Q1 2020 Earnings Call
Good day, ladies and gentlemen, and welcome to the Clorox Company first quarter fiscal years 2020 earnings release Conference call. At this time all participants are in listen only mode. At the conclusion of our prepared remarks, we will conduct a question answer session. If you'd like to ask a question you May press star one on your Touchtone Todd at any time if any.
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As a reminder, this call is being recorded.
I'd now like to introduce your host for today's conference call at least for had Vice President Investor Relations for the Clorox Company is for had you may begin your conference.
Thanks, you're welcome everyone and thanks for joining us today happy Halloween.
Coal with me today are better outdoor our chairman and CEO and Kevin tickets and our CFO broadcasting this call over the Internet at a replay of the call will be available for seven days at our website. The Clorox company Dotcom on today's call. We may refer to certain non-GAAP financial measures, including but not limited free cash flow EBIT margin that.
EBITDA organic sales growth in economic profit management believes that providing insights on these measures enable investors to better understand analyze apart or ongoing results of operation.
Reconciliations with the most directly comparable financial measures.
Permit in accordance with gap can be found in today's press release. This webcast prepared remarks or supplemental information available on our website as well in RCC fine.
In particular, it maybe helpful to refer to tables located at Yesterdays earnings release.
He's also recognize that today's discussion contain forward looking statement.
Actual results or outcomes could differ materially from management expectations and plan.
Also direct you to read the forward looking disclaimers in our quarterly earnings.
Please review our most recent happy filing with FCC and or other SEC filings for a description of important factors that could cause results or outcomes to differ materially from management expectation implants. The company undertakes no obligation to publicly update or revise any forward looking statements.
I'll start by covering our topline commentary discussing highlights in each of our segment.
Having said that address our financial results as well as our outlook for fiscal year 20.
Finally spend I will offer his perspective, and we'll close the acuity.
For the total company Q1 sales decreased 4%.
The result are on top of solid sales growth in the year ago period organic sales were down 2%.
Well now go through our results by segment.
In our Crane segment.
Sales decreased 2% for the quarter.
Our professional products they since going public strong sales growth driven by a successful back to school campaign, particularly in the E Commerce channel.
We also continue to see strength and longevity of our innovation in the system with platform such as Marc Hedrick Brookside Uncork fusion.
Disinfectants use in health care setting delivering double digit growth even four years after their initial launch.
In home care sales were down slightly with volume growth offset by unfavorable mix and increased performance bifurcation between truck and on track channel.
Shipments of Clorox Disinfecting wipes grew solidly for the quarter with growth in non tracked channels outpacing tracked channels by wife margin.
Our investments were fully implemented are working and helping grow the category.
Our near term focus its instructed our results consistently across all channels.
Additionally, as highlighted in art nice try to launch we have a strong innovation plan based on bigger secure platform.
With Clorox compostable cleaning like launching in late Q2.
Our country that platform continues to perform well with high single digit volume broke three years after its initial launch.
Lastly, within the cleaning segment.
Or laundry business sales were down for the quarter.
Driven primarily by distribution losses of Clorox liquid bleach inflect retailers, coupled with increased competitive promotion.
We're addressing this with innovation on multiple fronts.
Including the launch of a full line of compact that reach product in spring 2020.
During the same period, we're also launching a sanitizing innovation platform.
Including a trigger spray airseal spray and a liquid laundry additive products, bringing the strong clorox equity to the fast growing sanitization second.
Turning to the helpful second.
He loves sales were down 14%.
Driven mainly by declines did back in rats and trouble.
And back and Rep.
She wants sales were down double digits.
Given by the same factors we discussed previously.
Lighter price gap as well as distribution losses inflect portions of the portfolio.
Higher trade investments I'm glad trash bags are now in place.
We're seeing sequential improvements in volumes as well as market share and we're focused on building on this momentum.
As expected.
Trouble sales were down double digits this quarter driven by lower shipments.
The field decline also reflected higher trade spending part of an ongoing efforts to reduce market inventory from a week 2019 grilling season.
And to gear up for a stronger 2020 grilling season.
Building on a strong running category consumption and a normalized inventory level going into the upcoming grilling season.
We'll be focused on executing our plans to turn this business around.
In renew life sales declined double digit due to category slowdown and persistent consumption habits.
As part of our effort to return this business to growth, we're continuing to focus on engaging retailers in support of our category growth plans supported by full brand relaunch next calendar year.
Finally, our cat litter business was down slightly lapping strong double digit sales growth in the year go quarter.
Similar to the other businesses, we're seeing much stronger sales and share performance in non tracked channel that in truck channel.
Our fresh step clean Pos innovation platform continues to grow strongly beyond its first year.
So we'll even further with dedicated advertising and continued trial building activity.
In our lifestyle segment sales grew 4%.
Reflecting growth in three of our four businesses.
Well, let's be delivered double digit sales growth fueled by strength in its core categories up lift care and face care.
Successful innovation, and let care, including the new watermelon lip balm that was the number one overall flavor added <unk> retailer in mass channel drugs share growth for a 19th consecutive quarter.
And reinforce the brands position at the number one overall lip balm and the category.
In face care, there were a record shipments of products, such as face masks and a core cleansers as well as we launch sensitive skin Caroline.
