The Clorox Company (CLX) Q2 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to The Clorox Company Second Quarter Fiscal Year 2019 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. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Ms. Lisah Burhan, Vice President of Investor Relations for The Clorox Company. Ms. Burhan, you may begin your conference.

Thanks, Sharon and welcome, everyone. On the call with me today are Benno Dorer, our Chairman and CEO; and Kevin Jacobsen, our CFO. We're broadcasting this call over the Internet, and a replay of the call will be available for seven days at our Web site, thecloroxcompany.com. On today's call, we'll refer to certain non-GAAP financial measures, including, but not limited to, free cash flow, EBIT margin, debt to EBITDA and economic profit. Management believes that providing insights on these measures enable investors to better understand and analyze our ongoing results of operations. Reconciliations with the most directly comparable financial measures determined in accordance with GAAP can be found in today's press release, this webcast's prepared remarks or supplemental information available on our Web site, as well as in our SEC filings. In particular, it may be helpful to refer to tables located at the end of today's earnings release. Please also recognize that today's discussion contains forward-looking statements. Actual results or outcomes could differ materially from management's expectations and plans. I would direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to the tax legislation. Please review our most recent 10-K filing with the SEC and our other SEC filings for a description of important factors that could cause results or outcome to differ materially from management's expectations and plans. The company undertakes no obligation to publicly update or revise any forward-looking statements. I'll start by covering our Q2 top line performance discussing highlights in each one of our segments. Kevin will then address our financial results and outlook. Finally, we'll turn over to Benno to offer his perspective and then close with Q&A. For the total company, Q2 sales grew 4%, reflecting about 3 points of unfavorable foreign currency impact due mainly to the devaluation of the Argentine peso and about four points of benefit from the Nutranext acquisition. I will now go through our result by segment. In our cleaning segment, Q2 sales grew 6% behind strong results in all three business units. Cleaning segment sales growth was once again lead by homecare, benefiting from strong innovation across the portfolio, including the new products on Clorox Scentiva platform. We recently launched Clorox Scentiva disinfecting wet muffing cloths marking the entry of the Scentiva platform into this category. That will be the first branded muffing cloth to provide disinfecting benefits along with the Clorox cleaning efficacy and Scentiva sensorial experience consumers have come to love. Homecare is also a business where we have taken pricing across a substantial part of the portfolio. Pricing actions are progressing according to plan with market shares growing in key categories where we had increased prices last quarter. We continue to support this business with meaningful investments in advertising and sales promotion, with strong ROIs that have doubled since 2016, driven by the scale and quality of our digital marketing. Our laundry business also grew sales strongly in the quarter with higher shipments of Clorox liquid bleach. Just as in homecare, implementation of price increases is going well. While competition has not followed our pricing actions as anticipated, total liquid bleach share was up nearly 1 point in the last 13 weeks in tracked channels. This is only possible because we invest strongly in our brands and the benefit of our recent price increase will allow us to continue doing so and drive long-term category health. Lastly, within the cleaning segment, our professional products business grew sales, supported by broad-based double-digit volume growth. We continue to bring Clorox strength and innovation and brand building into this space and recently re-launched our offering as Clorox pro, a new mega brand encompassing both the business industry different healthcare products and commercial cleaning products, positioning it for continued momentum and to drive scale. Turning to the household segment. Q2 sales decreased 4%, reflecting the clients in glad, Charcoal and RenewLife, partially offset by gains in Cat Litter. Charcoal sales decreased in the second quarter, primarily due to a shift in the timing of shipments from Q2 to Q3 in support of an early season customer program, as well as continued lower consumption. As a remainder, Q2 is a relatively small quarter for this business, representing less than 10% of annual shipments. Our focus now is on implementing the aggressive plans we introduced in last quarter for the 2019 grilling season. Those plans, which are well underway into stepping up our brand building programs to reenergize existing consumers, as well as bring new consumers into the category. We’re also making significant packaging upgrades that include new sizes and strong claims. On the innovation front, we will be launching 100% hardwood briquettes to address some consumers' preferences for different grilling methods. And will be focused on partnering with our retailers to aggressively merchandize Kingsford, including extending the grilling seasons, which has worked so well in driving of the growth for so many years. In conjunction with these plans, we begin rolling out a cost justified price increase in December. We remain confident that these steps will help raise the overall value for the category, allowing us to reinvest in brand building, including innovation that will maintain the superior value of the Kingsford brand. In Glad bags and wraps, sales declined mainly as a result of lower shipments of food storage products, as well as lower shipments of trash bags due to an increased price gap compared to our competitors who did not follow our recent price increase. As you know, we're deeply committed to deliver in superior consumer value. Our back half plans include promotional activities aimed at defending our share position. Longer-term, we're confident that we can drive profitable growth in this business, as we have a successful track record of trading consumers up to our premium patent and trademark protected innovations, which remain our strongest competitive advantage. Our latest initiatives include leveraging our intellectual property, such as lip guard and ForceFlex Plus to support stronger claims and developing more effective advertising. In RenewLife, sales were down driven mainly by an overall category decline. That said, we continue to make progress in this business as we saw share growth in Q2 with largest national retailer in the Natural Channel for this first time in two years, any e-commerce the fastest growing channel where we had double-digit volume growth in Q2. We're also encouraged by early results of our initiatives to at scale by co-merchandizing Nutranext with RenewLife brands, which has already began to yield a significant lift in sales during merchandizing events. With our plans to continue leaning into e-commerce and innovation, as well as re-launch packaging featuring stronger claims, we'll keep driving this business and rebuilding momentum. A continued bright spot within household segment, our Cat Litter business had another strong quarter of double-digit sales growth supported by Fresh Step Clean Paws innovation, strong e-commerce growth and the benefit of price increases, which are now also reflected in all major competitive products. With additional Clean Paws innovation being introduced in the back half of the fiscal year, including unscented and a Mediterranean lavender scent, we're confident about the growth trajectory of this business. In our Lifestyle segment, we grew sales in every single business. Segment sales grew 25% in Q2, mainly reflecting the Nutranext acquisition, which added about 21 points of benefit. Integration is going well with our flagship brands recently gaining national distribution at several major retailers, reflecting the difference that our customer capabilities are starting to make. We're also turning on the innovation machine, fee wheeling growth with this business with a steady stream of new products in the back half. The Burt's Bees business saw strong sales growth with another quarter of double-digit shipments in lip care behind strong consumption, as well as innovation such as Burt's Bees conditioning lip scrub and Burt's Bees over night lip mask and continued strength in face care. This is in line with our strategy to drive profitable growth through a focus on our core segments. We told you last quarter. We're taking a cost specified price increase in the portion of the Burt's Bees portfolio effective this month. Selling is generally on track with our expectation with new pricing expected to be in effect at major retailers starting today. Food sales grew strongly in Q2, mainly behind shipments of hidden valley ranch dry dressings despite price increases implemented last quarter. We are continuing to build on the Hidden Valley ranch equity, which grew share for a 16th consecutive quarter. One of the ways we are doing that is through innovation that is on trend, capitalizing on consumer interest in Hidden Valley for uses other than salad dressing. In fact, over two thirds of bottle occasions are for these alternative uses, as tipping sauce, topping or spread. Now based on this insight, we will be introducing a ready to eat dip in the back half, supported by strong brand building investments. With this product, we are looking to play in the new segment with stronger tailwinds compared to the dressing category. Finally, within the lifestyle segment, Brita had its third consecutive quarter of solid sales growth with the stream pitcher and filter innovations continuing to perform well and our market share is starting to improve. We are optimistic about building on that success in the back of the fiscal year. We've recently introduced our new Brita premium filtering water bottles, which are now available in e-commerce channels. While it's early, we are excited to see that they are already generating great reviews. Finally, turning to our international segment. Sales decreased 8% as the benefit of price increases was more than offset by about 16 points of unfavorable foreign currency impact. Strong Go Lean strategy executions, including pricing and cost savings initiatives, provided a significant offset to the considerable FX headwinds. In particular, our Burt's Bees international business had a strong quarter with double digits volume growth and strong performance generally across the board. Now, I'll turn it over to Kevin who will discuss our second quarter financial performance and outlook for FY'19.

