Steven Austenfeld - Vice President-Investor Relations Stephen M. Robb - Chief Financial Officer & Executive Vice President Benno O. Dorer - Chief Executive Officer & Director.

Steve R. Powers - UBS Securities LLC Jason M. English - Goldman Sachs & Co. Olivia Tong - Bank of America Merrill Lynch Joseph Nicholas Altobello - Raymond James & Associates, Inc. Bill Schmitz - Deutsche Bank Securities, Inc. Ali Dibadj - Sanford C. Bernstein & Co. LLC John A.

Faucher - JPMorgan Securities LLC Christopher Ferrara - Wells Fargo Securities LLC Lauren Rae Lieberman - Barclays Capital, Inc. Erin Lash - Morningstar Research.

Good day, ladies and gentleman, and welcome to The Clorox Company Third Quarter Fiscal Year 2015 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. As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Mr. Steve Austenfeld, Vice President of Investor Relations for The Clorox Company. Mr. Austenfeld, you may begin your conference..

Clorox ScrubSingles, Clorox Triple Action Dust Wipes and Clorox Pump 'N Clean. Our Professional Products business grew sales 3% in the third quarter, particularly behind increased shipments in our food service channel.

As we discussed last quarter, following double-digit Q2 sales growth behind Ebola and enterovirus concerns, we anticipated some slowdown in third quarter Professional Products growth as those concerns abated. Looking ahead, we anticipate our Professional Products business will continue to grow faster than the company average.

In our Laundry business, sales increased 1% due to growth from Clorox liquid bleach and Clorox 2 Stain Fighter & Color Booster. As noted last quarter, due to increased input costs we implemented a 7% average price increase on Clorox bleach, effective February 1. The price increase was well executed in the market.

However, competitors have been somewhat slow to follow. From a market share standpoint, our strong execution is paying off as Q3 marked the fifth consecutive quarter of market share growth on Clorox bleach. In our Household segment, volume was flat while sales increased 5%.

The segment's top-line results were driven by strong performance in our Charcoal businesses, which grew volume and sales at a double-digit rate on top of high-single-digit growth in the year-ago quarter.

Charcoal's strong top-line results were driven by converting to a new and improved lightweight product that began shipping in January, supported by increased demand-building investments as well as strong early-season performance at key retailers.

Our Bags and Wraps business grew sales 1%, driven by innovation behind the new Gain scented trash bags through our partnership with Procter & Gamble. Volume on Glad declined 9%, reflecting the impact of price increases taken last March and November on our trash bag business.

Although competition has not yet followed, we continue to believe our pricing actions are right for the long term with signs the resin market is firming up. In addition, we anticipate reinvesting a portion of our pricing benefit in trade spending to manage price gaps and to invest in innovation on our premium lines of business.

Cat Litter volume and sales decreased 3% and 2%, respectively, in the face of competitive activity.

We're continuing to invest aggressively in innovation and communicating our value proposition versus the competition, particularly focusing on excellent clumping and odor control such as with Fresh Step's eliminate-odor-for-10-days claim that comes with a money-back guarantee. In our Lifestyle segment, volume grew 2% while sales grew 3%.

These results were driven by high-single-digit sales growth on Burt's Bees, largely due to innovation in lip and face care products. In particular, our new lip crayons grew strongly in the quarter, supported by new Burt's Bees television advertising, as did our renewal of face line, facial towelettes and skin brightening products.

Looking to the fourth quarter, sales growth will likely be well within year ago as we lap the strong merchandising and pipeline build for the lip crayon products. Full-year results for Burt's Bees continue to track to high-single-digit growth, and we look forward to another strong year in fiscal 2016.

Turning to our Food business, volume grew 1% and sales grew 2% versus the year-ago quarter behind higher volume of bottled and dry Hidden Valley products, including the February launch of five new flavored Hidden Valley Ranch dressings and two new Greek yogurt dry dip and dressing mixes.

Partially offsetting the Burt's Bees and Food gains where lower sales and shipments of Water Filtration products due to category softness and intense competition in pour-through filters. As previously communicated, we started shipping an improved Brita filter in August.

It is faster and easier to change than competitive filters and is getting strong reviews in e-commerce channels. In November, we began shipping improved pitchers. We're keenly focused on getting our consumer messaging right and, coupled with our focus on innovation, we're optimistic that our Water Filtration business will improve in fiscal year 2016.

Turning to International, volume was up 1% and sales were flat, reflecting the impact of unfavorable foreign currency exchange rates. Excluding the impact of foreign currencies, sales for International grew 10%.

In the quarter, International saw market share gains in Canada in local currency terms and we grew volume share in Latin America, particularly in bleach and cleaners.

As we discussed last quarter, we continue to see slowing economic growth in some of our key markets such as Chile and Peru, given macroeconomic trends such as high inflation and slow GDP growth.

That said, we remain committed to growing profitably in our International markets as we continue to carefully assess spending across geographies and implement price increases to partially mitigate the macroeconomic headwinds.

