The Clorox Company (CLX) Q3 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to The Clorox Company Third 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 7 days at our website, thecloroxcompany.com. On today's call, we will refer to certain non-GAAP financial measures, including, but not limited to free cash flow, EBIT margin, debt-to-EBITDA and economic profit. Management believes that providing insights on these measures enable 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 on our website as well as in our SEC filings. In particular, it may be helpful to refer to tables located at the end of today's earnings release. Please also recognize that today's discussion contains forward-looking statements. Actual results or outcome could differ materially from management's expectations and plans. I'd also direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to the tax legislation impact. Please review our most recent 10-K filing with the SEC and our other SEC filings for a description of important factors that could results or outcomes to differ materially from management's expectations and plans. The Company undertakes no obligations to publicly update or revise any forward-looking statements. I'll start by covering our Q3 topline, discussing highlights in each one of our segments. Kevin will then address our financial results and outlook. And finally, we'll turn it over to Benno to provide his perspective, and then close with Q&A. For the total company, Q3 sales grew 2%, reflecting about 3 points of benefit from the Nutranext acquisition, offset by about 3 points of unfavorable foreign currency impact due mainly to the devaluation of the Argentine peso. Sales growth also reflects the benefit of price increases across nearly 50% of our global portfolio. Overall, our pricing plans have played out in line with our expectations with the exception of Glad which I will address shortly. Like we’ve always said, cost justified pricing provides the fuel necessary to reinvest in the brands, which helps drive category growth. Not only are we seeing share growth in majority of the brands that we took pricing in FY 2019, we’re also seeing category improvement in those areas. I'll now go through our results by segment. In our Cleaning segment, Q3 sales decreased by 1% with growth in Home Care, offset by declines in Laundry and Professional P roducts. Segment sales reflect more than 2 points of headwinds from the substantial difference in the degree of severity of the cold and flu season between this year and last year. This drove lower sales in our disinfecting products, most notably in the wipes and professional products businesses. Home Care grew sales benefiting from double-digit increases for a number of Clorox-branded products and continued success with innovation. Sales of our Clorox Disinfecting Wipes, however, were down this quarter, driven mainly by the significantly milder cold and flu season. For perspective, Wipes category volume declined mid-single digits during the peak cold and flu months this year when it grew strong-double digits during the same period last year, a period classified by the CDC as high severity across all age groups. The Wipes sales decline was also driven by heightened promotional spending by our competitors. This business has enjoyed growth rates in the high-single digits to double digits in the past 10 years with market shares well over 50% for multiple years. With this level of growth, we expect competition to be intense, leading to short-term variability in topline from time-to-time. Over the last decade, we've had periods where we've lost or regained distributions, seen aggressive and dial back promotional spending, and we've seen competitors enter and exit the category. The bottom line is that we believe in the superior value proposition of Clorox Disinfecting Wipes and our strong innovation platform, and we're confident that we have the right plans to both address short-term competitive headwinds and drive profitable growth for our brand and the category in the long run. The rest of the Home Care portfolio remains strong with recent pricing actions on track. Sales decreased in our Professional Products business, which was also affected significantly by the milder cold and flu season this year. With illness rates down 27%, hospitalization rates were down 48% as well according to the CDC creating lower demand for products used to clean and disinfect a room after a patient’s day. We believe this is a temporary phenomenon isolated to this quarter. Lastly, within the Cleaning segment, our Laundry business sales declined behind lower volume, partially offset by pricing. Importantly, Clorox Liquid Bleach continued to grow share reaching a five-year high at the end of this quarter, driven mainly by consumers’ continue trade up to our premium Splash-less bleach. Turning to Household segment. Q3 sales decreased by 1%, primarily from declines in Bags and Wraps, which were partially offset by gains in Cat Litter and Charcoal. In Bags and Wraps, sales and shares declined due to lower shipments driven mainly by widened price gaps in the business as well as distribution losses in select portions of the portfolio. Since we took a price increase about eight months ago, the resin environment has changed, not only did our competitors not follow, we’ve also seen a higher promotional spending in the category. As a result, we're doing the following things. First, we are increasing our trade investments to narrow the price gap, and the benefit of those initial investments are expected to be reflected on shelf by Q4. Consistent with what we've seen historically, competitive spending tends to increase when input costs fall. We fully expect this competitive environment to continue at least in the near term. Therefore, we're also assessing other ways to further address the price gaps. Finally, providing superior value remains a focus for us, and our long-term plans will continue to be centered around growing profitably and expanding the category through a robust innovation plan behind proprietary technology and capabilities. Charcoal grew sales in Q3 by pricing and favorable mix. While it's still early, retailer support behind our plans have been strong out of the gate, and the reception of our Kingsford 100% Natural Hardwood Briquettes innovation has been positive. Now, we need to keep executing against our plan for the grilling season, which includes new advertising, packaging upgrades, and innovation. We will also continue to partner with our retailers to aggressively put merchandising programs in place and extend the grilling season. Our focus ultimately is on retaining our loyal consumers and engaging new ones, including millennials to drive household penetration for the Kingsford brand and grow the category. Our Cat Litter business grew sales on top of strong double-digit growth in the year-ago quarter with very strong performance in non-tracked channel. Our Fresh Step brand improved sales broadly across multiple channels, driven by the continued success of our Clean Paws innovation platform, including newly launched scents. The brand also recorded its twelfth consecutive quarter of share growth. With this momentum, we continue to feel confident about the growth trajectory of the business. In RenewLife, sales were down slightly behind an overall category decline. We remain excited about the long-term potential of Digestive Health and RenewLife products, which were rated the number one probiotic brand and consumer satisfaction in 2018 by consumerlab.com. Our focus continues to be on restoring growth in this business. In our Lifestyle segment, sales grew 23% reflecting about 21 points of benefit from the Nutranext acquisition. The one-year anniversary of the acquisition was April 2 and our integration is on track. Our focus in this business is on our strategic brands, which represent about 80% of sales and have higher margins and strong tailwinds while thoughtfully managing our non-core brands in order to drive scale and maximize profitable growth for the company. Burt's Bees recorded another quarter of very strong sales growth despite price increases on a portion of the portfolio. Lip Care had another quarter of double-digit sales growth, which has accomplished in the five of the past six quarters and at least 17th consecutive quarter of sales growth. This growth was driven by ongoing strength of the brand's flagship products. Burt's Bees Beeswax Lip Balm, which was number one in the overall Lip Balm category for the last five weeks in tracked channel. Consumption in Face Care was also up strongly behind it's new newly relaunched sensitive skincare line as well as face mask and towelette innovation, supported by continued strong brand investments and merchandising activities. Brita gross sales for the first consecutive quarter we had successful innovation as well as continued momentum in the fastest growing channel e-commerce. We're also encouraged to see share trends continue to improve in all channels. While it's still early we've seen positive retailer and consumer response to the new Brita premium filtering water bottle the brand's latest product innovation. Food sales decreased slightly in Q3, behind lower category consumption driven mainly by the shift in merchandising timing for the Easter Holiday, which fell in Q4 this year instead of in Q3. The fundamentals of this business remain strong with the hidden value brand, continuing to grow market share and our ready-to-eat dips innovation off to a great start. Finally, turning to our International segment. Sales decreased 5% as the benefit of price increases and volume growth were more than offset by about 18 points of unfavorable foreign currency impact. We feel good about the progress of our Go Lean strategy, which has allowed us not only to substantially offset considerable FX headwinds, but also to improve the profitability of this segment. Importantly, it has allowed us to invest in selected parts of the portfolio that have strong tailwinds and high margins. And we're starting to see the strategy bear fruit, such as in Asia where we've had double-digit sales growth for two consecutive quarters. Now, I will turn it over to Kevin, who will discuss our third quarter financial performance and outlook for fiscal year 2019.