Thank you, Lisah and thank you everyone for joining us today. We are pleased to deliver another quarter of strong sales growth and return to gross margin expansion. Importantly, we remain on track to deliver our fiscal year 2019 outlook. I will address that in a moment. Turning to our financial results for the second quarter. Sales grew 4%, which included 4 points of benefit from Nutranext acquisition, partially offset by 3 point of negative impact from foreign currencies. Gross margin for the quarter came in at 43.7%, an increase of 70 basis point compared to 43% in year ago quarter. Second quarter gross margin included the benefits of 220 basis points from pricing and 140 basis points from cost savings, partially offset by 190 basis points of higher manufacturing and logistics costs and 120 basis points of unfavorable commodity costs. I would like to note that a little more than half of the expansion in our second quarter gross margin was driven by a shift in spending in our supply chain, which we expect to reverse out in the second half of the fiscal year. Selling, administrative expenses as a percentage of sales came in at 14.3% versus 13.9% in the year ago quarter, reflecting Nutranext integration expenses. Advertising and sales promotion investment levels as a percentage of sales came in at about 10%. We are spending for U.S. retail business at a healthy 11%. Our second quarter effective tax rate came in at about 19% versus about minus 3% in the year ago quarter when we benefited from a significant one-time reduction in our tax rate as a result of U.S. tax reform. Net of all these factors in our second quarter, we delivered diluted net earnings per share from continuing operations of $1.40 versus a $1.77 in the year ago quarter, a 21% decrease due to lapping a one-time $0.40 benefit from U.S. tax reform in the year ago quarter. Turning to year-to-date cash flow. As we noted in our press release, net cash provided by continuing operations increased 39% to $449 million, primarily from lower tax payments as a result of U.S. tax reform. Turning to our full fiscal year, we are pleased to confirm our sales and earnings outlook. Our fiscal year sales outlook continues to be in the range of 2% to 4%, now reflecting about 3 points of negative impact from unfavorable currencies. As I mentioned last quarter, we anticipated more pronounced currency headwinds, primarily from the devaluation of the Argentine peso. Our sales outlook also now includes about three points of net benefit from the Nutranext acquisition, which is running slightly ahead of plan and the Aplicare divestiture. And as we mentioned in our press release, our fiscal sales outlook continues to assume about 3 points of incremental sales from our innovation program. We have a robust pipeline of new products in the second half of the fiscal year, which we plan to support with strong demand building investments to drive awareness and trial. Turning to fiscal year gross margin, we continue to expect fiscal year gross margin to be about flat as the benefits of pricing and cost savings are expected to be offset by increased cost and currency pressures. We remain on track to deliver gross margin expansion in the second half of the fiscal year, although at a more muted rate given the shift in supply-chain spending to the back half. Other assumptions that are unchanged in our fiscal year 2019 outlook, include fiscal year advertising and sales promotion spending at about 10% of sales, selling and administrative expenses at about 14% of sales and EBIT margin to be down, reflecting our expectations for flat gross margin, as well as our plans to complete the Nutranext integration and invest strongly in advertising to support our strong back half innovation plans. And finally, free cash flow of about 11 to 13% of sales. As we mentioned in our press release, our assumptions for our fiscal year tax rate did change and is now expected to be in the range of 22% to 23%. Net of all these factors, we continue to expect fiscal year diluted EPS to be in the range of 6.20 to 6.40, reflecting our estimate of $0.08 to $0.12 of EPS dilution from the Nutranext acquisition in addition to $0.05 to $0.07 of negative impact from tariffs, which are affecting a couple of our business units. In closing, we are very pleased with our second quarter performance and our overall first half results. Strong execution of our strategic plans from pricing to agile initiatives is helping us address continued cost and foreign exchange pressures. With our pricing actions largely behind us consistent with our 2020 strategy we can now shift our focus to investing in demand creation, including our strong innovation programs to sustain our core business and deliver long-term shareholder value. And with that, I'll turn over Benno.

