Steven Austenfeld - The Clorox Co. Stephen M. Robb - The Clorox Co. Benno O. Dorer - The Clorox Co..

Wendy C. Nicholson - Citigroup Global Markets, Inc. (Broker) Stephen R. Powers - UBS Securities LLC Ali Dibadj - Sanford C. Bernstein & Co. LLC Lauren Rae Lieberman - Barclays Capital, Inc. Olivia Tong - Bank of America Merrill Lynch William Schmitz - Deutsche Bank Securities, Inc. Joseph Nicholas Altobello - Raymond James & Associates, Inc..

Good day, ladies and gentlemen, and welcome to the Clorox Company First Quarter Fiscal Year 2017 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, please, you maybe begin your conference..

Great. Thank you. Welcome, everyone, and thank you for joining Clorox's First Quarter Conference Call. On the call with me today are Benno Dorer, Clorox's Chairman and CEO, and Steve Robb, our Chief Financial Officer.

We're broadcasting this call over the Internet and a replay of the call will be available for seven days at our website, thecloroxcompany.com. Let me remind you that on today's call we will refer to certain non-GAAP financial measures including but not limited to free cash flow, EBIT margin, debt to EBITDA and economic profit.

Management believes that providing insights on these measures enables investors to better understand and analyze our ongoing results of operations.

Reconciliation with the most directly comparable financial measures, determined in accordance with GAAP, can be found in today's press release, this webcast's prepared remarks or supplemental information available in the financial results area of our website as well as in our filings with the SEC.

In particular, it may be helpful to refer to tables located at the end of today's earnings release. Please recognize that today's discussion contains forward-looking statements. Actual results or outcomes could differ materially from management's expectations and plans.

Please review our most recent 10-K filing with the SEC and our other SEC filings for a description of important factors that could cause results or outcomes to differ materially from management's expectations and plans. The company undertakes no obligation to publicly update or revise any forward-looking statements.

So with that said, turning to our prepared remarks, I'll cover highlights of our first quarter business performance by segment. Steve Robb will then address our financial results and our updated EPS outlook for fiscal year 2017. And then finally Benno will close with his perspective as well as open up the call for Q&A.

So let me start with our top-line results. As this quarter's results highlight, the investments we've been making behind innovation and marketing continue to drive top-line growth, as we saw 8% volume growth in the quarter and 4% sales growth.

And as we noted in August when we provided our initial financial outlook for fiscal year 2017, we plan to spend about 10% of sales in advertising and sales promotion this fiscal year, which is consistent with our spend level last year in fiscal year 2016.

It's also important to remember that this high level of support is consistent with our 2020 Strategy objective of spending more behind our brands. And as a result, in a number of our categories we benefit from a very high share of voice, meaning Clorox brands are often the only ones speaking to the consumer.

In addition, in the first quarter just ended we increased trade promotion spending at a double-digit rate versus the year-ago quarter, both to support defensive activities in a few key categories against some competitive brands but also in support of recent innovation.

As a result, as noted a moment ago, first quarter volume was up 8% and sales were up 4%, which included about two points of growth from our Renew Life acquisition, which closed in early May. Steve will talk in a moment to the specific drivers of sales growth. But big picture, it's worth noting that all of our U.S.

segments grew sales in the quarter, as did our international business, on a currency-neutral basis. And importantly, this quarter's 4% sales growth was on top of 3% growth in the year-ago quarter. Additionally, our currency-neutral sales growth this quarter, which was 6%, was on top of 6% currency-neutral growth in the prior year's first quarter.

So fundamentally, we feel our businesses are performing extremely well. Now turning to market shares, our U.S. 13-week share in tracked channels – and I want to emphasize that this is only in tracked channels – decreased two-tenths of a point versus the year-ago quarter, ending at 23.6%.

This modest share decline reflects continued competitive spending in a number of categories, including Brita, Glad and Cat Litter.

But it is important to note that the tracked channel data I just cited does not reflect the significant gains we have had in untracked channels, including Home Care in the club channel; online sales across our entire portfolio, but in particular Brita and Burt's Bees; continued growth in our Professional Products business; and the great results we've seen in Charcoal over the last few years in the home hardware channel.

Looking at category growth in the U.S., our categories were up about two-tenths of a point in the quarter, which is lower than our long-term planning assumption of 1% to 2% growth. In great part, we believe this is due to extensive promotions by competitors, which is restricting growth rates in some of our categories.

In response, we remain focused on investing to drive category growth through innovation supported by marketing investments and with the intention of driving trial and awareness. So with that, I'll review our first quarter results by segment.

Starting with our Cleaning segment, first quarter volume increased 13% and sales grew 7% behind higher shipments of Home Care and Professional Products. In Home Care, which is our largest U.S. business, sales increased double digits.

The gain was driven by growth in nearly all segments of our Home Care business, with Clorox-branded products performing particularly well as we continue to invest behind the total Clorox equity.

Clorox Disinfecting Wipes reflected record quarterly shipments, as volume was up double digits, and that was even beyond the recent club distribution gains we've discussed. Further, our toilet cleaning business also saw record volume. And broadly speaking, we saw great support by retailers behind back-to-school merchandising.