Thank you, Lisah. And thank you everyone for joining us today. We delivered another quarter of sales and earnings growth and as expected gross margin expansion. As you saw in our press release, we've updated our fiscal outlook, which I'll discuss in a moment. Turning to our financial results for the third quarter. Sales grew 2%, which included about three points of contribution from the Nutranext acquisition, partially offset by about three points of negative impact from the unfavorable foreign currencies, primarily from the devaluation of the Argentine peso. Gross margin for the quarter came in at 43.4%, an increase of 60 basis points compared to 42.8% in the year-ago quarter. Third quarter gross margin included the benefit of 240 basis points from pricing and 170 basis points from cost savings. These factors were partially offset by a 190 basis points of higher manufacturing and logistics costs 70 basis points from unfavorable foreign currency and 50 basis points of higher commodity costs. More perspective, our International business contributed more than half the pricing benefit to gross margin. Selling and administrative expenses as a percentage of sales came in at 13.9% versus 13.7% 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're spending for our U.S. retail business coming in over a 11% for the quarter. Our third quarter effective tax rate came in at about 22% versus about 26% in the year-ago quarter, primarily driven by the benefit of U.S. tax reform. Net of these factors, we delivered diluted net earnings per share from continuing operations of $1.44 versus $1.37 in the year-ago quarter, an increase of 5%. Turning to year-to-date cash flow as we noted in our press release, net cash provided by continuing operations was $603 million versus $576 million in the year-ago period. Turning to our outlook. We have updated our fiscal year outlook to reflect two changes, our assumption for sales and our tax rate. Our fiscal year sales outlook is now expected to be in the range of 2% to 3% primarily driven by a significantly milder cold and flu season versus year-ago and heightened competitive activity impacting the Disinfecting Wipes category. In addition, our updated sales outlook reflects lower sales in our Bags and Wraps business related to competitor reaction to the price increase we implemented when we had anticipated a continuation of elevated resin costs. As Lisah mentioned, as resin prices subsided competition did not follow Glad’s price increases. They stepped up their promotional spending resulting in the widening price gaps we are now seeing on shelf. Our sales outlook also continues to anticipate about three points of negative impact from unfavorable foreign currencies, primarily from the devaluation of the Argentine peso. As well as about three points of net benefit from the Nutranext acquisition and the AppleCare divestiture. And as we mentioned in our press release, our fiscal year sales outlook continues to assume about three points of incremental sales from innovation program. Other assumptions for our fiscal outlook remain the same include fiscal year gross margins at about flat, advertising and sales motion spending at about 10% of sales, which continues to reflect higher investment levels in the back half of the fiscal year. Selling and administrative expenses at about 14% of sales, EBIT margin to be down and free cash flow at 11% to 13% of sales. As I mentioned, we've updated our assumption for the fiscal year tax rate, which is now in the range of 20% to 21%. Net of all these factors, we now expect fiscal year diluted EPS to be in the range of $625 to $635, primarily reflecting the benefit of lower fiscal year tax rate, offset by a bit assumption for fiscal year sales. Our fiscal year diluted EPS continues to reflect 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 affecting a couple of our business units. In closing, I believe we are largely executing well against our key strategic priorities, including pricing with the exception of Glad. We're actively working to address this. At the same time, we feel good, then the last two quarters, many of the brands that pricing continue to grow share. In addition, as Lisah mentioned, we are also seeing improvement in those categories. We are also pleased that pricing contributed to another quarter of gross margin expansion, giving us fuel needed to continue supporting our brands and categories. Moving forward, we are addressing the following immediate priorities and have stepped up our investments accordingly. First, we're addressing the widened price gaps and heightened competitive promotional spending in the Bags and Wraps category. Second, we're addressing heightened competitive promotional spending and the Disinfecting Wipes category. Additionally, we do anticipate competitive promotional spending in these categories to continue. While our experience demonstrated the promotional spending does not result in sustained category growth, we are prepared to increase own spending in the near-term. We remain committed to investing strongly to support the long-term health of our brands. And with that, I will turn it over to Benno.