Looking at the balance of fiscal year 2015, as noted in this morning's press release we've increased our sales growth outlook for the year to be in a range of 1% to 2%. The revised sales outlook takes into account the strength seen year-to-date.

For the fourth quarter, we continue to anticipate strong foreign exchange headwinds along with higher trade spending to support our categories and grow market shares, as well as to defend against reduced prices by competitors.

Now I'll turn it over to Steve Robb to provide more detail on our Q3 financial performance and updated financial outlook for fiscal year 2015..

Thanks, Steve. And welcome, everyone. We're pleased to have delivered another good quarter, following a solid first half of fiscal 2015. As you saw in our press release, given our results to date we've raised our fiscal year outlook for sales and updated earnings per share from continuing operations.

Now we'll turn to our financial results for the quarter. In our third quarter, sales grew 3%, reflecting 3 points of pricing, a little over 1 point of favorable mix and assortment, and nearly a point of volume growth. These factors were partially offset by 2 points of unfavorable foreign exchange and 1 point of higher trade spending.

On a currency-neutral basis, sales grew 5%. Gross margin for the quarter increased 110 basis points to 43.2%, reflecting 170 basis points of cost savings and 140 basis points of pricing benefit.

These factors were partially offset by 120 basis points of increased manufacturing and logistics costs and about 60 basis points of higher performance-based incentive compensation cost. For the quarter, commodity costs were about flat.

Selling and administrative expenses increased 16% in the third quarter to 14.7% of sales compared to 13% of sales in the year-ago quarter. This increase was driven primarily by a significantly higher performance-based compensation costs reflecting higher anticipated year-over-year payouts, which recognizes the company's strong performance to date.

While the largest impact from higher incentive compensation costs was reflected in selling and administrative expenses, it also resulted in higher cost of goods sold and research and development expenses.

Importantly, for the full fiscal year, we continue to anticipate that selling and administrative expenses to be about 14% of sales, consistent with our long-term target. Advertising and sales promotion investment for the quarter was nearly 9% of sales, with U.S.

spending for the quarter at about 10% of sales, reflecting continued strong support for our U.S. businesses. Net of all of these factors, we delivered diluted earnings per share from continuing operations of $1.08, a $0.06 decrease versus the year-ago quarter due largely to the higher year-over-year incentive compensation costs.

As a reminder, in the year-ago period earnings had a $0.12 benefit due to unusually low incentive compensation costs; again, consistent with our pay-for-performance philosophy. Fiscal year-to-date free cash flow was $398 million compared with $357 million in the year-ago period, an increase of 11%.

In keeping with our practice to return excess cash to stockholders through dividends and share repurchases, fiscal year to date the company has repurchased about 1.5 million shares of common stock at a cost of approximately $158 million. Now I'll turn to our updated outlook for fiscal year 2015.

As Steve mentioned, we raised our fiscal year sales outlook, which now anticipates sales growth in the range of 1% to 2%, reflecting stronger results to date and an impact of more than 2 percentage points from unfavorable foreign currencies.

Our sales outlook also reflects slowing international economies, increased trade spending as we continue to support our brands. Turning to margin, we continue to anticipate moderate gross margin expansion for the fiscal year as the benefit of cost savings and pricing are expected to more than offset higher manufacturing and logistics costs.

We also continue to anticipate that commodity costs will be about flat for the full year as year-to-date headwinds should be offset by lower commodity costs in the fourth quarter. As I previously mentioned, we continue to anticipate selling and administrative expenses at about 14% of sales.

EBIT margin is expected to be about flat, reflecting moderate gross margin expansion offset by higher performance-based incentive compensation costs. Our fiscal year EBIT margin also reflects incremental demand-building investments. We continue to anticipate fiscal 2015 tax rate on earnings from continuing operations to be about 34%.

And net of all of these factors, we have updated our fiscal year outlook for diluted earnings per share from continuing operations to $4.45 to $4.55. As we look ahead to fiscal year 2016, we're going to be keenly focused on three things.

First, headwinds in international markets, including slowing economies and foreign currency declines, which we anticipate to be higher than this year's expected level of more than 2% and will impact both top- and bottom-line results. In particular, we anticipate a meaningful currency devaluation in Argentina sometime in fiscal year 2016.

Second, we continue to monitor changes in commodity costs. Despite the current softness in resin prices, we're seeing early signs that the market may be firming up. In addition, logistics costs remain high, which will likely continue into next year. And third, we will invest heavily in our brands.

As I mentioned previously, historically we've invested a portion of the resin-related savings back into the business. In particular, we anticipate continuing to invest in trade promotion, especially in categories where competitors have yet to follow our pricing actions. As a reminder, we will provide our outlook for fiscal year 2016 in early August.

In closing, I feel really good about our results this quarter despite the headwinds we continue to face. We continue to be encouraged by the actions we're taking to accelerate growth in our U.S. businesses and plan to continue investing.