Consistent with these results, Home Care achieved healthy market share growth in the quarter and has now achieved more than nine quarters of market share gains. In Professional Products, we saw volume and sales growth across all segments of the business.

And as in our retail business, Clorox-branded products are performing particularly well in both the professional cleaning and the healthcare portions of the business. Turning to our Laundry business, sales declined in the quarter behind decreases on Clorox 2 Stain Remover & Color Booster.

However, our bleach market share did increase in the quarter behind gains on our regular and Splash-Less sodium hypochlorite products. Splash-Less, which is margin accretive to our overall bleach lineup, is performing well and is growing household penetration, which is a key objective across the company's portfolio.

This is a great example of leaning in on a margin-accretive product to drive profitable growth. Looking at our Household segment, we delivered 6% volume growth and 3% sales growth, in great part reflecting the benefit of the Renew Life acquisition.

Starting first with Cat Litter, first quarter volume and sales both increased behind merchandising activity and the new Fresh Step with Febreze innovation we launched earlier this calendar year.

And while competition in this category remains intense, we are pleased to have seen a second consecutive quarter of market share growth for the Scoopable Fresh Step franchise.

In Bags and Wraps, which is our Glad product line, volume was flat in the quarter, although sales did decline as we supported our brands with higher trade spending in an intensely competitive environment. However, even with this quarter's sales decline, there are some areas of the business that are performing well.

For example, we are continuing to see increases in our premium Glad OdorShield offerings. And as we've mentioned in the past, we continue to focus on driving profitable growth in the trash bag category. So we're pleased to see growth in this margin-accretive premium line.

Also, our premium food storage bags featuring Disney characters are doing extremely well and we are now extending beyond our initial offerings that featured characters from the popular movies Frozen and Cars to newly launched bags featuring Star Wars characters.

In the Charcoal business, sales declined but this was following a very strong fourth quarter in fiscal year 2016. Overall, the Charcoal team expects to build on its great run over the last several years, business remains fundamentally healthy and we look forward to the 2017 billing season.

And then lastly, results in the Household segment reflect the contribution of our newly acquired Renew Life digestive health business. For the quarter, it represented about 2% of total company sales but is also expected to grow very rapidly.

While still early, as we've only owned the business for about two quarters, Renew Life is on track with our expectations, integration is going extremely well, and we have already realized some of the distribution gains we anticipated when we bought the business. Turning to our Lifestyle segment, volume increased 1% and sales grew 2%.

Within the segment, starting with our food business, volume was flat, reflecting very strong performance a year ago when shipments grew at a high-single-digit rate. However, in the quarter sales did increase behind reduced spending compared with a very large promotional event in the year-ago quarter.

Positively, market shares on our food business continue to be strong behind all segments of our bottled and dry dressings and our dip business.

Turning to Burt's Bees, volume and sales grew largely due to innovation across our lip portfolio, including lipsticks, tinted lip balms and our new strawberry-flavored lip balm, as well as behind incremental merchandising which supported our strong base business performance.

We remain excited about our innovation plans for Burt's Bees as we look to continue to drive sales this holiday season, particularly behind lip balm and lip color. Turning to our Brita water-filtration business, while volume was flat sales were slightly down in the quarter due to slowing sales of our Brita bottle offerings.

Importantly, however, shipments of pour-through filters, which are really the core of our business, were up during the quarter as the brand continues to benefit from the great momentum we are building through our partnership with the reigning MVP of the NBA, Stephen Curry, of the Golden State Warriors.

Behind ongoing marketing, PR and future innovation, we continue to believe this business will improve over time. And then lastly, looking at our international business, volume for the quarter increased 4%.

From a sales standpoint, international was flat, which we believe is a really solid result recognizing the continuing negative foreign currency exchange rates.

Essentially, we were able to offset foreign currency headwinds through price increases as well as investments we made in certain markets, such as in Canada with the Renew Life business and our Burt's Bees business in Asia. Because of these actions, sales for international, excluding foreign currency, grew 10%.

In addition, we continue to execute our Go Lean strategy across our international business, focusing on margin enhancement, which we view to be particularly important, given our belief that foreign currency headwinds will continue through the fiscal year at roughly the current level.

So to wrap up, although just 90 days into the fiscal year we are very pleased with our top-line performance. Importantly, despite the continuing challenges of unfavorable foreign currency, our top-line expectations remain unchanged. We continue to anticipate sales growth of 2% to 4%, or 4% to 6% on a currency-neutral basis.

Now I'll turn it over to Steve Robb to provide more detail on our Q1 performance as well as our outlook for fiscal year 2017..

Thanks, Steve, and welcome, everyone. We're pleased to start the fiscal year with another strong quarter of volume and sales growth, supported by ongoing investments behind our brands. And importantly, I feel good that we're on track to deliver solid sales and earnings growth for the fiscal year.

Turning to our financial results for the first quarter, Q1 sales grew 4% on top of 3% growth in the year-ago quarter, reflecting nearly eight points of volume growth, including the benefit of the Renew Life acquisition, and more than one point of benefit due to pricing actions in our International segment.

