were very pleased then, and you were very confident then, like you are now, in the strength of the relationships of the retailers. And I think I remember you saying the top-to-top, the conversations are strong, the message is one of support for you. Yet in the wake, we've seen a lot of negative ramifications for those actions. So what changed? What did you sort of misjudge in that that caused that derailment? And since all that's happened, what steps have you taken to kind of go the other way and mend those relationships and strengthen them to the point where you now have this resounding confidence in your ability to recover the distribution and drive this sharp inflection in the back half?

Yes, if I rewind and what really happened was that first of all, right after we took pricing, Our consumption was very strong, as you will remember. That was prior to any distribution losses. But what we said then is that we expect significant bumpiness. And the significant bumpiness would show up, for example, in distribution losses and in merchandising losses. So that's exactly what happened. And as a result, I don't really see any change. So you don't find me any... more or less confident on this than I was six months ago or 18 months ago. The reality is that we're playing a long game here. We are protecting our ability to grow margins in the face of cost adversity with an eye on the long term. And retailers understand that, but retailers certainly also didn't consistently like that as we had anticipated, you know. Were there cases, perhaps like on GLAAD, where it was more pronounced than we had anticipated? I would absolutely say that that's true, in part because, as we've duly noted, like so many institutions and companies, we didn't necessarily get the resin forecast right. So if I look back, I would have liked to get more accuracy into our resin forecast because maybe our plan forward then would have been different and maybe distribution losses, if I speculate for a second, would have been more benign. But by and large, this is playing out exactly as we anticipated then. We've always said that we're after good growth and good growth is profitable and sustainable and responsible. And, you know, we don't like the distribution and the share losses either. At the same time, we do like our margin enhancements, which allows us to invest in the momentum of our brands in the back half, and that's what we're focused on.

Okay. Thank you. I'll pass it on.

Okay. We'll take one more question after this.

Okay. We have a question from Kevin Grundy with Jefferies. Please go ahead.

Hey. Hello, everyone. Thanks for squeezing me in. Two quick ones for me because we've covered a lot of ground. Ben, I just want to make sure I'm clear on the messaging with respect to the adequacy of the investment levels and your guidance for this year. So it sounds like. The additional investment behind price and trade investment and advertising and marketing will position the company well to get back to its normal type of algorithm back half of this year and into next year. So both top line and from an earnings perspective, as best we know, sort of steady state commodities. If you can confirm that, I'm just trying to handicap the risk that this is a multi-year necessity for higher investment levels. So maybe you could just... comment on that. And then quickly on M&A, given some of the challenges in some of your bigger businesses, are you any less inclined near term on the M&A front given the potential distraction and integration risk? Thank you.

Yeah, I'll take M&A and then Kevin's going to take your good question on advertising sales promotion levels. Not any more or less inclined to do M&A than we always are. As we always comment, we look at many things throughout the year, certainly continue to find desired valuations to be on the higher side and will continue to be disciplined. What we have said in the past is that our priority is to have a healthy core. So our focus right now is on just that. And we like the progress said that, you know, for, a good acquisition that is on strategy and where we feel like we can add clear value to a business, we remain open so that there's no change to what we've talked about during our investor day in October.

And Kevin, on your question about investment levels, I would make a couple of comments. First, I'm sure you can appreciate I won't provide any outlook for fiscal year 21. We'll come back and do that at a later date. But what I would say is, as Bena mentioned, we do believe 10% about is the right investment level, sometimes a little bit more, sometimes a little bit less, but feel like that's the right level of investment long-term. And we are working to get back to our Ignite financial goals that we set back in October, if you recall, 2% to 4% top-line growth. We believe we're taking the right actions to get back to those levels in the back half of the year, and that's certainly what we care about is that momentum going into fiscal year 2018. One, that we get back to growing the top line, consider the long-term goals while expanding margins, and we feel pretty good about our ability to do that.

Okay. Thank you. Good luck.

Yes. Thank you, Kevin.

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

Yes. Thank you all. And all that's left is to say is that I look forward to talking with you again in May when we discuss our Q3 results. Thank you, and have a good day, everyone.

This concludes today's conference call. Thank you for participating. You may now disconnect.