In addition, our team drove operational efficiencies that allowed us to expand our margins, which supports our focus on driving profitable growth. With that, I will turn it over to Benno..

slowing economies in international markets and strong foreign exchange headwinds, a volatile commodity market, and the need to continue to invest in trade promotions to support our brands against competition. And with that, we'll open it up to your questions..

Thank you, Mr. Dorer. Our first question will come from Steve Powers of UBS..

Great. Hi, Benno, Steve, and Steve. I wanted to ask a question around the gross margin guidance, Steve. I'm not sure how you define moderate expansion.

But if I take your full-year guidance of 1% to 2% in the top line and assume, just as a starting point, Q4 gross margin looks like Q3 in terms of expansion, that's going to put your gross margin performance for the year up about 40 basis points, if my math is correct.

So I guess first does 40 basis points line up as moderate for you? And then second, is there any reason why gross margin expansion shouldn't actually accelerate in Q4, given the magnitude of the presumed commodity benefits and the continued cost saves? I know you flagged the higher trade promotion in your outlook a couple of times.

And I'm assuming that's particularly focused on Glad, where you've got the price gap issue. But just how significant a spike in gross to net are you expecting in Q4, if you can size that order of magnitude versus Q3? Thanks..

Yeah. We are expecting a meaningful improvement in gross margins in the fourth quarter. Obviously, we're very pleased with the results we saw in the third quarter where we added almost a little over a full point of gross margin.

And what we saw in the third quarter, and this is relevant to the fourth quarter, strong cost-savings programs, pricing actions that are working in the market. In the third quarter, commodity costs were flat. And so all those benefits flowed through. When you look forward to the fourth quarter, we feel great about the pricing.

We feel very good about the cost savings. And importantly, we expect to get some commodity cost tailwinds, okay, and that will probably be the first quarter this year where we're actually getting tailwinds, so I would expect a meaningful gross margin expansion in the fourth quarter.

Now for the full year, stepping back, we do expect EBIT margin to be about flat. And the reason for that is we are going to continue to step up our investments in consumer demand-building investments, and our SG&A costs are expected to be about 14% for the full year.

So I think some of the benefit in the fourth quarter in gross margin will be offset by some of these other factors, but nonetheless you should see some pretty nice numbers..

And I guess just to square that with moderate expansion and in terms of language of your outlook, if you're up meaningfully in the fourth quarter, sounds like at least as much as the third quarter, that's 50 basis points or so.

That's going to be a sizeable – is that what you define as moderate gross margin expansion?.

Steve, I'll let you do your math. I'll let you apply your judgment. Keep in mind, the first half was a bit more challenging for us. Second half, as we expected, gross margins are expected to do better. We're seeing it in the third quarter. We'll see it again in the fourth quarter.

And I think, again, for the year you're going to see some good margin expansion at the gross margin line, but EBIT margins should be about flat..

Okay. And is there any way to frame or – Steve mentioned a couple of times increasing trade spends. You got increasing investments throughout the press release. You talk about higher trade promotion in your outlook. You flagged the price gap issue in Glad.

So how much incremental investment should we be thinking about relative to the Q3 run rate as we look forward on that trade promo line?.

Well, let me step back and just talk about the full year for a second in long term. First, you might recall that on our 2020 strategy, one of the things that we wanted to do was to invest in incremental point of sales in consumer demand-building investment and to some extent in R&D. We started that in the fourth quarter of last year.

I think we've continued it through this year. So I think what you should expect is a mix of both trade spending as we're looking to drive trial and repeat on new products, as well as just advertising as we keep those brands healthy. But I think you'll see us consistently do this over the coming quarters.

But again, full year you should see a nice increase, consistent with what you've seen year to date..

And Steve, this is Benno. One thing I would add is that you should see the incremental dollars probably float around depending on where they deliver the ROI, depending on the strategic needs at any given point.

Right now, it's fair to say that more dollars go into trade promotion, one, to support the price increases, but two, also to support fast distribution startup behind what is a really solid innovation program. Over time, that might change and the dollars might go into different buckets.

But as Steve Robb said, this increase in spend is going to be here to stay and in line with our strategies..

Okay. Thank you..

We'll hear next from Jason English from Goldman Sachs..

Hey. Good afternoon, folks. Thank you for the question. I wanted to focus on your International business quickly. I know you've made a lot of investments in the recent years or taken a lot steps, I should say, in recent years to try to improve the profitability – walking away from Venezuela, the SAP investment.

Yet looking at profitability I think from a margin perspective, this quarter marked a new all-time low.

So can you talk more – I know FX is a pressure point here, but from just a profitability perspective, what's driving the ongoing erosion? What can you do to maybe fix it, and what's a realistic expectation as we think about the forward there?.

Yeah. Jason, thank you for that. Well, our long-term aspiration in International is to grow 5% to 7% in sales but importantly grow profitably. And it's fair to say that at this point we're not meeting those expectations.

I would say that operationally we're executing well, but we all know this is a very challenging environment that will likely continue well into next fiscal year. The key drivers, to your question, a lot of them are macroeconomic in nature around GDP, around cost inflation, price controls and FX.