These factors were partially offset by a combined impact of about three points from unfavorable mix and higher trade spending and about two points of negative foreign currencies. Gross margin for the quarter was lower than we anticipated, reflecting unfavorable mix, which came in a bit higher than expected.

Specifically, gross margin for the quarter came in at 44.4% from 45% in the year-ago quarter, when notably the company delivered 220 basis points of gross margin expansion. The 60 basis point decrease reflects 140 basis points of cost savings, 90 basis points of favorable commodity costs and 70 basis points of pricing in International.

Our gross margins also reflect 220 basis points of higher manufacturing and logistics costs, driven by inflationary pressures, and strategic investments to continue growing our brands and maintain our cost-savings pipeline.

For example, we closed our Chicago bleach manufacturing facility earlier this year as a part of our ongoing productivity efforts to optimize our supply chain. Other negative impacts on gross margin in the quarter included 60 basis points of unfavorable mix that I mentioned and about 50 basis points of negative currencies.

At 13.9% of sales, selling and administrative expenses increased about a half a point versus year ago and primarily due to the impact of the Renew Life acquisition and increased performance-based compensation costs.

For perspective, excluding the impact of Renew Life, selling and admin came in at 13.7% of sales, and we continue to anticipate fiscal year selling and administrative expenses to come in below 14% of sales. Advertising and sales promotion as a percentage of sales was essentially flat versus year ago, while our U.S.

retail spending came in at about 10% of sales, reflecting continued support behind our brands. Our effective tax rate for the quarter was 32% versus 34.5% in the year-ago quarter.

The decrease was driven mainly by a 2 percentage point benefit to the company's effective tax rate in the first quarter of fiscal 2017 from the adoption of a recently issued accounting standards update.

As previously communicated, the benefit realized from the adoption of ASU 2016-09 could vary significantly given the inherent uncertainty in predicting future share-based transactions.

And while this year's first quarter tax rate was lower than year ago, it was higher than we expected, as first quarter option exercises were well below those in the year-ago quarter and historical levels.

Net of all of these factors, we delivered diluted earnings per share from continuing operations of $1.36, an increase of 3% on top of a 20% increase in diluted earnings per share in the year-ago quarter. First quarter net cash provided by continuing operations was $170 million compared with $135 million in the year-ago period.

The year-over-year increase reflects higher tax payments in the year-ago period. Free cash flow, defined as net cash from continuing operations less capital expenditures – which came in at $59 million this quarter – was $111 million, or 7.7% of sales.

For the full fiscal year, we continue to estimate free cash flow as a percentage of sales in the range of 10% to 12%. Now turning to our fiscal year 2017 outlook, we continue to anticipate sales growth in the range of 2% to 4%, reflecting our unchanged assumptions for growth and continued investments in innovation.

Excluding the anticipated negative two-point impact from unfavorable foreign currencies, we continue to expect fiscal year 2017 sales to grow between 4% and 6%.

Turning to margin, we now anticipate gross margin to decrease modestly versus our previous assumption for gross margin to be about flat, reflecting firming commodity costs and somewhat greater pressure from unfavorable mix.

While we benefited from lower commodity costs in the quarter, as previously communicated we continue to anticipate commodity favorability to dissipate as we go through the fiscal year.

We continue to anticipate fiscal year EBIT margin expansion in the range of 25 basis points to 50 basis points, with growth expected to be seen later in the fiscal year from lower selling and administrative expenses, driven by ongoing productivity initiatives and more normalized levels of performance-based incentive compensation costs.

In addition, we will be lapping a number of items, including one-time integration costs related to Renew Life acquisition and distribution expansion of Clorox Disinfecting Wipes in the club channel. Now we'll turn to our fiscal year 2017 diluted earnings per share from continuing operations.

As noted in our press release, we now anticipate our effective year tax rate to be between 32% and 33%, reflecting a two-point reduction versus year ago from adopting the accounting standards update, compared to the previously anticipated four-point reduction.

As I just mentioned, there is an inherent uncertainty in predicting future share-based transactions and our updated outlook for the fiscal year effective tax rate reflects the lower-than-anticipated exercises of Clorox stock options in the first quarter and the company's revised outlook for the full-year stock option exercises.

Moving forward, we continue to anticipate more variability in our quarterly and annual tax rates as a result of adopting this updated standard.

Net of all of these factors, we now anticipate fiscal year 2017 diluted earnings per share from continuing operations to be in the range of $5.23 to $5.43, which reflects our updated assumption of $0.10 to $0.15 of benefit from the adoption of the accounting standards update versus the prior assumption of $0.25 to $0.30.

Importantly, excluding the impact of the updated accounting standard, we continue to anticipate fiscal year 2017 diluted earnings per share to be in the range of $5.13 to $5.28. In closing, we are pleased with our start to the fiscal year. We're growing sales on top of strong sales growth in the year-ago quarter.

And as we look to the remainder of the fiscal year, we'll continue to drive the following priorities. First, we'll stay the course in investing strongly behind our brands to drive our innovation programs and defend against competitive activity we are seeing in select categories.