Thanks Kevin, and thanks everyone for being on the call. Let me share my three key messages for you today. First, I’m pleased with our first half results with the second quarter delivering strong sales growth and a return to gross margin expansion. Our sales increase to 4% is especially strong considering we absorbed about 3 points of unfavorable foreign currencies, primarily from the devaluation of the Argentine peso in the last fiscal year. Clorox continues to sustain top line momentum, demonstrating our ongoing ability to win with consumers. We are differentiating our products and brands through innovation, investing strongly in ROI based marketing communications and leveraging our strength in e-commerce, which we continue to expect to grow strongly and be about 8% of company sales for fiscal year. The Nutranex acquisition also contributed strongly to total company sales and continues to be accretive to the company's gross margin. Integration remains on track and we're pleased about expanded national distribution at several major retailers. I’m also very pleased that we expanded gross margin in the second quarter as rebuilding our margins is an ongoing priority and our focus on good growth, growth that is profitable, sustainable and responsible. My second point is that Clorox continues to execute strongly against our strategic priorities. As you know, Clorox leaned into pricing early to address increased cost pressures. As Kevin noted, we have now completed most of our pricing actions, which have been executed with excellence and with our pricing actions mostly behind us, we can focus on growing our categories and brands that are long-term. We will invest strongly in marketing communications to maximize innovation platforms and drive awareness and trial of new products across our portfolio in the second half of the fiscal year. Importantly, last quarter I said we would leave no stone unturned in our focus to rebuild margin and we did deliver. Clorox people stepped up to drive margin accretive innovation, execute our pricing plans and lean into our agile initiatives for cost savings. Finally, my last point is that we remain confident in having the right strategy to drive long-term shareholder value. Our 2020 strategy has been the bedrock of our focus on long-term profitable growth. Clorox has continued to deliver strong growth and shareholder returns in an environment where growth is hard to come by because of our relentless emphasis on strategic clarity supported by agile decision-making and strong execution. And while we are still closing out the current strategy, we also have our sight set on the future. As we finalize the successor to our 2020 strategy, I can tell you we will continue to lean into critical areas. First, serving our consumers and delivering superior value will continue to underpin everything we do. Innovation continues to be our lifeblood and sets us apart. We will continue to lean more deeply into our proven innovation capabilities to win in the marketplace, particularly in a dynamic omni-channel retail environments. Second, transforming how we work to be an even more agile, decisive organization that executes with excellence and leverages technology to drive competitive advantage will be critical to supporting a culture focus on growth. And finally, as a mission driven business, we will continue to focus on good growth, creating long-term value for all our stakeholders by living our values and ensuring corporate responsibility is embedded in our business. We look forward to introducing our updated strategy to you in early October. to you in early October. Thank you. Operator you may now open up the line for questions.

[Operator Instructions] Our first question comes from Steve Powers with Deutsche Bank.

So I guess just to start. Obviously, you had a strong quarter and there's the lower tax rate in the full year guide. And I get that there's were seeing effects, but you've also got strong pricing and incremental contributions from Nutranext. So, I guess just within the outlook. What's the negative offset in the back half that's not allowing a full-year guidance raise at least at the low-end? And I guess within that, is it the increased promotion that you've called out today in household care that's disallowing that upside from flown through?

What I would say, as you mentioned, tax rates a little bit better. I wouldn’t read too much into that. I'd view that more as a minor tune-up. At the end of last quarter, I anticipated we'd be slightly above 23%. I think we'll now be below 23%. So I've tightened up that range. And then I'll say that as we mentioned in our prepared remarks, we do think the FX environment is a little bit worse, particularly in Argentina. And so I think within our range, those are both fairly offsetting and it allows us to maintain our outlook for the year.

And I guess just given the -- I mean, I think the topic that's on a lot of folks' minds, just given the oil prices as a benchmark, for example, are back to where they were in the fall of '17 when the inflation headwinds that are just defining current price increases started. Is there a concern that what you're seeing in household care is specifically in bags and wraps with competitors not following. But we're seeing it a little bit in charcoal and other places as well. Is that a bellwether for other categories that you may have to promote back some of this recent price increases going forward more broadly? How does that factor into your thinking?

As it relates to commodities and specifically oil, I would say for us because we primarily source resin from the U.S., it's much more driven by supply and demand and driven by nat gas than oil. And so I would say as we talk maybe broadly about pricing, as both Ben and I mentioned in our prepared remarks, we feel very good in aggregate about our ability to execute pricing and how it's playing out in the marketplace. The one exception that I would say is on our bags and wraps business. And what I'd tell you is when we start our planning back in May, June, we had a certain expectation for the resin market. Sitting here today I would tell you, while resin is still going to be inflationary, we are seeing softening-up in international demand. And my expectation now is we will not see the same level of resin increase that we anticipated when we took the pricing. And so specific to the Glad business, I think we will spend some money back to defend share in the near-term on the Glad business specifically. But what I'd tell you is that's something we know how to do. We've done it quite often specifically on Glad. We used trade spending managed resin prices. I would say broadly everything else in commodity is playing out as we expected. And then I would say that's true for pricing, as well with the exception of Glad I think we will do some work there. Important to note though, because we will spend a little bit more money back on Glad, we're also seeing a slightly less commodity headwinds that will fund that. So we're no worse off as it relate to margin and profit, but something we will do in the back of the year.

I just wanted, maybe one quick clean up, just the inventory level exiting December, it is more elevated than we've seen in a while just measured in days. How much of that is you building inventory ahead of new product launches in the second half given the strong innovation pipeline versus maybe being less with excess inventory in some of those household categories. It didn’t see as much sell through in December. Just trying to get underneath that inventory spike for lack of a better word?