Again, these are factors that our peers are seeing as well, and they're pretty well established. Going forward, our focus will be on rebuilding margin. I'm not happy about the profitability, and rebuilding margin is our first priority. I would point at a few key tactics. One, continued pricing to offset inflation.

Two, innovation where margin accretive that drives trade up, and we're seeing good results behind tactics like this in markets like Argentina and there's more that we can and will do. Three, we will really be very disciplined about demand spending.

We will spend where it is profitable and where we feel like there's going to be a long-term growth effect. We will not spend if the profitability is not there. And then fourth, we have intensified our efforts to apply what we think is a solid playbook from the U.S. on the cost-savings side, and we will do more of that.

So going forward, I do not expect us to be on the growth trajectory, the 5% to 7% in sales growth that I mentioned earlier, any time soon. But I do think that we can do better to start rebuilding our margin, and that again will be our priority near term given all the challenges that are largely macroeconomic in nature..

Okay. One follow-up and then another question. Some of the cost-relief benefits that you're expecting in the U.S., would you expect to see them in International as well, or is FX going to be a full offset? And then real quick on top line, you bumped it from 1% to 1% to 2% for the year, with only one quarter left. That's a pretty wide range.

It implies sort of down 2% to plus 2% for the fourth quarter. Plus 2% seems like it should be pretty much – it should be a pretty achievable target.

So the question is why not just go from 1% to 2%, or is there real risk that your top line is materially weaker than just 2% in the fourth quarter?.

Okay. Jason, let me start with the latter question and then I'll step back and address the former. Starting with the latter question, which is regarding the outlook. Again, the outlook for sales growth for the full year is 1% to 2% all-in, including foreign currencies.

Now to be clear, fiscal year-to-date we've delivered about 2% sales growth, a little over 2% sales growth all-in. I think as we look to the fourth quarter, we are expecting sales growth to be probably flat to up slightly. The things that we're monitoring carefully right now, number one, is just foreign currencies. There's a lot of volatility there.

Second, our Charcoal business, which by the way is off to a great start certainly in the third quarter, but it's a seasonal business. It's historically had some volatility, so we'll need to see how that plays out. And then finally we're going to continue to invest in our business.

So I think on balance it's fair to say, based on what we know, that we're probably in the mid to upper end of that range of the 1% to 2%.

Turning to your question on International, it is challenging because you've got foreign exchange, which is certainly placing a drag on the margins in our International business because, like many companies that have businesses in the emerging markets, you pay for a lot of your costs in dollars. And as a result you take a double hit on that.

We are seeing benefits of lower commodity costs beginning to trickle through to International, but probably to a less extent than we're seeing in the U.S. because the inflationary pressures are higher in the International markets, and where possible we try to source materials locally and try to pay in local currency.

So I think the margin challenges in International are a bit more acute. And I think as Benno said, that's why we're going to focus on what we can control. We're going to lean into pricing. We're going to continue to drive hard against our cost savings. We're going to get smart about how we allocate our investment spend.

And then finally, I think there is more opportunity to lower SG&A costs globally but particularly in International, and you'll see us focus on that as well..

Great. Thanks a lot. I'll pass it on..

Olivia Tong with Bank of America Merrill Lynch, your line is open..

Thank you. Good afternoon. I just wanted to talk a little bit about commodities because you obviously started to see that turn this quarter and just kind of get a better sensing of what you were thinking sort of for 2016 in terms where that can go.

And then also on the logistics costs, I know there are a lot of factors that go in there, but just wondering if you could provide more color as that number moves around. Is that just continuing higher truck and rail costs, or is there something else that we should be thinking about? Thanks..

Yeah. So let me start with the logistics question, Olivia. What we have seen – and this is not unique to Clorox. As we've talked many times before, there's two fundamental problems in logistics that everybody is facing – simply not enough drivers and trucks. Part of that is changing rules and regulations.

Part of it is probably a fallout from the economic slowdown. A lot of trucking companies went out of businesses. There's just not enough trucks on the road, and rail has been somewhat congested. And so that's been driving up overall logistics costs.

I think this area may be impacting Clorox a bit more though than other companies because some of our plants are in more rural locations. We have longer shipping lanes, and we also tend to ship things like bleach and charcoal and cat litter, which weigh a bit more and so you pay a bit more there. So it's an ongoing pressure.

It's something that we fully expect will continue through next year, which is why again we're focusing on pricing and cost savings to address it. In terms of the outlook for commodity costs, again as I said in my opening comments, we anticipate commodity costs to be about flat on the year. But we do expect to get some tailwinds in the fourth quarter.

What we're watching very carefully right now is energy prices. Energy prices over the last four weeks to eight weeks have moved up pretty sharply. And one of the things we know over time is that commodity costs tend to come down slowly but they move up pretty quickly And so resin prices appear to have found a bottom. They're starting to firm up.

I do expect that in the fourth quarter there'll be some tailwinds. And there might be some tailwinds going into early fiscal 2016. But we're just keeping a sharp eye on this because these markets have a tendency to swing pretty quickly. But we'll have a better update for you in early August when we provide our outlook for fiscal 2016..