Second, we plan to step up our productivity and cost-savings programs to support our margins in the U.S. and in international in light of ongoing inflationary pressures impacting manufacturing and logistics costs and our expectations for firming commodity costs. Finally, we remain committed to delivering value to our shareholders over time.

I am pleased with our near-term actions to support this commitment, including increasing capital expenditures in the first quarter behind growth and cost-savings opportunities. Importantly, despite these investments, we continue to believe that we'll deliver fiscal year free cash flow in the range of 10% to 12% of sales.

Bottom line, we'll continue to invest behind our brands, focus on the long-term margin expansion and deliver against our 2020 aspirations. And now I will turn it over to Benno..

Thank you, Steve, and hello, everyone. Here's what we hope you will take away from today's call. First, we are very pleased with the continued strong top-line growth, particularly in an environment where growth is so hard to come by.

The key focus for Clorox remains driving good growth – growth that's profitable, responsible and sustainable for the long term. Driving good growth is important because it means we're winning with the consumer. We're winning with the customer. We're running an operation that is effective and efficient, and we're creating shareholder value.

We've been keenly focused on doing just that through innovation, distribution expansion and incremental demand-building investments behind our brands. We have significantly increased our marketing support across digital, trade promotion and other marketing mediums to nurture our growth brands and drive our right to win.

And our strong Q1 growth on top of strong year-ago growth is the direct outcome of this deliberate and strategic approach. Second, in the midst of an intensely competitive environment we have momentum on our brands and we're staying the course.

In the U.S., our business is healthy and we intend to continue driving it by offering superior value to consumers supported with excellent retail execution, which is something that's a hallmark for us. Notably, and very consistent with our strategy, we are particularly pleased to have completed Q1 with more than two-thirds of U.S.

net customer sales growing household penetration. Increasing household penetration is a strong indicator of healthy business growth. In international, we're staying the course. We're stemming headwinds from foreign exchange and inflation with our Go Lean strategy.

We're taking a long-term view of the business to improve profitability while making select investments in key growth markets. And I feel very good about the future of our international business, recognizing the fundamental strength of our brands in many countries.

Finally, we are taking a long-term view to invest in growth that is profitable and sustainable and to continue to deliver strong ROIC and cash flow to create long-term value for our shareholders. Examples include that we are investing in value-added innovation and have a robust collection of launches teed up for the second half of this fiscal year.

We also remain focused on smart investments with solid ROIs, ensuring our demand-creation dollars work harder for us every year. We will continue our focus on productivity and cost savings to fund our investments, improve our margins and reduce selling and administrative expense.

And while only a few months in, we feel very good about our Renew Life acquisition and the opportunity we have to make a difference to the business through our 3D brand-building capabilities and through the brand scalability and distribution expansion potential. And with that, let's open it up for your questions, please..

Thank you, Mr. Dorer. Our first question comes from Wendy Nicholson of Citi..

Hi. Good afternoon. Could you talk about one of the comments you said at the beginning, Steve, was category growth was unhealthy, in your words I think, due to the higher level of promotional activity.

But can you talk about how that is driving volume or velocity, if you will, among those categories? Because I guess what I'm wondering is, number one, if oil prices are headed higher, what do you expect? Or have you started to see any changes in that competitive activity? But number two, do you think there has been pantry stocking on the part of consumers because there hasn't been so much promotional activity? Just if you could talk about that comment maybe a little bit more that would be great..

Yeah, Wendy, this is Benno. Just to put it in perspective, as Steve noted, category growth was somewhat lower over the last 13 weeks due to the promotional activity that we're seeing.

Recall that commodities were still somewhat of a tailwind for us this quarter and therefore it didn't surprise us to see promotional activity across several of our categories, in particular perhaps Glad Trash and the Disinfecting Wipes to be higher and depress that category growth somewhat.

We did not see any particular pantry stocking, so that's, again, I expect that this promotional activity is going to subside over time as we expect commodities costs to firm up later on in the fiscal year. And what Steve also did was to point towards the particularly strong growth that we've seen in non-tracked channels.

So again, this is an example where category growth in tracked channels really just tells part of the story of what's happened this quarter, given that we've seen such outsized growth on a number of our brands in non-tracked channels. And Steve mentioned some of those and they include but are not limited to Disinfecting Wipes, Brita, Burt's Bees.

So we're feeling good about the total top-line momentum that we have, as is evidenced by the strong volume and sales growth in the last quarter..

It just strikes me as strange that category growth is lower than you would expect because there is a higher level of promotional activity. In other words, the discounting or the price promotions are that high that it's not being compensated for by higher volumes.

That's just intuitively – usually, there's an acceleration in category growth when there's a lot of promotional activity..

Yeah, recall, Wendy, that a lot of our purchases in categories that were in routine purchases, so people are not necessarily buying more trash bags or buying more bleach just because it is on sale. What it therefore does do is keep volumes somewhat unchanged and depress the sales growth. And that's exactly what we've seen in tracked channels.

It also gives us certainly ammunition to continue the conversations that we have with retailers that price promotion, as we've noted to you and certainly to retailers in the past, don't really add value in our categories.