Thanks, Kevin, and thanks everybody for being on the call. I'll start by emphasizing the Clorox remains dedicated to good growth. Growth that's profitable, sustainable and responsible for our company shareholders and retail partners. Our approach to good growth is to invest strongly in our purpose driven brands to deliver superior value beyond industry-leading innovation and strong consumer engagement online, execute pricing and cost savings plans to offset cost pressures and pursue mergers and acquisitions thoughtfully to evolve our portfolio over time. With this in mind, here are the three important takeaways from today's call. First, Clorox's executing well overall against the strategic priorities we set at the start of the fiscal year. We continue to invest strongly in our brands, our multi-year innovation platforms including Clorox Scentiva and Fresh Step Clean Paws continue to perform well. Burt's Bees strong third quarter sales were supported by innovation in Face Care and while early. We are encouraged by the initial results of our latest innovations, including new Kingsford a 100% Natural Hardwood Briquettes, Hidden Valley Ready-to-Eat Dips, and the Brita Filtering Water Bottle. And we are seeing sustained momentum in ecommerce across a number of brands. We continue to expect this channel to be about 8% of company sales this fiscal year. As we had planned for the second half of fiscal 2019, we invested strongly in advertising and sales promotion in our third quarter with investment levels at more than 11% of sales for our U.S. retail business to continue driving awareness and trial behind innovation and to support the long-term health of our brands. We continue to be pleased about our acquisition of Nutranext, which recently reached the one-year mark of joining the Clorox family. We're certainly pleased about the businesses contribution to total company sales and our integration work remains on track. We delivered another quarter of gross margin expansion. Good growth means we're focused on profitable growth versus growth at all cost. We’re pleased that our pricing actions in the U.S. and international as well as our agile enterprise and cost savings programs contributed to gross margin results. Apart from Glad, we're seeing pricing resilience in many parts of our portfolio with continued market share growth in six of nine brands that took pricing, including Clorox bleach, sprays and toilet cleaning products, Fresh Step cat litter, Hidden Valley dressings, and Burt's Bees products. Lastly, we feel very good about the strong progress we are seeing in our international business with continued strong topline momentum in several categories and countries, including two consecutive quarters of double-digit sales growth in Asia. What's more, in the face of significant FX headwinds, our Go Lean Strategy focusing on pricing and cost savings has delivered five consecutive quarters of profit growth. My second message for today is we are aggressively addressing the challenges in the Bags and Wraps and Disinfecting Wipes categories. As Lisa and Kevin mentioned, we're charging ahead with increased investments to address the challenges in these two categories. We have been through this before, and we have a strong track record of getting businesses back to growth. We demonstrated this on the Litter and Brita businesses recently and while early, we are encouraged by the initial progress on Charcoal in the third quarter. Finally, my last point is this, we manage our business for the long-term. As we address the challenges we're facing, our priority remains investing in the long-term health of our brands. Longer term, we anticipate continuing to face elevated competitive spending in select categories make it our pursuit of good growth, more challenging, at least in the near-term. We will be prepared to increase our demand building investments to create superior value and support the long-term health of our brands behind the successor to our 2020 strategy. It's a strategy we're excited to share with you in the fall. What I can tell you now is that our updated strategy will include the key elements we believe are critical for continuing to deliver good growth, investing strongly to innovate how we build our brands with proven and new capabilities, which will help us win in the marketplace, transforming the way we work, including leveraging technology to drive competitive advantage, so that we evolve into an even leaner and faster enterprise. And continuing our commitments to be a mission-driven business as a means to support long-term value creation for all our stakeholders. Operator, you may now open up the line for questions.

Thank you, Mr. Dorer. [Operator Instructions] Your first question comes from Lauren Lieberman with Barclays.

Great. Thanks. I just had some questions on the Nutranext business. So margins in Lifestyle were really weak this quarter. The press release mentioned a couple things like manufacturing and logistics and tariffs, but the ongoing investments to support Nutranext is kind of what stood out to me, so if you could share a little bit of context on what that may or may not have been related to. And then on top of that, I think last quarter, your inventory was up significantly and it was again the case this quarter. So, I was wondering if there was anything related to the margin performance, and Nutranext tied up in that inventory conversation as well. Thanks.

Good morning, Lauren. This is Kevin, and let me start talking about margin in Lifestyle. What I'd say overall is we continue to feel very good about Nutranext. I think as I've mentioned in the past, we fully expect it to be margin accretive to the company. If you look at our specific results in Q3, I'd highlight a few items in the Lifestyle segment. The first is, and I think you're aware of this, we have the ongoing headwinds from tariffs that are impacting our Brita business unit and that's having a drag on overall profitability. In addition to that I would say two other items, we are leaning into Burt’s advertising, our commitment was as we're taking pricing to recover costs, we would invest that back into the business, and we've done that. And one of the areas we focused on in the third quarter was Burt’s behind our relaunch that Lisa mentioned. So we feel really good about the money we're putting behind the Burt's equity. And then lastly, we've got some integration expenses for Nutranext that continue, and that’s been going on for about 12 months now, and so we continue to integrate that business. But overall, regarding Nutranext, I feel very good about the ongoing profitability of that business.

And on the days inventory piece, Kevin.

Yes, no real change there. It's pretty consistent to what I mentioned last quarter, we were up about $48 million year-over-year at the end of Q3, $46 million was Nutranext, so the base business was essentially flat year-over-year and that was my commitment. Last quarter, we’d worked down the higher inventory as we launched our innovation. We had pre-built some innovation. And as I also mentioned, if you think about Nutranext, it's a relatively small business we've acquired, it was not particularly efficient when we bought it. Their days on hand probably operate in the 120 to 130 days. Clorox generally operates in the 50 to 60 days inventory on hand. So, there are some good work and some good opportunity for us to go through there and make that business more efficient. It will not be our first priority. We're focused on innovation. We're focused on extending distribution, but we will improve the overall turns of that business, but the other comment I'd say is I never expected to be consistent with other parts of our portfolio. They tend to be very high turn items. I think the VMS space in general will be a little bit higher in inventory levels and days on hand because of the complexity, but certainly expect it to be lower than where it is right now.

Okay. Great. And then just separately, if I may, the conversation on Wipes, of course appreciate you guys being so forthright about that dynamics have changed for the moment in that category, but I was actually surprised by let's say how sharply you're talking about this even in the prepared remarks, it's sort of, from what we can see in scanning your report, it doesn't look nearly as severe as what you're starting to describe where you're kind of talking with the long-term track record. And so, if you could offer a little bit more detail perhaps on what it is that you're seeing, I would have thought perhaps it was just things got a little more promotional because there was inventory out there, people didn't get that sick. Okay. More promotion to kind of move the category, but this sounds like something more sustained that you're worried about in kind of gearing up the site, so a little bit more context there would probably be pretty helpful.

I'll be happy to Lauren. I think we want to separate Q3 and then what we were expecting going forward. If you think about Q3, as Lisa mentioned, Wipes was down. To give a perspective, that was 1 point in headwind to the Company and 2 points of headwind for the Cleaning segment. And the majority of that was cold and flu, pretty mild cold and flu season this year compared to a very severe cold and flu season last year. Last year, according to several metrics and the CDC, it was the most severe cold and flu season since 2009 for perspective. So the delta this year versus last year, pretty extreme, and that accounts for the majority of the weakness. Said that to a lesser extent in Q3, we did see an increase in competitive promotional spending certainly towards the end of the quarter, and we expect that to be continuing. So the cold and flu impact is certainly one-time, and hopefully will help next year if there is more average cold and flu season. But the competitive promotional spending, we do expect that to be sticky and we will defend against it and spend against it mostly to strengthen our own merchandising planning in Q4 and beyond. So this is something that we've seen in the past. If you look at the past 10 years, we've been here before. Generally, we've had most years with very strong growth in Wipes, but we have had years in particular following particularly strong sales and share growth and we've certainly seen that on this business over the last few years, where we have seen a little bit of a correction, where competitors branded and private label, spend back in trade promotion to defend their own share. So if you look at the last 10 years of share in Disinfecting Wipes, we've been as high as mid 50s, we've dropped back down to 47 in 2014, then back up to the mid 50s in 2018, and what you're seeing now it's dropped back in tracked channels below 50%. So, very consistent with what we are seeing every few years. It's a hotly contested category. We're the innovation leader. We’re the spending leader. We have the superior equity. Our brand has seen as better in value. So what that means is as competitors are under pressure they sometimes react with increased promotional spending, and that's what we're seeing now. We're applying the recipe that we've always applied, which is to defend short-term to make sure that competitors understand that this is not the way to grow this category, but then also to continue to drive our strengths long term the strengths certainly, our innovation and our brand equity building, advertising, and sales promotion. To be clear, trading down in this category does not work for the category long term. So as you think about what retailers will see as this promotional support happens right now in the marketplace is that the category growth is easing up, and over time, what we've seen in the past is that the market gets back to rational behavior and driving the category the right way, which is through innovation and advertising and trading in consumers in ways that are sustainable. So nutshell, not a new situation, something that happens periodically, something that certainly happens right now is resin costs has eased up a little bit, but it's something that we know how to deal with.