Got it. Thanks.

And then on bleach pricing, you mentioned that you're gaining share but if private label doesn't end up following in the pricing, what's the game plan there?.

Yeah, Olivia. So for everybody, as a reminder, we took a 7% price increase in February. Our price increase was executed successfully. And on the competitive side, I would say at this point it's early days and we need to let this play out. Some accounts did follow on the private label side, some not yet. So it's not clear where this will end up.

I would offer a few pieces of perspective. First of all, the price increases continue to be cost-justified. Our competitors see the same cost increases that we do. So again, early days, we need to let this play out. We do have a strong track record obviously taking price increases over the long term.

We know how to execute pricing and we're certainly committed to growing our categories profitably. We had anticipated the need to spend some of the pricing benefit back in trade promotion. This is exactly what's happening. This is exactly what is reflected in our outlook.

So we are staying the course on pricing on bleach, and also on Glad for that matter, but we'll also stay agile if needed. So if we need to course-correct down the road, we will. But at this point, my expectation is that this price increase will be executed successfully.

We'll probably see, also as a disclaimer, volumes and shares over a few quarters be somewhat depressed. Again, that's a normal thing, and after three quarters to four quarters, once consumers are used to new price points, we should see that ease up and normalize. But overall I would say the price increases are on track..

Got it. Thanks a bunch..

We'll hear next from Joe Altobello from Raymond James..

Thank you. Good morning. First, I guess since we're on bleach, I'll start there in terms of a housekeeping question. You mentioned that Glad volumes were down 9% after the price increase. And I'm not sure you gave the bleach volume number in your prepared remarks..

Our Laundry business in total, and that includes Clorox 2, it was down, from a volume standpoint, mid-single digits..

Okay. So as expected, I would think..

As expected. There was no surprise there for us, as Benno said..

Okay. And in terms of Litter and Brita, obviously you guys have struggled in both of these areas of late. And it sounds like they're moving in opposite directions. It seems like Brita's getting a little bit better.

And I'm curious, number one, has that business turned a corner, or is still a lot of wood to chop there? And two, how do you guys fix Litter? And I know this is a very tough question you've been asking for probably three years now. But it's not for lack of spending, and it's not for lack of innovation but that business continues to decline.

So I'm just curious if there is something that we haven't heard from you guys yet that you're thinking about to try to turn around that business. Thanks..

Yeah, Joe. Thanks. Brita first, Brita has been soft recently, and certainly on the share side we're seeing some improvements. It's, to be honest, too early to say that we've turned a corner but I'm certainly feeling better.

The issue on Brita has been private label filter distribution expansion, which led our share and volume to be under pressure and also has led the category to a decline. We are focused on innovation, innovation on systems but also innovation on filters to differentiate from private label. That work is underway and we're seeing good progress.

We're also working with retailers to reverse the trade downs in the category and revitalize the category. And I expect better results in fiscal year 2016. The good news is on Brita that our pour-through systems, which is the majority of the business, is growing and that's typically a precursor to higher filter sales.

So that's the green shoots and I think Brita will see growth in the next fiscal year and I'm quite optimistic. Litter, obviously no surprise, not yet where we want it to be. What we've always said is that it will take a few quarters until we can expect improvements. And I will say that I think that it will take until fiscal year 2016 also.

We're focused on earning share and not buying share, which ultimately requires better innovation. We've put a few things in place that are beginning to take hold. We're investing in better value communication. Lightweight litter, which we've launched earlier this fiscal year, has been quite successful and we're investing behind it.

And as Steve Austenfeld said earlier in the call, we have strong innovation coming up in the next fiscal year, which is ultimately what it will take. So pleased with the progress. I'd also offer as a perspective that Litter is growing both volume and sales fiscal year-to-date.

So that share number is certainly the one number that I don't like and no one here at Clorox likes. But to put it in perspective, we're nevertheless growing and we feel good about our prospects for 2016 and beyond..

Great. Thanks, Benno..

Thanks, Joe..

Bill Schmitz from Deutsche Bank, please go ahead..

Hey, guys. Good morning. Hey, the first question, a couple of housekeeping items. The first is the corporate line in the segment data has been super bouncy, and I think a lot of that is incentive comp.

But when you look forward, is the right number like $60 million a quarter? Is that about right?.

You're right in your first conclusion, which is incentive – it includes a lot of things, interest income and expense and other things. But incentive compensation is really what's causing it to move around, and you're going to see variability across the quarters.

The simplest way I'd have you, if you're modeling this out, model this year SG&A cost at about 14% of sales I think is right. And I think again, as we've said many times, over the longer term we'd like to get that number below 14%, but that might be the easiest way to think of this..

Yeah. I mean, the reason I asked the question is I know you're not going to give us guidance for next year, but there's a really difficult comp on the corporate line in the first quarter. And I think if you look at the Street numbers, if you kind of normalize it to the regular corporate number, the number is like $0.10 too high..