And that over time we expect the promotional spend in our categories to subside and our competitors to return to perhaps more rational behavior that drives our categories the right way, which is certainly something that we're focused on. And the right way means investing in our brand equities and investing in value-added innovation..

Fair enough. And then just the second follow-up question I had is on Burt's Bees specifically. Can you remind us, the Lifestyle segment has been a little bit volatile over the last couple of quarters. When are you lapping the launch of lipsticks? Because I know that was a big deal for that brand.

It's a small brand but still I think it was a big initiative. When are you launching that? And where are we in terms of how much more distribution is there for that product and brand extension, if you will? Thanks..

Lipsticks was launched in Q3 of fiscal year 2016, so take a little bit until that laps. But keep in mind that we are continuing to drive innovation on that business, and we certainly also have innovation planned for the back half of this fiscal year. Specific to your question on lipsticks, that continues to do very well.

As we speak, we have started to do TV advertising for this brand, and the early returns are really strong. And we expect that initiative to continue to grow in its year two and year three post its launch. We view cosmetics in general as a potential growth platform for the Burt's business, and we'll invest behind that.

And lipsticks in particular has been very well received by consumers but also by the press. Notably, we've gained two lipsticks of the year awards by two leading magazines, Cosmopolitan and Allure, and consumers really follow the recommendations that publications like those two make.

And we are feeling good about this launch and think that doing TV advertising as we're doing now is another down payment in the long-term success, not only of Burt's Bees cosmetics but the Burt's Bees franchise as a whole..

Terrific. Thank you..

And we'll take another question, and that comes from Stephen Powers from UBS..

Hey. Great.

First, you may have disclosed this somewhere and I just missed it, but on Renew Life can you just confirm that it was roughly a full contributor to both sales and volume in the quarter? And maybe in doing so highlight for us what volume growth was in Household excluding Renew Life?.

Yeah, so Renew Life contributed about two points to both volume and sales growth for the company as a whole. Turning to sales on Renew Life for the Household segment, it contributed about six points to sales growth for the Household segment..

Okay. Great. Thank you. And then pivoting to gross margins. You mentioned the negative mix and the commodity dynamics, but I wanted to focus also on the inflationary pressures impacting manufacturing and logistics.

Was there any timing factor there, or should we expect that drag to continue at an elevated rate? And separately, as you factor in competitive activity plus your own innovation pipeline, can you just frame a bit on the trade spending line over the balance of the year? It sounds from Benno's comments like perhaps we should expect it to remain elevated year-over-year in the nearer term and then perhaps tapering off towards the end of the year as you lap the investments of late 2016.

I just wanted to make sure that was a fair read..

Yes, so just starting with the trade spending, yes, we do plan to continue to invest in trade to kind of support the innovation, particularly our second-half innovation that we are pretty excited by. So those numbers will continue. Regarding manufacturing and logistics, in the first quarter it is was about a 220-point drag on gross margin.

Now, I would not have you project this forward for the full year because included in the 220 points, in addition to inflationary pressures in international and the U.S., which we do expect to continue, it also includes some one-time investments we are making behind our cost-savings programs and our growth initiatives.

And to be specific, that's about 60 basis points. And we are feeling good about the investments we are making. We think they're going to generate nice returns going forward, but I think that number is a bit elevated in the first quarter just because of these investments we're making..

Okay. That helps a lot. And then maybe just stepping back, Benno, you mentioned at the end of your prepared remarks the increases in household penetration that you realized in the quarter. I was hoping you could maybe pinpoint which businesses were most incremental there.

I'm assuming wipes, just given the growth that we saw, and Renew Life, given that it targets seemingly different customers in different channels from your core business.

But were there any other businesses to call out in terms of where you are reaching new consumers and new households?.

Yes. For clarification, what I said is more than two-thirds of our U.S. volume or our U.S. net customer sales grew household penetration. And it's really broad-based, Steve. Notably it does exclude Renew Life because we do not know what the household penetration was last quarter – last year, sorry.

But really, really broad-based with a skew towards our growth businesses, which is what you'd expect and also tells you that our portfolio momentum accelerator, which is to eventually invest in those businesses that have a stronger right to grow, is really paying off well.

But broad-based, certainly Disinfecting Wipes continues to grow household penetration, but I would point out that the Clorox brand as a whole is perhaps the shining star here and that is not limited to Disinfecting Wipes but also includes toilet bowl cleaners and sprays.

We have grown our Clorox brand into four million more households over the last year and that is really unique in an environment like this when so many brands in our categories competitively are struggling to gain new households.

So we feel good about our ability to connect with consumers based on innovation, based on the change in our marketing approach and the increased focus on digital and the investments that we are making in our brands with the particular focus also on offering superior value to consumers. So really broad-based and feeling good about that.

Broad-based, when I say that, maybe a last word, also does mean that it includes our fuel businesses.

As you know, we have differentiated the way we classify our portfolio into fuel and growth businesses and we've seen notable household penetration growth also in our fuel businesses, which tells you that also fuel businesses have a right to grow and we're certainly focused on growth in those businesses as well..

Thanks for that. Appreciate it..

And we'll go next to Ali Dibadj from Bernstein..

Hey, guys. So just to go back on a couple of things, top line and margins.