Okay, great. Thank you so much.

Your next question comes from Steve Strycula with UBS.

Hi, good afternoon. Thank you for the candid remarks. So with the updated guidance wanted some clarification on how we think about Q4. If I'm backing into it correctly, I think domestic sales were down almost about a half-point this quarter. So within your implied guidance, what kind of gets better in Q4 and does domestic business get back to call it a 1% or better growth rate? Thank you.

Hi Steve. This is Kevin. And I'll take the question. As I'm sure, you’re going to appreciate, we don't provide quarterly outlook. I’ll speak to the full-year, but with nine months in the books, I assume you can back into this. We've updated our topline outlook. I would say there is no change in Nutranext and no change in the impact of FX, they're essentially equal and offsetting, and that leaves our base business growth rate about 2% to 3%. I think what that really highlight is as Benno mentioned, we did see the slowdown in Q3 specifically associated with cold and flu, that's transitory. I don't worry too much about that issue going forward. But the challenge we have particularly in our Bags and Wraps business with the widened price gaps that's something we'll see not only in Q3, but will continue into Q4 as we work to address the price gap. So I would expect a portion of what we're seeing this quarter to carry forward next quarter, but I don't expect the impact of cold and flu to carry forward into the quarter, but will certainly impact the full-year.

And then a quick follow-up for Benno. On the Charcoal business, I was pleased to see that it sounds like the volumes grew. What's really driving that just given that the category was a little bit weaker last year from a market share perspective? Thanks. I'll pass it on.

Thanks, Steve. So feeling good about Q3, growth in sales came behind pricing and mix. We've certainly seen a strong retailer acceptance to our selling plans for the new grilling season which really kicks off this quarter. Pricing is also underway and on track and we expect the sell through to be complete during Q4. So a lot of the things that we talked about in the last quarter are working so far pricing in particular of course has given us the fuel to invest in this business, which has credibly important in particular, as it comes to driving household penetration by engaging millennials and by continuing to drive frequency of use through strong merchandising to create impulse purchases. So encouraged by the return to strength in Q3 mainly behind retail engagement. Now what we need to see is that strong retail engagement and the expected strong merchandising plans flow through to the consumer hopefully also aided by a more normal weather compared to last fiscal year. So feel good where they stand. One quarter out of the gates. But the main grilling season is ahead of us and we're focused on engaging our consumer to keep growing the business in line with what we've come to expect over a number of years on Charcoal.

Steve, for the record, solid sales growth for coal, but volume is down consistent with pricing.

Your next question comes from Bonnie Herzog with Wells Fargo Securities.

Hi. It’s actually Joe Lachky calling in for Bonnie. So I wanted to ask about gross margins. So your fiscal 2019 guidance was flat implies Q4 gross margin will be up, but not as much as it was in Q3 and Q2, so I was kind of curious about the puts and takes there. And the reason for the slowdown in momentum and I know you have increased promos coming in and that's probably part of it. And then longer term on gross margin, I know you won't give fiscal 2020 guidance until next quarter, but maybe if you could talk about your confidence in maintaining margin expansion into fiscal year 2020. For example, do you expect the pricing impact to continue to accelerate and how should we think about commodities and manufacturing and logistics going forward? Thanks.

Thanks, Joe. Let me start with this fiscal year. I know you got a few questions here. As it relates to this fiscal year, if I think about flat for the year, we were down about 50 bps in the first half of the year, which would require us to be up about 50 bps in the back half of the year. In Q3, we saw we’re up about 60, so pretty much in line with what I expected. As I think about Q4, I think it's mostly playing out as we expected, although the one changes and you mentioned it, I do expect to see heightened trade spending would have a little bit of a negative effect on gross margin. So I still feel comfortable about flat is right, but importantly it will reflect three quarters in a row of margin expansion. And as we've talked about, that's incredibly important to us as we've taken pricing to get back to growing gross margins, it's allowing us to increase investments in the brands, which is how we create long-term value. So that model is working well for us and we are very much on track this year to do that. In regard to fiscal year 2020. As you may know, we do not have a gross margin goal, we have EBIT margin goals of 25 to 50 bps and while I won't provide an outlook yet for 2020, we're in the process right now of finalizing our plans next year, but we remain committed to expanding EBIT margin 25 to 50 bps over time, but we'll get back to you in August and give you more details about fiscal year 2020.

And then just one follow-up on pricing, and then I'll pass it along. I guess, are you planning on, I know you've taken pricing across the vast majority of our portfolio, already, but are you planning on taking any incremental pricing in the near-term, and specifically thinking international where your price mix hasn't been able to offset that severe FX headwinds the last few quarters. Thanks.

Yes, I would say we've executed a tremendous amount of price internationally and in fact we haven't talked about it a lot, but if you look at our total pricing benefit of about 240 bps this quarter about two thirds of the pricing benefit we're generating from our international division, and they have done an excellent job executing pricing and it's resulting in improving profitability. If you've seen our results, I believe over the first three quarters of the year, we've grown profit about 12% internationally. And importantly, we've returned to international gross margin expansion as well. So the pricing work internationally has been excellent and is delivering increased value very similar to the U.S. Every year, we will look at the markets and decide it was to appropriate take pricing based on inflation. We price towards the medium-term cost environment and so while we've executed quite a bit of pricing this year not prepared to discuss our pricing plans for fiscal year 2020 at this point.

Your next question comes from Dara Mohsenian with Morgan Stanley. Dara, your line is open.