So if you look at our attachment, you can see our inventory levels, they were 53 days at the end of Q2 they are 59 days now. We're up a little bit. I would say the bulk of that is Nutranext. Keep in mind Q2 last year Nutranext not one of our portfolio. So that’s the bulk of the increase in inventory. And then because we have such a strong innovation pipeline in the back half of this year, we did pre-build in preparation for launching in innovation, so that explains a bulk of the rest of it.

Your next question comes from Bonnie Herzog with Wells Fargo.

I just had a couple of questions on your Charcoal business. First, could you guys quantify the amount of the shift you saw in Charcoal, maybe from Q2 that you are expecting to move into Q3? And then did the change in timing of this shipments impact your gross margin in Q2? Or do you guys expect it to maybe impact gross margins in Q3?

Bonnie, what I would say is the bulk of the movement in Charcoal is based on just the timing of the shipment. Keep in mind shipping between December and January that moves all the time. We're shipping and preparation for early-season merchandising. So we anticipated going December, it actually is going to in January, but for the year that creates no impact to the results. And then the second question was beyond timing of shipments?

Just trying to get a sense of how much of an impact that could be on gross margins just some of this timing in your shipments for that business?

Yes, it won't have much impact on margin. Charcoal is pretty close to the company average. So I wouldn’t expect to see much change in margin as it shifts between quarters.

And then could you guys talk a little bit further about some of the innovation that you bring into the market place. Just in terms of what we're seeing with the slowdown in trends and how you expect some of this innovation to resonate better than maybe some of your existing product?

Keep in mind that what you're seeing in tracked channels less and less reflects what we are seeing on a total business right. So I would take what you categorize as a slowdown with a grain of salt. But we are very excited about very strong innovation plan in the back half across all or most of our portfolio with notable innovations across the major brands. Lisah has mentioned a few of them, Scentiva as a platform in homecare. Our largest SBU continues to do extremely well. And we're launching a very differentiated product in the wet mopping cloth category that’s a big category. And we will launch the first available product that combines the Clorox cleaning performance that people love with disinfecting, which is not available in this category today, but also the sensorial experience that Scentiva delivers and that’s an innovation into a new space for our oldest brand that we are excited about. So we are excited about Glad where we are expanding the latest technologies platform, which is backed up by about 40 patents across the portfolio and that of course is very timely on Glad. We're launching 100% hardwood briquettes on charcoal. We're starting to launch innovation across Nutranext brands. And we will continue to expand the clean paws platform on litter. And then last but not least super excited about food where we're launching into ready to eat dips, that's a category that's almost $2 billion in size and about the same size as salad dressing, so we're essentially doubling the access of the Hidden Valley brand, which continues to do extremely well, 16 quarters of share growth. And you three quarters of all the uses that we see on the Hidden Valley today are outside salad dressings. People use it on pizza, use it on chicken wings, or with healthy snacks and veggies. And the ready to eat dips are great premium products that's going to make that easy and that we're very excited about, both in terms of customer reaction as well as early consumption in market. So we have long said that in the back half, we will return to investing strongly behind innovations, and that's why it was very important for us also to do pricing early. Because as Kevin noted, in particular it's now largely behind us and we have an organization that will now focus on growing our brands and growing categories for retailers and doing that behind a really strong set of innovations and aggressive spending. So feel good about where we are and that's a big part of why we're sitting here today and able to confirm our outlook both in terms of sales and earnings.

And then just one clarification on timing. It seems like what you just discussed, a lot of it will be back half weighted. But I get the sense that Q3, there'll be a fair amount of stepped up advertising and certainly promo support, just in terms of trying to drive trials. So maybe a little bit more of a drag on Q3 than what you're expecting in Q4? Maybe first question and then second, I think you mentioned this but a huge opportunity for you guys could be with this innovation, is also for you to privatize or drive trade-up within some of your different categories?

Maybe the last one first, Bonnie. Trade-ups hallmark of our company and we believe that consumers continue to be willing to reward us and pay for innovation that they see as value and the bulk of this innovation is in the premium segment, the bulk of this innovation also is margin accretive to us as a company, which is part of why we feel bullish about gross margin in the back half. So we continue to do a nice job to stay value focused, but capture value at the premium and through innovation. So that observation is certainly true. And then in terms of you know quarterly spend, I wouldn’t necessarily conclude that. The reality is that because of retail of shelf set timings and also because of our increasing focus to drive these innovation platforms with an eye on the long-term and not just in one quarter. You will see a strong spend for us across the back half, across both quarters. And I'm not in a position right now to predict whether one quarter is stronger than the other, but you'll see healthy spend for Q3 and Q4.

Your next question comes from Jason English of Goldman Sachs. Your line is open.

A couple questions, first I'm trying to get a better understanding of the price contribution this quarter versus the last quarter. We can clearly do some math on back half volume to try to get to organic price mix. On that math it suggests that price mix was about 200 basis points in the first quarter and again in the second. But clearly, the flow through to gross margin stepped materially in the second quarter. Is it fair to assume that the reason for is that absolute price grew substantially from 1Q to 2Q, and that there was a healthy mix benefit in the first quarter that stayed in the second. So is that thought process reasonable? And second if so, what drove the spike in the mix benefit in the first quarter that fed in the second?