Yeah. I haven't seen the consensus for the first quarter, so I really can't comment on that. Again, all I can say is that, for modeling purposes, you're going to see variability across the quarters in SG&A cost, as we previously discussed, and 14% is probably a really good number to use at this point..

Okay. That's helpful. And then the net-debt-to-EBITDA now is like 1.5 turns, and I think that's fairly below where you guys kind of feel comfortable.

So what's the plan on the sort of balance sheet utilization front?.

Yeah. At the end of the third quarter, our debt-to-EBITDA came in at 1.9, okay? So it's certainly....

(43:07).

I understood. Understood. Yeah. We look at – you've got to also remember some of that cash is overseas and somewhat trapped. So we like to think of it as about a 1.9 against the target of 2 to 2.5. In any case, our free cash flow fiscal year to date is up 11% versus year ago. So we're certainly feeling very good about our ability to convert sales to cash.

And it gives us a lot of financial flexibility. We've started to use some of that money, as we've discussed for the last few quarters, to invest for growth and we've been putting more money into growth and it's certainly working. We're going to keep the dividend healthy.

But you saw us in the third quarter re-enter the market for share repurchases essentially to start offsetting stock option dilution that's occurred over the last couple of quarters. I think longer term what you'll see us do is we'll continue to obviously support the growth of our business organically with investments.

We continue to look for bolt-on acquisitions in the areas that we've discussed and we'll keep the dividend healthy and return cash that we don't need back to the shareholders. So we're certainly sitting in a very good spot with a lot of financial flexibility..

Got you. And I know some people complain that I ask too many questions on these calls. But the last one is it seems like finally like the scan to non-scan channels are aligned.

Is that going to be the case going forward? So is the sort of Costco stuff lapped and now it seems like, by channel, things are kind of growing at the same rate?.

Should be, yes. So as you rightly say, Bill, the Costco matter, we're through. That happened in Q3 of last year. So we should see, barring any unforeseen events, scan to non-scan to be reasonably aligned, yeah..

Great. Thanks so much, guys..

We'll hear next from Ali Dibadj from Bernstein..

Hey, guys. Just wanted to go back to the cost justified-ness of the price increases. When I look at your gross margin drivers, at least in this quarter, the 140 basis points you got from price is significantly higher than the combo of commodities and manufacturing logistics.

So I'm trying to understand why now was the right time, with the accumulation of all the impacts for the past year or so of commodities impacting you. And then as you look forward, clearly you have to invest back in the business to try to close some of the price gaps.

But I guess I'm trying to understand the logic of why do this in the first place if you're going to try to spend back.

Is it just because you want to get a higher lift price and hope the promo kind of eventually goes away, or is there another logic behind this around innovation or something else?.

Let me start off and talk about the cost base, and then maybe I can have Benno weigh in with his point of view, the longer-term view of the business. Starting with cost, keep in mind we're not looking at this for a quarter or two. We actually look at this over a longer period of time.

We tend to price to the long-term average cost of where we think these markets are going. And again, as we've pointed out, logistics costs are up, wage inflation is real, healthcare costs are up, commodities are actually still up in the first half of the fiscal; they went flat in the third quarter. But we have yet to get any relief.

So the pricing that we have taken, we think it's the right pricing for the business. It's certainly cost-justified. While it's early days, it's certainly we've executed the price increase as well. But I'll turn it over to Benno for his thoughts..

Yes. So to your question, Ali, on investments, I want to make it clear that the benefit we are getting from pricing as far as our profitability is concerned is higher than the amount that we're investing back. So there's still a net benefit. We are committed to growing these categories profitably.

As I said earlier, these price increases are cost-justified. And typically what happens, and this time is no exception, that we have to invest back temporarily. In the long run, I would assume, as has happened in the past, that the trade spend will subside over time and will normalize.

But as we are helping consumers adjust to new price points, as we support our brand against competition temporarily, again, as was the case in the past, we will invest back for a net benefit from pricing..

So I have a hard time seeing it as – perhaps cost-justified is a heavy term, but cost-justified given that you are yourself saying that commodities are going to roll over in the short term.

So maybe it's cost-justified certainly to your point on a longer term, but I worry about what's going to happen in the shorter term to you guys, particularly – and if you can help me with some color on this – particularly as we've been looking at FSIs every week now for a little while in your categories and other's and it really looks like the European companies are putting significant amount of pressure on this marketplace already based on the currency benefit.

So do you feel that this is a little bit of a dangerous situation to be in relative to the Europe, relative to what the commodities are doing, or do you still feel like you would do it all over again knowing what you know now in the pricing?.

We would absolutely do it all over again. I will remind you that right now we're growing market share. We've seen the highest market share growth in four years. And the subject categories – bleach, Glad – are growing share very nicely. Bleach now we've grown share for the fifth quarter in a row.

And in fact what we're also seeing is that the momentum that we have seen over the past years from private label share has become much more modest at this point. And we're today are growing in fact in dollar terms faster than private label.