Hey guys, sorry about that. So I just wanted to parse through the Charcoal side of the business. It sounded like you performed pretty well in the quarter which surprised me because the track channel data looks off. So was that just stronger growth on the untracked side of the business were shipments ahead of retail sales, perhaps aided by the pipeline fill for the natural innovation, any clarity there would be helpful. And then also just from a longer-term perspective, I was hoping for more of sort of a broader state of the union on Charcoal, A, the category itself, it looks like household penetration maybe decelerating a bit with the shift to pellet grilling, et cetera. Is that the case from the data you see are really not a big issue? And secondly, your market share performance in the track channels, it looks like it's weekend with the shift to some of the all-natural competitors. So any commentary there would be helpful again on household penetration and your market share performance. Thanks.

Yes. Dara, first of all, tractors is non-tracked as is the case across most of the businesses, non-tracked channel performance is stronger perspective. We grew volume across the total company last quarter at non-tracked channels and that's certainly also two for charcoal and remember that non-tracked channels account for 30% to 40% many of our businesses total sales. So it's pretty significant. So pretty different performance there did not built any inventory beyond what we’re seeing normally heading into the acrylic season. Certainly what we've talked about before. So, really what I have to say on charcoal is nothing new relative to what commented on in the last quarter. Last quarter, what we said is that we're focused on driving household penetration by reengaging millennials. We're doing that by spending incremental dollars, the dollars that we're earning through price increases in target media for new advertising, through new graphics, through 100% hardwood innovation, which is off to a good start and we're also doing that by continuing to engage retailers to drive frequency of use, strong merchandising plans are critical to create impulse purchases because the charcoal purchase is often, an impulse purchase in store and displays work and we are engaging retailers to make sure we have strong plans in place as the grilling season kicks into high gear. So nothing new other than that one quarter in against the plan that we talked about last quarter, we're feeling good about the progress that we're making in particular with retailers and we are focused on the same priorities one quarter at a time. And that's, that's the story in short on Charcoal.

Okay. And then Benno on the pricing front, just for a broader perspective, I guess the tone in the call and the comments around Wipes in trash bags stands out to bid in contrast to a very confident home, we heard from you guys, a couple of quarters back when you put the pricing plans into place. So I'd just love the get sort of a post modem on any lessons learned around how you implement price increases with the competitive issues that have emerged in Wipes in trash bags. It's more just a couple of categories were competitive issues ramped up and it is what it is or is there sort of better ways to manage it going forward? Thanks.

Yes. So upfront, I would like to separate Wipes and trash bags and I want to reemphasize as did Kevin and Lisah before that the issue that we're dealing with in the short-term on Wipes is one of competitive promotional spend, but not related to pricing. Okay. So let me unpack this a little bit. First of all, did we execute our plan on pricing? Yes, we did. About 50% of the portfolio mix of U.S. and international pass-through in line with expectations on all of the businesses. So, that's all good news and consistent with what we said in the past. Second, is it working? Yes, it is working with one exception. That is not inconsistent with what we said in the past, we have talked about Glad and the emerging concerned the competitors did not follow in the last quarter and what we certainly see now is that they still haven't followed, but they also now started to spend back. So that's one issue that we're dealing with, but other than that it's working. First of all, because of the gross margin expansion that you've seen them that have given us the fuel to invest in growth for the company, it's working because two-third of the categories where we took pricing up in share, it's working because the categories where we took pricing, post pricing are tending higher. So, we are seeing stronger category growth, which means more money in the pockets for retailers and it's also working because price elasticities even though early post, the price increases, but the data that we have the vast majority of brands are stable or in some cases, even better than pre-pricing. So that checks off all the boxes that we've talked about in the past and it tells you that the Clorox Company knows how to take pricing. Are we experiencing the bumpiness that with anticipated to you in the last few quarters where we've talked about pricing? Yes, we're seeing that. We're seeing that in particular on Glad and as Lisah and Kevin have said, we are addressing the wide price gaps there aggressively. But other than that it's working, pricing still cost justified our analytics are showing that we can predict what's happening in the marketplace and beyond Glad, we're very confident at the success behind pricing and also confident that these price increases will be sustained in the marketplace.

Okay. Thanks, guys.

Your next question comes from Jason English with Goldman Sachs.

Hey, good afternoon, folks. Thanks for spot me in. Two questions, first, a really quick one, the tax rate for the year, should we expect to sustain or should we be modeling the step-up into next year.

Hi Jason. Yes, thanks for the question on tax rate. As you saw our expectations this year 20% - 21%, I would say, driven by two items beyond the obvious benefit of tax reform. We've seen a much higher level of stock option exercise activity and you might recall, a number of years ago there is accounting change that provides excess tax benefits associated with stock option activity. So, that is certainly impacting our results this year. We've also had a couple of settlements with some state and federal authorities and these tend to take years to resolve in the hard to predict, but we've had a couple of settlements that impacted our rate this year. So while we're enjoying a lower rate this year. As you think about next year, I would encourage you think about a more normalized tax rate for us, if you think about a statutory federal rate of 21%, state rate of about 3%. I expect mid 20s ongoing. And so I've enjoyed the benefit this year. I don't expect to see either level of stock option exercise activity or the tax settlements that we had this year. And I think that will generate about 300 basis point increase in the rate next year, year-over-year.

Thank you for that. My next questions on innovation, you certainly had some great success in the past couple of years and you've touted many initiatives on the call today. But when we grind through some of the data, it looks like maybe net innovations beginning to slow. We're looking at Scentiva branded, and it's across all categories, it's slowed quite a bit with prior launches and things like bathroom cleaners, declining and kind of offsetting the gains in your new mop cloths, your new sulfur-type products and toilet ones and when we look across your aggregate portfolio, your total distribution points are declining solid mid-single digit clip suggest sort of SKU is sort of shrinking. Can you give us some color and context on what's happening in driving some of these metrics in that direction?