As it relates to price mix, here's what I'd tell you. We actually don’t spend a lot of time talking by price mix, because I think that really only represents about half of the impact we take pricing. And so you take pricing, there is really two implications. One, you generate more revenue per case. But with elasticities in the near term as consumers adjust to the price, you expect to see some volume pull back. Our history has been and what we expect for this round of pricing is when you look at both of those issues together, there's very little impact to the top line from pricing. One essentially offset the other in the year you take pricing. And I would tell you us, that's pretty much how it's playing out through the first six months and frankly how I'd expect it to play out for the balance of the year. But as you know that's not why we're taking pricing. We're taking it because we’re trying to address the cost and currency headwind that we have to face and allow us to continue investment in the brands. And so that's really the primary reason we’re taking it. As it relates to the impact you’re seeing, what I would say is you look at Q1, we got about 90 bps of gross margin accretion from pricing. And then this quarter, we got about 220. The reason why that improved is if you recall in Q1, really only Cat Litter was the only brand that had pricing in place for the entire quarter. We started taking additional pricing in August and September across the bulk of the portfolio, and that's really why you see the greater impact to margin in Q2. And then what I'd expect going forward keep in mind, we've taken a price increase in charcoal and a portion of Burt's Bees are not in these results. So I would expect some continued strength in the back half of the year from pricing as it relates to gross margin as you fully reflect the benefits of those two additional pricing actions.

So mix contribution to sales didn’t change between the first and second quarter?

No, Jason. What I'd tell you is as it relates to pricing. Pricing is generating very little benefit to revenue. And we're really getting the benefits. If you look as an example in Q2, 4 points from Nutranext and 3 points of revenue growth from our base business primarily focused on innovation, that’s really what's driving the top line, it's not pricing.

I will another question then. On the U.S. business in aggregate, organic sales decelerated from the first quarter despite a substantially easier comparison. I you we walked through a few puts and takes at the individual segment level. But high-level, can you give us some of the key drivers of what drove the deceleration, particularly to your stack basis?

I don’t see that same data, Jason. Our base business grew about 3%, both Q1 and Q2. So I’m not sure what you are looking at, but that’s not the perspective we have on the performance of the business.

Okay, it was just -- it's from your part of results. But I will follow up with these offline. Thank you.

Your next question comes from Steve Strycula of UBS.

I was curious for the renewal life in charcoal business, sounds like you have some initiatives underway for the back half of the year. Do you think that those businesses can grow, particularly charcoal as you put through some pricing, get the shipment benefit and then you lap easy weather? That will be my first question, and then I have a follow up.

First of all, today, no major news versus the November update that we gave, because our improvements are really focused on the 2019 calendar year grilling season. So Q2 is clearly is somewhat soft, Kevin explained it primarily due a shift in timing as is related to an early-season customer program. Keep in mind that Q2 is really small with less than 10% of fiscal year shipments. I would say that we would expect the rest of this fiscal year to be better clearly than Q2, albeit it's probably not all of the way to where we wanted to be. Pricing will help. Significant packaging upgrade will help. The 100% hardwood briquettes launch in the back half will help. Better retailer merchandising will help. And then there is the weather components, which I find hard to predict. But last year, clearly, wasn't a great year. But I would say that's plus pricing should enable us to do better for the rest of the fiscal year. And then my hope would be that as we think about the total 2019 calendar year relative to 2018 that we should see a market improvement on that business as a result of all of this activity that I was just describing.

And then a follow-up question for Kevin to Steve Powers' question on inventories. On a year-over-year basis, you were up $85 million and the RenewLife business, my understanding is it's about $200 million business. So I'm just trying to understand that seems like a big contribution the year-over-year build of inventory. Is there anything else from an inventory shipment perspective that we should think about or finished goods that are ready to come into market in the third and fourth quarter for to support and innovation?

Steve, I'd say a few things. One, it is primarily Nutranext, as I've mentioned. And as you could imagine, it's a fairly new business that we've owned less than a year. There's some real opportunities for us to rationalize inventory, so that we see that as an opportunity going forward. And then also we do have some innovation coming on Nutranext. So there is some pre-build as well as we're preparing to launch some new products on that business.

Your next question comes from Andrea Teixeira with JPMorgan. Your line is open.

So do you expect the household sales staying flat positively in the Q3? And I'm saying that because you called out some shelf space losses. So I'm wondering if you can reverse within this fiscal year with innovation and new displays. Or that's something that you're still going to be looking to use promotional dollars to reignite? Thank you.

I mean without providing specific outlook for quarters and segments, which as you know Andrea, we would not want to do. Kingsford, we certainly would hope that the quarter relative to year ago is going to be better and what we talked about for Glad, and those are really the two big businesses that impacted Q2 sales negatively and household in frankly an environment where now we're talking those two businesses. But I would note that the rest of the businesses of course did very, very well. But I'm Glad we're starting to spend back some of the pricing goodness and promotions, and we should see that at minimum stabilize and ideally start to improve the trends that we're seeing. Again, not unusual to see these trends in a year where you take pricing in particular when resin costs now go the other way, and we're not seeing competition follow. So that's noise in the market that we've seen before and that's noise that we've also managed before. But I would expect Q3 to see improvements on both businesses, yes.

Next question comes from Kevin Grundy of Jefferies.

I would like to come back to medical, gross margin commentary. So last quarter, the comment was you didn’t expect to see improvement to the back half of the year and your comment was also some of this was timing and supply chain spending, which I think the comment was it drove half of it. The gross margins were still up in the quarter. So a little bit better seemingly than what you had planned. So if you could drill down a little bit on that? What was driving some of that? Is this just lower commodities? And then with respect to how this informs the view for year. It seems like maybe pricing trade spending a bit worse given the dynamic in Glad, commodities are bit better and then perhaps no change to manufacturing and logistics. Is that the right way to think about? I'm just trying to gauge the level of conservativism in the outlook, because it seems like the quarter certainly came in better than planned but yet, you are maintaining outlook.