If you go back to excluding obviously currency but also Renew Life and then also the expansion of wipes into Costco, just to kind of level set, Q1 growth would've been in the kind of 2% to 3% range? And can you give me the analogous number relative to your fiscal year 2017 2% to 4% range? So excluding the Renew Life, which you do, currency.

which you do, but then also the Costco wipes expansion..

Let me try to answer your first quarter question and highlight what we had previously communicated. So Renew Life contributed about two points of sales growth for the company in the first quarter, which was offset, by the way, with about two points of foreign currency.

As it relates to Clorox Disinfecting Wipes, the incremental distribution at club, the net customer sales was less than a point. So nice contributor to the sales growth but certainly not the biggest contributor to the sales growth..

Okay. That's helpful. And then according to your always helpful retail pricing actions, I guess disclosure in the press release, it doesn't look like you've actually taken any U.S. pricing since like February 2015.

And a twist on the questions from earlier around trade spend, do you think you'll be able to take pricing up as input and manufacturing costs – granted, maybe less than we saw this quarter – but those kind of ramp up and then there's inflationary environment that's growing obviously in the commodities directly.

Do you think you're going to be able to take pricing up to offset that? Or do you think it's going to be more difficult going forward? And depending on your answer there, on the other side of the operating margin story is obviously the SG&A bucket, which has been great. Right now it's below 14% is the target.

How much more fuel is left on the tank there from a cutting-on-SG&A perspective?.

So, Ali, you've got a couple of questions in here. Let me see if I can take each in turn. First, starting with pricing. Our fiscal 2017 outlook, as we'd previously communicated and this remains unchanged, we are taking pricing but it's primarily in our international business where we're seeing higher rates of inflation.

And importantly, where we are taking the pricing, it's sticking in the market. I think longer term, we continue to believe we've got pricing power in our U.S. brand equities given the health of those brands and the investments we've been making.

If inflation does in fact ramp up over the long term, I don't think we're afraid to take pricing to protect our margins. But at this point, it certainly wouldn't be our preferred option. And let's get through the next couple of quarters and let's just see what happens with some of the inflationary pressures.

Regarding selling and administrative expenses, we continue to believe that will come in below 14% of sales this fiscal year, really being driven by a combination of our productivity programs as well as more normalized levels of incentive compensation. And most of that benefit you will likely see in the second half of this fiscal year.

So as we move through the fiscal year you should see that number come down. We've got plans in place to get that number well below 14% over the long term. So short answer is there's more runway there. It's going to take time, but we feel pretty confident in the plans we have there..

So – and this is helpful. And so to your former answer, which was on gross margin in particular, can you share your view on what we've been hearing, obviously, from retailers in the U.S.? So long-term commentary about more private label, clearly discussions about ALDI and Lidl coming to the U.S.

much more aggressively, they're 90% plus private label, and what the impact is on your business. It has an impact on everybody, but an impact on your business in particular, given some of the categories – granted not all – but some of your categories are playing in that area where you say yourself you're the only share of voice out there.

So does that shift that we expect over the longer term towards retailers that may be more focused on categories that are private label-prone like yours?.

Well, Ali, I'm going to take that. First of all, I think where we're going to see that shift remains to be seen, yeah? So I would certainly say that we're watching that, but we'll have to let this play out.

Again, I would point to our sales growth, right? So investing in our brands and investing in sales growth and making sure it's profitable is what it's about, and I think that's what we're doing particularly well.

And we're doing that in categories that reasonably are flat more recently, and we have shown that we can grow 8% volume and 6% in currency-neutral growth in an environment where growth is very hard to come by. And that's because our recipe continues to be to invest in our brands.

Our innovation is, as you know, margin-accretive, and we have a lot of innovation out there right now and particularly a robust innovation program in the back half. So for us, as we look at the pricing environment and the retail environment, it's frankly relatively stable.

And what retailers continue to want is growth, and they want growth the right way. And that's what we're delivering for them, which is why as you look at assortment, shelving, merchandising, in-store, we're winning the game with retailers right now. And we're investing for the long term to continue to do that..

Thanks very much for the perspective..

Our next question is from Lauren Lieberman from Barclays..

Great. Thanks. Hello. I was hoping to talk a little bit about Renew Life. You mentioned getting some early distribution wins.

What types of retailers those are in, if it's mainstream or still kind of more the natural type channel? And also, you made a point of discussing how much it contributes to this quarter's growth, but that it's growing very quickly. So should we assume that the contribution to total company sales growth actually grows through the year? Thanks..

Lauren, let me take the first part of that question. Again, as we've said, we think Renew Life will contribute about two points to sales growth for the full year, and it certainly did that in the first quarter. I think over the next couple of quarters you'll see something fairly consistent.

It is a nice-sized business, but it's not the largest business in the portfolio. So while it is growing nicely and it's very much on track, I'm not ready to say it will accelerate the growth rate in the short term. I think we need to get through the integration, start driving the distribution build-out, all of which we have plans to do..

And on your distribution question, Lauren, so the first objective we certainly have is to maintain and build on the strength that the brand has and enjoys in the natural channel, and we are doing that well.