Yes, Jason, a lot to unpack. First of all, innovation on track overall feeling good about innovation both to longer-term platforms, you've mentioned one of them Scentiva – also clean pause and the PPT platforms, really good Scentiva the particular comment I would make is that what's great about – Scentiva is that it brings in new consumers into the franchise 70% of the purchases from new consumers. So that tells you that we're continuing to feel good about the ability to attract new users with innovation. The more recent innovation from this back half, while early all feeling really encouraged whether that's Glad with its LeakGuard technology, which builds of the technology platform, with more than 40 patents and is off to a nice start Hidden Valley Ranch dips with three flavors essentially doubles. The access that we have on this brand to usage this occasions and feeling good about how that's doing out of the gates. We talked about Kingsport the premium filtering bottle is doing great. Consumers are spending $15 billion on bottled water every year and the majority in home. So we feel good about the ability to attract consumers in home, but also out of home with this bottle especially because single use plastic continues to be under attack. We talked about Burt's Bees lot of innovation in lip and face, including new Lip Balm flavors new face masks, towelettes and sensitive skin care relaunch which we've supported with TV and has led to really strong growth in the Face Care arena. And then Scentiva wet mopping costs of course as an entrance in the sizable convenient screen platforms. So across-the-board feeling good overall certainly early but indications are all positive. I would perhaps separate that from the distribution comment that you made. First of all, I would remind everybody that again tracked channels only account for a portion of the business and that the business performance is much stronger non-tracked channels. But as you unpack distribution, we're seeing some very some gains in some businesses like Brita and Cleaning and Cat Litter and we did see some losses in other businesses. And I would however perhaps tie those two the things that we're working with. First of all bumpiness post pricing, if you listen to our comments in the last few quarters, we have said that bumpiness post pricing can mean that retailers could react with lower distribution temporarily, that's something that we used to and something we've anticipated to you and something we know how to work through over time. And we're also in the speed of driving growth, that's profitable, sustainable and responsible and we call this good growth. We're not afraid to accept distribution losses unless strategic parts of the portfolio, give you a few examples. And in Glad we've lost some distribution on trash behind the discontinuation of our quick tie business, which is lower tier trash, lower margin in order to continue to facilitate the trade up into the more profitable premium skews. In food, what you have seen as a temporary discontinuation of skews, which will be replaced with innovation and make space for future growth. So this is not uncommon. We're remaining comfortable with where we are and if I look at our track record of building distribution overtime, I feel good. We do it the right way behind innovation. We do it because we are the leading investors in our category. We do it behind customer capabilities, we are confident and we do it with SKUs, which overall tend to have a higher productivity on shelf than those of our competitors and retailers know this. So feeling good about where we are in-store and again would perhaps not high what you're seeing on distribution through innovation. We feel good about innovation portfolio.

Got it. Thank you. Very helpful. I'll pass it on.

Your next question comes from Wendy Nicholson with Citi.

Hi. I don't mean to beat a dead horse, but I guess my one question on the Glad Bags specifically is just one of the things we've heard today. As oh gosh, this is the death knell in the business. This means that private label has finally taken over and everybody's buying Solimo and not Glad. So I guess obviously dramatic over reaction, but just what gives you confidence that I'll maybe that is not the case and maybe in terms of what you see in terms of non-track channel market shares, I mean, what gives you confidence that some pricing adjustments and trying to bring some new innovation to the category really is going to bring back growth in this isn't some sort of structural change in the category. And to that point, I guess one of the things you had said a couple quarters ago or two quarters ago I think was that the stock what kind of rich in your view and you wouldn't be buying back much more stock at the current price, but what's your sentiment now where you're thinking now about share repurchases and not just looking at the stock today, but also reflecting your confidence in your outlook for the fourth quarter and thinking about 2020 is now a place where you think about stepping in and supporting the stock? Thanks.

Yes. Let’s Kevin comment on stock repurchase would want to make it clear that we did not comment on that. We never do. We also certainly didn't comment or make comments that you talked about Wendy and your ingoing remarks on Glad Bags. What gives me confidence and I want to be clear, there is absolutely nothing in here that points to a structural change. The thing that gives me confidence is that we've been here before and we know how to manage this. If you look back at the Glad business and I personally been involved in it Glad business for 16 years, what you're seeing is when resin falls and it's certainly come in lighter, over the last few months promotional dollars flow into the category. So that's what's happened. And what we've always done successfully is to defend against that and we have commented that that's what we're doing now. What we've also seen is that competition has not followed through a price increase. Again, that's something that we have seen before and we know how to manage that. So this is tactical. This is a phenomenon like one that we have seen in the past and one that we know how to manage. And that's all there is. And then Kevin can perhaps comment on repurchases.

Sure Wendy. In regard to repurchases and maybe just to reconnect to our program. I think many you folks know we have authorization for up to $2 billion share repurchase program, the Board approved back in May. To date, I've execute about 9% that program returned about $178 million to shareholders. And then specifically this year, if I think about total cash returns through the first nine months, we've returned about $675 million to shareholders. That’s split pretty equally between dividends and share repurchases. And that's up about 75% versus the prior year, over the first nine months, really driven by both a significant dividend increase, we took last May of 14% plus we've stepped up share repurchases, both for open market and dilution management. And then specific to Q3, we've returned about $200 million to shareholders about two-thirds of that is the dividend about a third share repurchases. We repurchased about $73 million and I sign that all dilution management. As I look forward, I won't comment on our actions going forward, but I will reaffirm that we have a very disciplined approach to how we'll execute the program. There is no time limit on it and by design, it is not an ASR that gives us plenty of flexibility, but I am certainly committed to updating folks every quarter on our progress. But certainly won't share going forward in terms of the express criteria.

Both of those are very helpful. Thank you.

Thanks Wendy.

Next question comes from Andrea Teixeira with JPMorgan.

Hi, thank you for squeezing me. So I have a follow-up on Nutranext from a topline perspective, I know you discussed a little bit on the margin side? What is the other line performance of the brand now that you've owned for about a year. In all math, it looks like your sales are growing only like low single-digits, I don’t say to mid single-digit range. So wanted to double check on a like-for-like basis. And was that in line with your expectations going in and if you can talk about opportunities on potentially accelerating that growth going forward. And if you can layer that with the category challenges that your face with RenewLife is that also hurting Nutranext? Thank you.

Andrea, if you are good about Nutranext integration remains on track, which certainly has been our year one focus. Now we are in year two and integration, I would say is that a good part behind us feeling good about where the businesses, which includes topline growth. Our focus is, first of all on expanding distribution and we're seeing that across Food, Drug, Mass and Club making really good progress. Our focus also is on starting to bring in innovation, we're launching on NeoCell one of our strategic brands, collagen protein peptides that is a fast growing category that combines two trends collagen and protein and innovation that we feel bullish about. And then third, as you'd expect from us, we're also managing the portfolio differentially we've acquired seven brands, about 80% of those brands, we consider to be strategic. And we're investing heavily into the growth of this business and then about 20% is non-strategic and we manage that as a fuel business just like we do with other parts of our portfolio, outside Nutranext and that in turn generates profit for the strategic businesses. So, Nutranext had a strong Q3. We like the business, we like where it's going. And we like how our team managed it and we're certainly committed to invest in the business and also not afraid to increase investments in the business. Should we feel like that's necessary. And we can certainly update you on our 20 plans in the next quarter. As we have commented in the past you know Nutranext and RenewLife are separate businesses as far as some of the issues that hold RenewLife back temporarily now. So, we feel good about Nutranext and remain bullish on the growth that we're seeing on that business.

Thank you, Benno.

Thanks, Andrea.

Your next question comes from Jonathan Feeney with Consumer Edge.