I would also say that, look, at the end of the day this temporarily higher spend on trade is just one component of what we are doing. I would ask that we also consider that we're investing very strongly in innovation. A lot of our trade spend today goes against fast distribution and innovation. We're seeing several innovations off to a fast start.

On the distribution front, we're pleased with the progress on the cleaning innovation. Glad with Gain is off to a very strong start as is lightweight coal. The new Hidden Valley Ranch flavors with cucumber, avocado and sweet chili are doing nicely.

So I would look at it in context of our stated desire to invest in accelerating growth but investing to accelerate growth profitably. And I feel like Q3 is a good example of that. And there is more to come on that front..

Okay. Thank you. And last question just around advertising spend, roughly just under 9%.

Given what you just said, how should we expect that to change going forward?.

I don't know that we've given a specific guidance on the advertising sales promotion. What we have said is that we want total investment in our brands to increase by 1 point, Ali. And we think that that continues to be a fair assumption. Within the advertising sales promotion line, what you will continue to see is that the U.S.

spending is going to continue to float up, which it has. And we are spending less in International today, again consistent with our desire to grow profitably and the stated intention to spend only where profitable in the International market..

Thanks very much..

We'll hear next from John Faucher from JPMorgan..

Yes. Thank you. I wanted to talk a little bit on Charcoal. You talked about increased retailer merchandising as a key driver in the third quarter.

And I guess what do you think is driving that? Is that weather-related? And I guess what's your visibility in terms of whether that higher level of merchandising is going to be continuing over the course of the summer selling season? Thanks..

Yeah. So first what's behind this is we've been on a strategy in Charcoal to encourage year-round merchandising for a while and that's certainly been very successful. We've seen particularly strong success this year.

If you think about what's happened in much of the country weather-wise, there was pent-up demand and there was readiness also by retailers to invest in charcoal to get people back into the stores and encourage store traffic, and our merchandising program certainly anticipated that.

We've worked with retailers to plan for such events and we've seen particularly strong pull. The good news is we're seeing quite a bit of that translate into share and category growth. So that obviously makes us feel good about the prospects going forward. We feel good about our start into Q4 on the business.

I will say that Charcoal is more difficult to plan. A lot of it does depend on weather and we'll have to see it play out.

But we are certainly very optimistic about how we're executing what we can control and the early success we've had this fiscal year behind merchandising programs, again, all planned and consistent with the strategy that we've had on the business for a while..

Okay. If I can ask a follow-up on that; that makes sense, I guess.

But if you're getting incremental sort of counter-seasonal promotional activity, it seems like as you cycle into the normal promotional activity that the incremental benefit year-over-year should lessen almost by definition, right, because you're going up against a seasonal period when you're used to having more merchandising.

Is that right?.

We've seen particularly strong growth on the business in Q3. Do I expect those types of growth rates to continue? I don't think so. But again, on Charcoal one can be surprised at times. It depends on a lot of factors, including weather.

But again, I'm looking at what do our plans look like and what do they look like compared to year ago and I certainly feel very good about those and we need to let Q4 play out..

Okay. Thank you. And then if I can just follow up on Ali's last question about advertising. The ad-to-sales ratio had come down over the past couple of years. There was a lot of discussion about International being the key driver of that falloff in the whole company ad-to-sales ratio going down.

Is that something where you just talked about the profitable growth, I guess it seems like it was masking something that you had to go back and now you're saying you have to spend more. How can we get comfortable, I guess, that it really is the International piece that's driving that down when your stated need to increase advertising in the U.S.

would indicate that the U.S. was also part of a driver of that reduction over the past couple of years, if that makes sense..

So John, let me take this. If you go back and you look at this over the last couple of years, our U.S. retail spending has been anywhere between 9% and 10%. In fact, I think it's been closer to 10% than 9%. So what you've seen us do is shift more spending into the U.S. retail business.

Keep in mind the Professional Products business, which has been growing fabulously for us, we really don't have any advertising expense in there. So you have to be careful with that number. International, I think as we've talked for quite some time, we have been making cuts in advertising.

Back when we were in Venezuela, we had basically turned off the advertising. We're spending very little, if any, advertising in Argentina in some of these markets that have price controls. So we've systematically gone into those markets that are margin-challenged and have some issues and we're really pulling back on the advertising.

By contrast, we've been putting it in the U.S., which is why we've been quoting I think for the last few quarters what we're spending in our U.S. retail business. So we feel good about the total demand-building investment. We feel good how it's building market share for us. Certainly it's driving top-line momentum in the U.S.

business and I think you can see that in the numbers..

Okay. Thank you..

We'll move next to Chris Ferrara from Wells Fargo..

Thanks.

I guess going back to the share gains in the U.S., I think if I'm right, if I caught it right, the number was 30 basis points of gain, right? And that's despite a couple of price gap issues, right? So I guess the question is how sustainable do you view that level of share? And I guess where would you put the level of share gain needed to meet your growth objectives over time in the U.S.?.

So we feel good about the share gains. We feel also good about the fact that they're really broad. Other than Brita and Litter, we're growing share everywhere. It's our objective to grow share in the U.S. but it's also our objective to grow categories.