I would not say it's conservative. I think this is a balanced view of where we see the year landing. What I would say and you heard in my prepared remarks, little more than half of our gross margin expansion in Q2 was timing. We had some investments planned for some very long lead cost savings projects that are probably 12 to 18 months out in the future. And is not atypical to see some of that spending ship between quarters, and so that money will get spend in the back half of the year. And because of that, I just think the shape of our gross margin expansion will be a bit more consistent Q2 through Q4 as some of that money ships to the back half of the year. But for the most part I would tell you the items that we are monitoring within margin are playing out about as we expected, transportation, manufacturing cost savings, et cetera. There is probably going to be a little bit more FX headwinds as we mentioned as we have talked about the pressure on the top line from FX being closer to 3 point and 2, that will have a little bit of a margin impact. I also mentioned I think the commodity environment will be a little bit more favorable than we anticipated, still a headwind but I do expect resin to lighten up a little bit in the back half. And so those are some of the items we are watching. But I guess bigger picture I would say the items that we can control, cost savings, pricing, admin, productivity, I would say all going very well and on track. But I do want be balance here. There is a lot of volatile items that are outside of our control, FX, commodities and currencies. So I think it’s a prudent and balanced outlook at this point.

And then one follow-up just with respect to capital deployment, share repurchases in the commentary there and the impact on guidance received a lot of attention last quarter. Any update there? And then in terms of what's included in your guidance. And then Benno maybe you could tie in M&A. And you've been pretty clear about areas of interest, personal care, food enhancers and health and wellness in the past. What are you seeing in terms of pipeline at this point? And are you prepared to transact there, should the right deal come along?

I'll start with your question around cash return to shareholders. And maybe the perspective to be most helpful, I'll talk about our activities fiscal year-to-date. So halfway through the year, we've now returned about $500 million to shareholders, and that's been split almost equally between dividends and share repurchases. That's up about 75% versus the first six months of last year. And it's really driven by both the combination of, as you may recall, we took a 14% increase in the dividend last May that's certainly helping. And then we initiated our open market share repurchase program starting in May. Specific to Q2, I repurchased about $38 million for the shares in the second quarter and assigned that all to the dilution management program. And so as it relates to the open market share repurchase program, no new activity in the second quarter. I'm still at about 9% of my total authorization. And I would tell you plans for the balance of the year hasn't changed from when we talked last quarter and those are certainly included in the outlook.

And then Kevin, your question on M&A. Obviously, we continue to generate a lot of cash. This was a very strong quarter in terms of cash flow, up 39%. And our business priorities overall continue to be the same. We continue to build our business from a core out, so maintaining and driving the strong core business continues to be our most important job. The second priority also continues to be to keep driving shareholder return with our vitamins, minerals and supplements business. We've got some work to do on RenewLife, but we certainly like the green shoots that Lisah was describing earlier. We also like that we're now able to drive scale, in particular with retailers around Nutranext, which is showing some very significant initial lift as we think about merchandising events. And Nutranext obviously is doing really well, so we're pleased with that. But we continue to look at a lot of things M&A wise with our board. We can continue to pursue the same priorities. And should the right opportunity come along, and that means good business at the right price, we're absolutely willing to pull the trigger. But in the meantime, I think we're seeing that we could do quite well for our shareholders with the businesses that we have.

Next question comes from Ali Dibadj with Bernstein.

So, I'm a little confused about a few things that I'm hearing, would just love maybe to point through them for some clarification. So one is, I still have a tough time pinpointing why H2 is getting worse. I get the FX, I get Argentina. But it does seem like there's something that you're going to have to be investing in more. And I don't know if it’s the supply chain investments, maybe that's what the answer, maybe magnitude of that. But it just feels like there's something else that's going on in terms of H2 that you're seeing perhaps you want to have some flex to invest in. I don't really understand 20%, 17%, 18%, inventory growth coming from business that's about 1% of your sale. I don't really get when you said earlier, Kevin, I think it was that top line isn't really being helped by pricing to Jason's question, which means elasticity is a negative one and you're doing it for gross margin. I am not sure how your retailers would feel about that. And then we still have the laundry business, 9% of sales and the Glad business 14% of sales, so about a quarter of your business not seeing the pricing come through like you thought. So I guess, I am sorry for the long lip, but I am just trying to figure out what's going on. And I'm just having trouble. Can you help on any of that?

It's a long list, let me take a shot at a few and see if we can answer some of your questions. So as it relates to inventory, as you see in our attachments, it's up about I think $84 million quarter-over-quarter. And as I said, a good portion of that is the Nutranext acquisition. And if you've been around small business when you acquired them, there's lots of opportunity to drive improvements and I'd say this is just one opportunity to significantly rationalize that business. And that include skew rationalization, which would certainly lead to improved inventory levels. So I view that as certainly an opportunity for us. And that was the bulk of the change in inventory. So that's the business we acquired. It gives me plenty of opportunity to go after improvements. And I think we can drive that over time. Another question you had us on the top line. Look, what I'd tell you, I'll step back and talk in aggregate versus anyone business. When we take pricing and as you know, Ali, we've taken a lot of pricing over the years. I don't expect much impact to the top line. When you net out price mix and volume at least in the near term that’s first six to 12 months that has very little impact to the top line, but why we do that is because we have to recover the cost and currency headwind, because we want to keep investing in our business and to help grow categories. And so I think the retailers appreciate strong innovation that helps them grow their categories, that's the partnership we can offer. But to do that we have to cover the cost environment, and that's really why we're executing pricing. We are not executing pricing to drive the top line.

And maybe two additions, Ali, so helpful to be able to clarify these for the inventories; so I think it’s clear to everybody that most of our orders; and most of our inventories are managed electronically with our retailers; so this all flows through so there is nothing strange going on. I want to be very clear here on the inventories are than the things that Kevin expected. And as a company, we pride ourselves in being efficient. And obviously the economic profit matters to us a great deal as everybody knows. So we manage inventories tightly and we certainly expect to continue to do that on our entire business, including Nutranext And then perhaps just to close the loop on pricing. I want to be sure that we all understand that, Glad, our pricing was executed exactly in line with our expectations. So we see it full pass-through. But due to a change in the resin environments, we are now not seeing competition to follow. So we're temporarily spending back on promotions. And I also want to confirm that on laundry pricing in fact has gone through in line with expectations. And while competition has not followed, which we didn't expect in this one, I think we've also noted the top line growth in laundry and the strong performance also in terms of market share from Clorox liquid bleach. So I would want to make sure that we all understand that the laundry price increase along with all the other price increases are executed very well and are now going in line with plan.