And then the second opportunity is to make stores and food, drug, mass, so our traditional strongholds retailers, where as a company we have very strong capabilities and a strong track record of success. We are doing a nice job to expand distribution there and we are starting to see the benefits of that.

But by no means are we done with that, but we're certainly pleased with the progress. This business is doing exactly what we hoped it would do. We are starting with distribution expansion. As time goes by, we will then plug in our marketing and innovation machine and we are certainly looking very closely at the international business as well.

One example that Steve Austenfeld mentioned earlier was the really noteworthy growth we've had in the Canadian business and we think that there's a lot more to come. So this is a good acquisition for us that's on track and doing exactly what we hoped it would do for us..

Great. And then just one clarifying point on CapEx. I think, Steve Robb, you were clear in terms of manufacturing logistics, there are some one-time charges in there given that you're a GAAP reporter.

But is that also the case for CapEx, the elevated level had to do with some of these investments and plant closures and restructuring activity?.

Absolutely. The incremental CapEx we're making is really to drive both the growth in the business but also importantly to drive the cost-savings program.

And I think as we've said for many years, over the long term it will probably be very close to the level of depreciation and amortization, but we're not afraid to let that float up, either on the quarter or the full year if we see good investment opportunities, and this is exactly that. We let it float up on the quarter.

It's likely it will be a bit higher this year than we've seen in recent years, and that's a good thing. It just means that we are finding good opportunities to invest behind. So you will continue to see us lean in to keep the cost-savings pipeline healthy and keep the top-line profitable growth going..

Okay. Great. Thanks so much..

And moving on we will hear from Olivia Tong from Bank of America Merrill Lynch..

Great. Thanks. Just wanted to ask you about spending behind your brands. How nimble are you in terms of changing up the buckets of spending behind promotion and advertising? Because obviously you've kept your foot on the pedal on promotion, but ad spend was flat this quarter after a big increase in the second half of last year.

So maybe could you first talk about that? And then in addition to the nimbleness question, do you think you have a better sense on ROI on your spend and perhaps can you give some examples as it pertains to a few of those categories, maybe wipes in particular? Thanks..

Yes. So Olivia, the spend by quarter is certainly going to vary, so I wouldn't read too much into Q1. What we said is that for this fiscal year we think we have about the right spend and we expect advertising sales promotion to be in the 10% range, which is consistent with last year and certainly increased versus previous years.

So feeling good about the ROI that we are getting across all of the buckets and have a really disciplined process in place that allows our businesses to measure ROI across all buckets including digital on at least a once-a-quarter basis and then shift dollars around.

And again, the best way for me to perhaps look at ROIs and show that the ROIs are really solid is to go back to the growth that we are seeing in so many of our businesses, which has really been broad-based this last quarter across all U.S. segments and even in international.

So feeling good about the ROI that we are seeing and, again, as mentioned perhaps also the past, we leave it to the general managers to decide where they want to spend based on where they see the ROIs.

And that could mean that in the business like Burt's Bees we're investing in television because driving awareness behind initiatives like Burt's Bees lipsticks deliver strong return. On businesses like Cat Litter, we're investing in store to drive awareness behind the Fresh Step With Febreze innovation that's been working well for us in store.

And then some other businesses like Hidden Valley and perhaps Brita we're spending the dollars more online, including e-commerce, and we're seeing really solid results there. So feeling good about the ability to be nimble and flexible and shifting the dollars to where we're seeing the ROIs.

And again, I would point to the strong top-line growth as a proof point..

Got it. Got it. If we could dig a little bit more on the legacy Household business excluding Renew Life. It seems like Litter's getting a little bit better; Charcoal, the decline makes sense after the last couple of quarters. But it seems like we go back and forth on Glad a fair bit.

So I get that the premium end is doing well, but when do you consider sort of paring back or rationalizing some of the non-premium businesses?.

So if I look at Glad, the volume's been flat after really several quarters of solid growth.

And I'd also point to really a comp matter perhaps on that business because if you look at fiscal year 2016, the first quarter, we had a very strong quarter year ago with sales up mid-to-high single digits and profit up very significantly, very highly into the double digits. So I would look at perhaps the year-ago quarter as the main issue here.

I certainly expect better results in the coming quarters. As we've noted, competitive price promotions are depressing the category and perhaps also the share.

And what we're focused on is being balanced here, certainly responding in kind and we're not afraid to invest in the defense of our brands where we think that's the right thing to do to set a strong signal to competitors that we're not letting them steal share at our expense by spending and price promotions.

But we're staying balanced and we're staying focused on long-term profitable growth. So how you see that is that we certainly are accepting temporary share losses, in particular in the lower-profit and lower-price segment. The good news is, as Steve Austenfeld noted, the OdorShield premium segment is still growing.

We have strong innovation plans in place for the back half, and we expect the trade promotion activity to subside as commodities firm up over time in the back half. So if you look at this business over a longer period of time, perhaps the last 10 to 12 years, there have been these ups and downs, as you noted, Olivia.

But if you look at the long-term trends, they've been very favorable and positive, and we know how to deal with situations like these where commodities are lower and competitive spend is elevated.