One thing that I would note is that behind the increase in investment and also behind the innovation, our categories this quarter have been quite healthy. We saw 2% category growth this quarter. That's been as high as it's been in recent years. I would say in the future I would expect our share gains to continue.

I would think that on Glad and bleach we might see somewhat depressed shares for three quarters to four quarters as we cycle through those price increases.

But we are putting the plans in place based on stronger investments, based on strong innovation, based on competitive marketing communication that's centered around consumer value, that should make us expect to continue to see share gains..

Okay. And I guess on the buyback, on a separate note, are you done with the targeted buybacks you guys were – I think you said you were going after some of the share creep you'd had.

Are you guys done with that?.

I think what we've consistently said is, within our outlook, we will periodically re-enter the market to soak up stock option dilution. And I think you'll see us again periodically do that with the excess cash. Beyond that, we haven't commented on specific plans..

Got it. Thanks, guys..

Lauren Lieberman from Barclays, your line is open..

Thanks. Just quickly on bleach, I was curious did you talk about what you have seen more recently as demand is kind of normalizing or accelerating now that pricing has been in the market for a couple of months? Thanks..

Yeah. So I mean on bleach what we're seeing is that share has been strong. I mentioned earlier we've seen five quarters of share growth on the business. Expect that to ease up, so feeling good from that vantage point. I think as far as the category is concerned, our expectations are that that will be more flat going forward.

But feel good about the innovation program that we're putting in, feel good about the communication that we're putting in. One thing that we're doing is supplementing the very strong focus on Laundry with stronger communication around cleaning occasions.

One thing that we found is that heavy users in particular display a lot more usage around cleaning occasions on top of laundry, so we will focus on that part of the business.

So I would say bleach is steady as she goes and feel good about the prospects in the category with the one caveat that we'll cycle through the price increase and somewhat slower consumption over the next three quarters to four quarters..

Okay. Great. Thanks. And then also just on Green Works, I was surprised to see Green Works Laundry called out in the release. So my recollection was that you were kind of giving Green Works, the line, another go, but I thought it was more in the Household Cleaners and not so much in Laundry.

So maybe I need an update on what's been going on or not going on with the Green Works franchise..

sprays, toilet bowl cleaners and wipes. And those are performing okay. Green Works laundry was a distribution loss with one specific customer. It's non-strategic. It's a one-time event but it doesn't affect our plans on the remaining Green Works business going forward..

All right. Great. Thank you..

We'll hear next from Erin Lash from Morningstar..

Thank you for taking my question. I was hoping you could talk about the acquisition environment. I think there was a lot of talk at CAGNY in terms of the fact that acquisition premiums being demanded by sellers were too high. And I just wondered if that had changed, or if there's any I guess your interest in looking to acquire to, as a use of cash..

Yeah. Well, a couple of things. First of all, we certainly have plenty of dry powder to be able to do bolt-on acquisitions, as I mentioned earlier. So no concerns there. From an acquisition market, it continues to be, particularly in the U.S., a seller's market more than a buyer's market.

And I think you see that when you look at the multiples some of these businesses are trading at. All of that said, we do have a pipeline of ideas we're working against. We continue to be very interested in natural personal care and opportunities in that space. The whole idea of health and wellness is interesting.

We like U.S.-centric businesses because it allows us to hopefully pay for a deal on synergies with our U.S. business and then buy a growth upside. So I would say we stand ready to do acquisitions. We're continuing to work the pipeline. But I think these things take time and they're pretty difficult to predict.

Nonetheless, we think we'll be successful over the next couple of years..

Thank you for that. And just one follow-up. You mentioned that it is a seller's market.

In that light, and obviously several of your peers have been looking to kind of skew their brand portfolio, was that something that you've considered or are you happy with the brand mix as it stands?.

You might recall that over the last couple of years I think we have made some adjustments in the portfolio. We exited the auto business because we didn't like the trends of things like STP. We didn't think it was right for us as a company. Of course we more recently exited Venezuela as a way of adjusting the portfolio.

I think like other companies we do have small brands that are probably trapped in the portfolio. We're always looking at that to find out if we're the highest-value owner. Keep in mind, though, many of those businesses have been in the portfolio for decades. As a result, they have virtually no tax base.

So sometimes it's better to manage the business for cash over the long term and use that cash to invest for growth or return it back through the dividend back to our shareholders then to sell those businesses where you may have substantial tax leakage. Nonetheless, we continue to look at the portfolio on a regular basis..

Thank you. That's helpful..

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

Yeah. Thank you. Let me sum this up. I feel very good about our third quarter and year-to-date performance. I'm pleased that our strong year-to-date results allowed us to raise our sales outlook. And I believe our strategy and focus on accelerating profitable growth are the right ones to create long-term shareholder value.

So I look forward to speaking with you again on our next call in August when we will share our full-year results and provide our fiscal 2016 outlook. Thank you..

That does conclude today's teleconference. We thank you all for your participation..