Good morning. Thanks very much. When I look across all your categories, I guess the flipside of Jason’s question. Your dollar sales per total points of distribution are growing mid single-digit for the company as a whole with that loss for distribution. And it's really pretty consistent across categories, each of which seem to have their own dynamics, it seems pretty unlikely that every single bottoms up analytic would be pointing to that being the strategy. So, I mean, is there some aspect of this. That's a thoughtful transfer of less hardworking measured retail points that might be losing traffic towards alternate channels that are generally gaining traffic like e-commerce, et cetera. And as part of that do you have, you mentioned analytics earlier Benno. Do you have when you lose distribution in somebody's places, particularly your larger categories. Do you have household usage data, loyalty data that gives you the confidence that these are maybe the right moves, particularly on the pricing side? Thank you.

Yes, again, first of all, just to have a differentiated point of view on distribution were growing distribution in some categories and we're not growing in some other categories. I like where you were going on dollar sales as a point of distribution that of course has a lot to do with two things. First of all, pricing is working as we have commented. Second, simplification in the category, which sometimes means less distribution and our SKUs too, is a good strategy because in many categories shelves are over skewed in there too many brands that shelf and you know that doesn't necessarily help the consumer find what they want. As they spend a limited time in front of the shelves. What we do find is that thoughtfully managing distribution unless strategic SKUs enough comment on that before on this call, is a good idea and I use Glad Trash as an example. We're eliminating very low margin, lower priced SKUs that don't add value to the category and don't add value to our brand is smart if it helps consumers trade into the right SKUs, which tend to be more profitable, which tend to be a higher price and which tend to grow the category for retailers. So that's something that we do. That's something that we'd backup analytics both pre and post and something that we worked with our retailers on an ongoing basis. So at the end of the day, while I'd always in an ideal world like to gain distribution on all of our businesses, all the time, sometimes as it relates to bumpiness post pricing and as it relates to managing distribution thoughtfully and non-strategic businesses, it does lead to lower distribution on some of the businesses. But again, in the long run, I feel good about where we stand, but feel good about the growth plans that we have with retailers and I feel good about our ability to continue our strong track record to grow distribution on businesses over time.

Thank you.

Your next question comes from Ali Dibadj with Bernstein Research.

Hey guys. So, I guess I still want to get to, if we can the root cause of some of the “bumpiness” as you call it Benno. You just contextualize that I'm sure you guys have seen a lot of the other peer reports and none of them have really had bumpiness this quarter in terms of taking pricing and pricing up for a while. And so I'm trying to figure out why you guys, yes, and then no so much. What are the characteristics I guess another way to ask it about the Bags and Wraps and Wipes categories maybe historically the Cat Litter category, a little while ago is a private label versus brand mix, have you guys analyze things that commodities as percentage of COGS? Is it brand strength? Is a price gap? And I guess on the last one, if it is price gap, there are many categories of yours that we see the price gaps have expand the lot, nothing happened to the share we agree yet. But, the price gap spend a lot. So I guess really trying to understand how you think, why you think characteristics of the category exist that you think, this price bumpiness is only a bump and only isolated to these two categories?

Yes, Ali. So thank you for the question. First of all, I don't want to compare our company to others. I feel like that's perhaps something that you guys can do better. I'd certainly ask if you see as much pricing from your competitors and as much positive gross margin impact from your competitors, so that as we compare Clorox's performance to other companies, we take everything into consideration, but just to reiterate that we feel good about where we are on pricing. We talked about bumpiness. And we're seeing that in particular on Glad. As I also said before on Wipes, heightened competitive promotional activity is not tied to pricing. So we feel like pricing does exactly what we said it would do, it helps build gross margin, it helps us build market share in the majority of the categories where we took it. It helps grow the categories in the vast majority of categories where we took it. And there is one issue that we're dealing with on Glad and that's an issue that we've dealt with in the past because clearly, resin costs today are different than where they were at the time when we took pricing and that's what usually happens that you see widen price gaps and you'll see more promotional activity. And then what you'll see us do is react and then you will see those activities subside and you see sales and market share performance stabilized and grow over time because our equity building efforts take hold again. I want to make sure I remind everybody that on Glad the increased trade spend that we put in place starts to take effect in Q4, not in Q3 and that we're certainly also looking at ways to continue that in further quarters. So again there is really, no news here on pricing. The bumpiness in Glad is one that we had expected, one that has accelerated as resin costs have subsided and one that we know how to manage.

And so just to push further on Glad. As you think about spending an extra $1 in that business to deal with the bumpiness, let's just call it and the short-term bumpiness here, would you rather spend $1 there given that you know this might happen again as commodities roll-up and then back down and to your point, all of us you have lived it for 16 years. Would you rather spend the money there – the dollar there or in another category, and I ask that in the context of M&A and divestitures in particular of the value it continues to bring or not to your portfolio. And I know in the past you said, we love our portfolio, we love our portfolio. But again, I'm not trying to make a big deal about this one instance, but it is a repeated instance whenever commodities go up or down.

Yes. So we still have our portfolio. Ali thanks for the questions. There is nothing changed there and we still have the Glad business, it's driven a lot of value for our shareholders over the last 16 years for sure and we are confident that we'll continue to drive a lot of value in that we have a strategy that continues to work behind a lot of patent and intellectual property protected innovations that are yet to come on this business. So I would say to your question, would I rather spend the dollars here or elsewhere. There's not an either or question, we're spending the dollars on Nutranext, on Burt's Bees. As Kevin has commented earlier, we are increasing our investments in Burt's Bees, certainly willing to lean into Nutranext, also willing more than we perhaps have two, three years ago to lean into profitable growth areas in international where we're seeing nice success not only through pricing, but also on our brand building efforts whether that's in Burt's Bees Asia, or whether that's on Cat Litter, other parts of the portfolio or international where we have seen really nice volume growth in China. We've seen a nice volume growth in Europe in Q3, Mexico, Canada all solid and robust markets and we have commented that we are interested in investing more in that part of the business. Our priority certainly continues to be to invest in profitable growth and the long-term brand health of our businesses, our priority continues to be to spend in activities that are driving brand equities behind innovation and the superior value of our brands. But we also not afraid to defend the businesses where we have to and certainly, big businesses like Glad Trash and Clorox Disinfecting Wipes out two businesses where we're not going to let our competitors steal share from us in ways that are not productive for categories and brands in the long-term. So this is not a question of either or spending on Glad or elsewhere, but the answer here is always and.

Okay. And then just my last question if I may, in that context of spending back, is it 10% of advertising of the trends of sales still applicable for this year, that's a couple 100 basis points up in Q4 to get there?

Yes, it's still the same number for this fiscal year and higher in the U.S. remember, and also higher in the back half. So it's still the right number for this fiscal year, early.