But if history is a teacher, which we expect it to be, than this will subside and then our balanced and marketing and innovation-driven strategy will continue to succeed..

Got it. Thanks, Benno. Appreciate it..

We'll go next to Bill Schmitz from Deutsche Bank..

Hi, guys. Good morning. Hey.

Can you just drill a little bit more on this gross margin bridge for the year? So do you still expect gross margin to be roughly flat for the year? If you look at some of the puts and takes I guess, like the Argentina devaluation laps, so that probably helps the international business, but I was surprised that there wasn't more pressure from all that Costco volume because obviously Costco's a lower-margin customer.

So was sort of curious if that gross margin on that Costco business in the wipes is accretive to the fleet average. And then I have follow-up as well..

So Bill, couple of thoughts. So first of all, when we had originally come out with our outlook in August, we had thought gross margin would be about flat. As I said in my opening comments, we now anticipate gross margin will be down modestly on the year. Part of that reflects mix, which was a little bit less favorable than we had thought.

In the first quarter, it was more unfavorable than we had originally expected. But the biggest change has to do with our expectations for resin prices, which we think are firming up a little bit quicker than we had originally anticipated. So at this point we think gross margin will be down modestly.

It assumes commodity costs in total are about flat, so it will dissipate as we had thought. It assumes that we'll still have some drag associated with mix, which we've seen for some time. But importantly we feel very good about our cost savings.

And I would also say that at this point we have got solid plans in place to deliver EBIT margin expansion of 25 bps to 50 bps for the full year.

And I would also just point out over the long term, keep in mind we're coming off of some very strong gross margins over the last couple of years, but I feel very good about our plans to expand gross margins and total margins over the long term behind our cost-savings programs, also as we lower our S&A costs over time, and as we've talked we've got pricing power.

So we're comping a pretty tough number in the year-ago period at 220 basis points of gross margin expansion, but I think we're feeling pretty good about the plans we have in place both for the intermediate and long term..

Gotcha. So you're not going to touch the Costco question.

Can just tell me what e-commerce growth was in the quarter and what it is as a percentage of total sales now and if you've make targets on them?.

As a total percentage of sales, Bill, it's about three points, even though, as we've noted in the past, it's much higher than that on selected businesses like Burt's and Brita and also the Professional business.

We don't comment typically on specific growth rates on businesses like for any given quarter, but it continues to do very well as we invest and as we continue to win with customers, be it Amazon or be it Walmart.com or Staples.com. We continue to be bullish about this business.

As you know, we've been able to double the business over the last three years and we think we can at minimum do the same once again over the next three years and we are investing behind that..

Okay. Great. Thanks so much..

And will take a question from Joe Altobello from Raymond James..

Thank you. Hey, guys. Just a question in terms of promotion spending.

Just curious if you guys are seeing any discernible trend in spending between your tracked and your non-tracked channels?.

If you look at the non-tracked channels, it really varies category by category. Look, a lot of the non-tracked channels frankly tend to be less promotionally-driven, right? They tend to be more everyday low price, Joe.

So it's hard for me to quantify this in numbers, but off the top my head what I would say is that there's less price promotion in the non-tracked channels. Think about non-tracked channels, e-commerce, home hardware, club, tend to be more everyday low price-focused..

But in terms of the trend, that hasn't changed all in the last couple of quarters?.

To be very honest, I would have to look it up. It's a level of detail that I would need to look at. I mean, certainly I would expect that in channels where promotional spending happens that are non-tracked, I would think that we're seeing the same phenomenon in non-tracked channels as we are seeing in tracked channels.

It's hard for me to give you any highly qualified perspective on what specifically it was in those channels over the last quarter..

No, that's fine. If it's not on your radar screen, it's probably not a major trend shift, I would imagine. I guess in terms of the wipes business, obviously you guys have taken some significant shelf space from a major competitor. I imagine that they are not taking that lying down.

Have you seen them step up spending obviously beyond what you've talked about this morning but more so looking for gaining shelf space outside of the club channel?.

We've noted earlier, Joe, that Disinfecting Wipes is one of the businesses where we have seen more competitive price promotions.

I will tell you, though, that this is a business where we are continuing to win in club and beyond and the best way to express that is in the strong share growth that we've seen in the category over the last quarter and the double-digit sales growth that we've seen even beyond the specific club retailer that you alluded to.

So we are winning because we are investing in gaining household penetration, which is working well. We're investing in marketing dollars and we are by far the leading investor in brand equity type of channels in this category.

And we continue to invest in innovation, which has been very successful, in particular Clorox Disinfecting Wipes with Micro-Scrubbers continues to do very well and keeps growing. So it's a fortress of ours, and we're defending the fortress and we're growing it. And we're winning in the marketplace in club and beyond..

Okay. Great. Thank you, guys..

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

Yeah, thank you. In closing, we're very pleased that our investments continue to drive momentum and growth in the first quarter on top of the strong growth we enjoyed a year ago. We remain confident in our strategy and the health of our core business, and we remain focused on making investment choices that are right for the long term.

Thank you all for joining us today..

And that does conclude our conference call today. Thank you all for your participation..