And then just on that point in particular around portfolio in general. And maybe this is not how you guys thinking about it. But how I think about your portfolio there is the core legacy business, laundry, bags and wraps. You guys were saying competition is not following, is not a big issue we’re planning for that. To be fair, that worried me a little bit, but I get it. Then you have the international businesses, which is clearly doing better but still pretty volatile here even if you don't include the FX issue. And just on the recent acquisitions, particularly RenewLife, I was surprised to hear already declining. I understand you have some plans behind that. But that makes me a little concerned about your new acquisition declining. And Burt's another lifestyle is doing really well. How do you feel -- it feels like half of business is doing well, half of business is not doing well. How do you characterize the portfolio right now? And Ben for you the level of this much is right on planning doing well. This much isn’t doing that well. I got to work on this and this. How would you characterize the portfolio in those terms?

So first of all, if you know of a company that does well 100% of the time with the 100% of their businesses. I would love to know who that is. So again set context, I would say that as we've noted, you think about this quarter. We have very strong performance on all businesses in clearing. We have very strong performance on all businesses in lifestyle. Household's litter continues to do very well. And then you have one business that's done super well for us in its first year, and we’ve had some executional issues that are duly noted, but we're getting behind those and they are green shoots and that's RenewLife and we talked about Glad that Kingsford. Clearly, Kingsford is one where we've got a good handle on the issue and we're fixing that. And on Glad, we are seeing temporary issues related to pricing that we've seen before, and then international. So at the end of the day, we're dealing with an FX issue that everybody is dealing, and that's mostly Argentina. We're growing 8% in U.S. dollars across the international business. We're growing profit in U.S. dollars in a very difficult environment. So I would look at the international business actually as doing really well, if you exclude the Argentine peso. So you called 50%, 50%, that's not how we're looking at it. We like our portfolio and we like all our portfolio. We have expectations of every business unit to add to shareholder value. And if you look at it over the long run that's exactly what's happened. And you know, while it's not the case that 100% of the business is doing well, I also say that that gives us an opportunity to do better. I like it if there is businesses that we can fix and there is some of them that we can fix, because that gives us upside. But then again it's hard to feel bashful about how the company is doing when we're sitting at 4% sales growth and gross margin expansion and we're doing exactly what we said we were going to do. So I feel good about the portfolio. And we have a firm handle on the few issues that exist, but the vast majority of the portfolio has done exceptionally well in Q2. And we expect continued strong performance, in particular behind all the innovation that we're focused on launching now in the back half.

Your next question comes from Olivia Tong of Bank of America Merrill Lynch.

I wanted to follow-up on advertising spend. I think you had always planned for advertising to pick-up in the second half, because of the innovation tick-up. But now that we're one quarter closer first is that still the plan, because you've been flattish as the percentage of sales, good first half and driving 3 points of organic sales growth getting price. Do you think increased advertising can drive an acceleration in sales off of the current pace? Or could there be other places to allocate funds, which you think may generate even greater returns?

What I would say is your right. We've always planned for a heavier back half as it relates to advertising investments. We've got a pretty exciting innovation pipeline that we all have a lot of confidence in, and so we're going to support that driving awareness and trial. But I think it's really in the context of the outlook we provided that we think we've got the right investment level to support the innovation to deliver the outlook we've been talking about today.

And then if I could follow-up just in terms of the pricing, particularly on charcoal, and bags and wraps where competition didn’t follow. Obviously, the commodities have turned now. But what else do you think allows them not to price? And do you think that puts them in a pretty tough position, because I just think like. Is it to say they are okay with lower margins in you? And if you have any insight into what allows if not to follow through and follow your pricing?

Yes, Olivia, good clarification on Kingsford. Kingsford pricing is still underway right. So you had remarked that competition is not following, so that's not the case. We are executing Kingsford now and that will be in place this spring. So we are really talking Glad where we are seeing our price increase executed excellence, but we are not seeing competition follow. And that's because we were out early and resin, as we all know, is very volatile and resin costs has softened since we came out with the price increase. So I want to be clear it's still a cost justified price increase. But the resin cost increase is less severe than we had anticipated. And because we were out first, we were out there with pricing and everybody else then didn't follow, because they probably saw that resin is softening. That's happened before and that's where we are addressing with promotional spend. We like our strategy to continue to be focused in this category on trading consumers up, because consumers will not use more trash bags in the future, that's very unlikely. And what we've been on for a period of 15 years now is to effectively trade up consumers with innovation. So we like the mix of taking pricing on one end and rewarding consumers with great innovation backed by strong investments on the other ends. Which is why you saw that even in the quarter where Glad grew margins nicely and grew profits nicely, but where sales were down the core focus, which is our indoor differentiated OdorShield business actually grew volume and sales quite nicely. So that's straight up strategy. It's still working. And I mentioned earlier, we have innovation coming out, it's backed up by solid patents that we are driving now. It is much easier to take pricing and also sustain pricing certainly in the long term. If you have innovation and if you support your brands and we are the only player in that category in trash that does that and that may be explaining the difference in spends that our competitors take as far as pricing is concerned, even though it would be hard for me to speculate. But we think that this combination of innovation backed by pricing continues to be the right strategy for our company even though temporarily we will now spend back on promotions.

Next question comes from Jonathan Feeney of Consumer Edge.

I wanted to ask about Burt's Bees natural personal care products overall. Where would you say you are in terms of total distribution versus where you'd like to be for the last 12 months of innovations, first off? Within that what have been the strongest channels for those innovations for the growth you are seeing? Is it more succeeding side by side and beauty displays? Or is it other places that as maybe the heritage of Burt's Bees has that in a little bit? And I noticed you laid out in your deck the pipeline of innovations, I didn’t see any for Burt's Bees second half in '19. Are there plans for more natural personal care products for Burt's Bees that you didn’t mention in there for '19 or for that matter beyond that?