Okay, thanks very much.

Thank you.

Your next question comes from Steve Powers with Deutsche Bank.

Like you talked a lot about the competitive headwinds in Glad and Wipes already, but I guess just to round it out. I'd love to get a better sense of how long you expect to last as a base case Wipes seems like a, it's a relatively new competitive front of opened up, but any thoughts on duration there just given your past experience will be great. And then, I'm glad we're the issues have been known for while discussed for a while, I guess you could point to your actions that are coming in the fourth quarter as well as higher oil as perhaps the reason for some relief. But on the other hand, natural gas conditions seem to favor lower resin prices for longer. And it sounds like maybe Lisah and I don’t want – maybe Lisah may have alluded to some actual list price rollbacks or other initiatives in her opening remarks in Glad. So just if you can comment on that as well and whether I miss misread or comments that'd be great.

Yes. Thanks, Steve. So, first of all, impossible. How long this is going to last, because it certainly will depend on input costs to a certain extent, which is the reason why we're sitting here in the first. So it's like looking into a crystal ball, but I would say as a base case, typically what we have seen in the past on Glad, but also Wipes, this is not a new phenomenon Wipes, this is something that we have seen in the past before. It takes a few quarters. And I would assume that that's a good assumption. In this case two and I would also assume if I were you that we are planning for that always remaining agile should the situation changed. But our assumption is that this is going to take a few quarters. On Glad what we have commented on is that we will we have put trade dollars in place for Q4. But that we're looking at further actions beyond Q4 and we'll update you in August on our thinking for fiscal year 2020.

Okay, fair enough. And I guess just a real quick one, another thing that I just want to clarify from the opening. Just going back to Lifestyle for a moment, it sounded a little bit like a stark or distinction in the discussion that segment between core and non-core brands and just trying to get a sense of if that's a change or not is the message now that you're going to manage more for profits versus growth or is there a more nuanced takeaway there that you want to walk away with.

Thanks for allowing us to clarify their thesis that was not clear, so the distinction we may between strategic and non-strategic was within Nutranext, 80% of the business strategic 20% non-strategic. We have commented on only part of the portfolio being strategic in the past. Now we're giving you more of a quantification 80%, 20% and, as you'd expect over time portfolio management and also more aggressive portfolio management is part of what we do across all of our company and we'll be a stronger part of our year-to-management of this business, where we largely moving on from integration, but it's no change. And it certainly doesn't affect lifestyle more broadly, obviously lifestyle is a business where if you just look at Burt's Bees as examples several of the businesses are located that we view as strategic growth businesses for the company.

Right, okay. That makes sense. I obviously miss that. Thanks so much.

Your next question comes from Kevin Grundy with Jefferies.

Thanks. Good afternoon, everyone. I wanted to pull together yes, a number of the topics that have been asked on this call. Really forward looking appropriateness of investment levels relative to what you're seeing now with respect to market share. We spent a lot of time on Bags and Wraps that sort of characterize as more tactical fine as you look at the Nielsen data companies also losing some share in charcoal litter cleaners, et cetera, and of course this is within the context, we've seen a number of CPG companies take up advertising marketing levels among other levers pretty significantly this year. I just want to make sure I'm clear here on this call. So, without guiding the fiscal 2020, Kevin mentioned some comfort with the 25 to 50 basis points of margin improvement. Longer term, but a couple of things, number one, can you confirm you generally comfortable with investment levels. And then the second piece to that are you prepared to take any sort of major step-up in investment levels for fiscal 2020 off the table without providing guidance for next year. Thanks for that.

Yes, Kevin “without providing guidance for next year”, if I just maybe just take a step back. So we'll continue to invest in the strategy that we have confidence in with emphasis on innovation engaging consumers digitally and drive a superior value on our brands. For the fiscal year to 10% as I've commented before 10% of sales higher in the U.S. higher in the back half that's still a right assumption and of course like, like we said we'll update you on August, we're always evaluating the right spending levels we certainly think that the competitive activity and trash and Wipes, as I said, we'll stay elevated and will continue to rise require our attention. But as we look at our number for fiscal year 2020 would perhaps say that the most important thing here is that we will continue to have a principal approach to spending in advertising and sales promotion. We're not afraid to defend our businesses if this costs money where needed, especially if you feel like it's necessary to keep the brands healthy long-term. We are also staying focused on investing behind the strategy and we're certainly prioritizing investments in the long-term brand health where we see the opportunity and where we feel like we've got particularly strong ROI is an we commented that during this call on a few businesses like Burt's Bees where we certainly that feel like that's the case. Food behind innovation Nutranext International, so, are we seeing more spend in some of our categories, yes. We taken the long-term approach, yes. Are we willing to consider an increase in spending levels for fiscal year 2020? Yes, if we feel like that's the right thing to do short-term and long-term, and that's about as much as I think I can say at this point, and the details behind that statement will then come in August. Is that okay?

I appreciate the color. Thanks Benno. Good luck.

Thanks, Kevin.

We’ll take our last question.

And we have a question from Olivia Tong with Bank of America.

Great. Thanks for squeezing me in. I appreciate it. I'll keep it quick. Just I guess relative to your expectations, what was particularly surprising to you? Because you know, the Bags and Wraps competition we've been talking about for some time and clearly a little bit more elevated. But it's been going on for some time, cold and flu season, we already knew the comps obviously, it was coming. So I guess I just want to better understand relative to your going in expectations, what was surprising and how fast you think you can pivot on, on some of these things, whether it's Wipes PPD and Bags and Wraps. Thanks so much.

Yes. Thanks, Olivia. I need a really quick answer. The thing that surprised us was cold and flu, cold and flu. Normally it doesn't have that much of an impact as long as you're staying year-on-year within a certain threshold, but particularly mild a year compared to a very severe last year. It did impact our business more strongly than we had anticipated. And we've commented on that. And then I would say Bags and Wraps, it has elevated over time as we think about, um, the, the competitive merchandising activity as we went all through the quarter. And that's something that we are prepared to spend against. So it's really those two. Everything else, execution against the strategy, on track innovation, marketing spend, ecommerce seeing very strong growth with the biggest ECOM customer pricing executed well, cost savings, strong momentum on international neutral, Exxon on track. So all the things that give us confidence in the strategy. We have executed well feeling good about strong results across many parts of the portfolio and we commented on many of those during this call. So that it's really a cold and flu for the quarter and we've reflected it in the sales outlook and Bags and Wraps, which we have to address, that it.

Great, thank you.

Thanks, Olivia.

And thank you everyone. I look forward to speaking with you again in August when we share with you our fiscal year 2019 results. Thank you and have a good day.

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