So strong quarter for Burt's Bees, volume up, sales up high single digits, so feel good about that. The single most important driver continues to be lip care. Just the core lip business grew double digits, and that grew behind innovation and base. Face care also up high single digits, cosmetic up high single-digits, behind innovation and also a strong holiday business. Burt's Bees is a great business that's used for gifting by consumers. And we're always driving that with special gift packs and we did that well in the last quarter. So I'd say in terms of where we are on the business, we certainly continue to have opportunity to drive distribution around new products. We also have opportunity to drive the core business into wide spaces and we have a dedicated team driving that, whether that's convenience stores or other stores where we can drive what we call it lip ubiquity, getting lip balm in the vicinity of where the consumer might be interested in buying that everywhere she goes. So going forward, we feel good about this business and we do have innovation. The fact that we haven't mentioned it maybe more of a factor of having so much innovation across the portfolio, and we have certainly called out Burt's Bees in the past quite a bit. But we have innovation mostly focused on lip, but also in skin care and face care, where we have a variety of masks coming out. Mask is a hot category and we have a detoxifying sheet mask, as well as a clay mask coming out. We have new a facial mist come out. And importantly, we will do TV on face care for the first time this back half, because we can now make the claim that our natural skincare products perform, as well as the synthetic creams out there. And that's a claim that we haven't been able to do before. And that's a claim that we can make based on independent dermatological testing and that we're excited about, because it resonates with consumers in a big way. So that along with pricing, which is effective today, will make for really strong backup on Burt's Bees. And international, we have noted as well that the business is up double digits. And we feel good about the progress that we're making in international, particular in Asia. So we're staying the course on Burt's Bees and this continues to be a business with a lot of potential here domestically, as well as internationally. And of course we like the business, in particular, because its margin profile is accretive to the company and it's the poster child of what we mean when we say we're interested in good growth that's profitable and responsible and sustainable.

Next question comes from Joe Altobello of Raymond James.

So first on Nutranext and the upside you saw this quarter. It sounds like a lot of that was distribution gains. Was there any greater same store sales as well?

It's hard to break it down, right now. So I would -- obviously we feel good about Nutranext, Joe, and integration continues to be on track, we are seeing slightly improved trends. But somewhere it also is rounding right, so we’re rounding up now, because the trends are slightly stronger, whereas previously we had to round down. I would call it on track for the fiscal year and perhaps slightly ahead versus where we were in our November call, and that is driven by really robust performance of several of the strategic brands in Nutranext. But we are seeing as we've noted and you've certainly picked up distribution wins with key retailers in Food Drug Mass, also international. And now in the back half, we're beginning to innovate on this business on various brands. So we feel good about where this business is. And think that we are in many really great emerging categories here where our company capabilities can make a difference and where consumers feel like the product are making a difference in their lives. And we stay focused on driving that. So I would call it on track to perhaps slightly ahead, but it's too early to call this a discontinuity in trend just yet.

And then secondly on charcoal, it's clear you guys are excited about charcoal. But I’m curious how retailers think about the upcoming growing season in your merchandizing program. Are they as excited about your plans to increase alpha penetration? And so could we see a trade load, which seems like what you’re expecting in Q3? Or are they relative there to last year or is it something in between? Thanks.

Again, we manage inventories pretty tightly. So clearly, retailers have an interest in a strong charcoal business. Why is that? First of all, it's a significant and meaningful business in itself. But also the baskets that the charcoal product is in for the shopper is usually a basket that is North of $100, because consumers by a lot of other things with charcoal that retailers are excited about, whether that’s meat or whether that drinks or potato chips, you name it, so barbecues is a pretty nice shopping occasion. So retailers have interests and we're meeting with a lot of retailers to discuss the 2019 season now. We are getting a lot of support for our plans. So I expect weather permitting 2019 to be a robust grilling season for Kingsford.

Your last question comes from Lauren Lieberman of Barclays.

I was hoping you could just talk a little bit about litter, because numbers you discussed and some of this business is doing really, really well its quite different in track channels. So I was curious if you could just share with us, one, what you are seeing in terms of competitive pricing activity if you've been -- I think you're a leader there as well. So if you've been followed, how rational the category. Is it a total category look? And then also where some of this stronger performance, is it in club, is it e-commerce? So just curious the channels that are driving this performance?

So obviously another good quarter by Litter, and pricing certainly executed with excellent, that was the first business that went out with pricing in last summer. We have started to see competition follow, not all competition. But again, I don't think we're done playing this out just yet. This usually takes six to 12 months, so we'll have to see what happens. But in general, we're pleased to see competition follow in that everybody else is seeing the same cost increases too, key drivers behind the performance continues to be innovation. Clean Paws continues to do very well for us. And it's really broad-based, I would say and clearly non-track channels are doing better than track channels, but within that it is broad-based. It’s a business that starts to really well. In e-com also it's one of our faster growing e-commerce businesses that really across the board just signaling the strength of the brand and the strong support that we have by retailers behind Fresh Step, in particular.

Is there a major margin differential for e-commerce versus brick and mortar for litter, because the shipping cost would be probably a bit onerous?

No, it's about the same, Lauren, as is true for the rest of our portfolio as well. There is no significant margin difference. Again, emphasizing our focus on good growth and profitable growth, so growing e-commerce is a terrific opportunity. Also, because litter is one of the product categories that is really conducive to being purchased on autopilots, because you use it the same way every single day, so this is one where overtime we think that there's an opportunity to build a really efficient business once you hopefully able to lock more and more consumers into automatic repurchases and reordering that can be particularly effective down the road.

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

Yes. Thank you all for joining us today. And I look forward to speaking with you in May when we share our third quarter results. Have a good day all.

This concludes today's conference call. You may now disconnect.