The business also has a strong pipeline of innovation.
Putting a half life as well as men's line launching into free.
For burts bees accommodation of pricing in innovation has been a successful formula in driving strong category growth.
What's sales were up for the quarters, while reflecting higher shipments of dry hidden valley seasonings and dressings.
The results for a couple of strong sales growth in the year go quarter.
The ready to eat dips innovation remain on track with plans to increase demand building investments to expand usage occasion.
The brand also extended to streak of share growth to liking quarters.
We just sales were up slightly for the quarter behind higher shipment of our new Bretaa bottle.
Brett alone last water filtration system.
Which performed strongly in the e-commerce and mass channel.
The businesses continued to streak of solid consistent volume growth getting back a year.
Finally sales for new Tonight, we're down this quarter, reflecting growth in our strategic brands and a double digit decrease in our non strategic brands.
Our strategic brands grew behind strong shipments of Neal sell and natural vitality.
The decrease in the non strategic part of this portfolio is mainly driven by our decision to exit the private label business that came with the acquisition.
Moving past the initial integration phase of new Tenax, we're now working on optimizing the portfolio focusing on a few strategic brands representing more than 80% of the portfolio.
We continue to be excited about the growth prospects of the system.
Lastly, turning to international.
Sales were flat for the quarter with volume growth innovation and the benefit of price increases offset by about eight point of unfavorable foreign currency impact.
Despite the strong headwinds we grew sales in Latin America.
And the international segment grew sales, 8% on an organic basis.
Consistent with our ignite strategy that aims to improve profitability. It international we continue to invest selectively and profitable platform and see the returns on businesses like burts bees and cat litter.
Now I'll turn it over to Kevin Who'll discuss our Q1 financial performance and our outlook for up what 20.
Thank you Lisa and thank you everyone for joining us today.
First quarter results came in generally as expected as we continue to work through the challenges our bags and wraps and trickle businesses.
Certainly and we noted in our press release, we remain on track for fear 2020 and confirmed our outlook.
Turning to our first quarter results sales decreased 4%, reflecting about three fourths of higher trade spending.
Two points of unfavorable mix about two points a foreign currency headwinds.
These factors were partially offset by about three points pricing got it.
On an organic sales basis first quarter sales decreased 2%.
Primarily driven by our bags and wraps and trickle businesses.
Gross margin for the quarter increased 60 basis points to 44% compared to 43.4% for the year go quarter.
First quarter gross margin included 180 voice is poised to benefit from cost savings.
And 120 basis points that benefit from pricing.
Partially offset by a 180 basis points higher trade spending.
Oh I can know that a portion of the benefit to gross margin was related to talking.
First quarter gross margin also reflected favorability in commodity and logistics costs and while it's still early because Goodyear. We're encouraged by the cost favorability, we're seeing in these markets.
Selling and administrative expenses are the presenter sale came at 14% compared to 13.6% due to reduced operating leverage.
Importantly year over year, selling administrative spending for the quarter decline.
Advertising and sales motion government levels as a projected sales were about flat.
Spending for a U.S. retail business coming in about 10% of sales.
Our first quarter effective tax rate was about 22% equal to the year ago corridor.
Net of all these factors, we deliver diluted net earnings per share from $1.59 versus the dollar 62, and a year ago quarter, a decrease of 2%.
Turning to your good cash flow net cash provided by operations and the first quarter came in at 271 million versus 259 million in the prior quarter, an increase of 5%.
Now I'll turn to our fear 2020 outlook.
As we communicated in October 2nd press release, we expect this gear sales to be down low single digits two up 1%.
Reflecting our recently up in assumption of about two points of impact from unfavorable foreign currencies, primarily from Argentina.
As I mentioned at around Wednesday, we previously assumed devaluation or the Argentine peso at about 25%.
And our expectations are closer to 50%.
Importantly, or 50, your organic sales outlook remains unchanged, reflecting 1% to 3% organic sales growth.
By innovation and our expectation for stronger business performance on bags and wraps and trickle in the back after the fiscal year.
Turning to gross margin.
We continue to expect just pure margin to be down slightly reflecting our recently updated assumption on foreign currencies.
Just to your gross margin outlook continues to reflect our expectation for additional supply to investments to support long term value creation.
Including our investment in the rollout of core which compaction in spring of 2020.
We continue to expect to be your advertising and self merchant investment levels to be at about 10% of sales.
We also continue to expect selling and administrative expenses to come in at about 40% of sales.
Consistent with their because your gross margin assumptions, we expect after your EBIT margin to be down slightly.
Our fiscal year 2020 outlook continues to anticipate our fiscal year effective tax rate to be in the range of 20% to 23%.
Net of all these factors we continue to expect this year 2020 diluted EPS to be the range of six so five to 625.
In closing first quarter results came in generally as anticipated we continue to work through the short term challenges, we're facing bags and wraps and Charles.
Did you expect improvement in our overall results in the back half of the fiscal year.
We're certainly pleased there are cost savings program is off to a good start contributing significantly to our fourth consecutive quarter of year over year gross margin expansion.
Looking ahead, we'll continue to address short term challenges, we're executing against a strategic choices, we have made Android nights tragic.
As you said an analyst day, our focus with ignite is to create a virtuous cycle generating fuel to continue investing to drive superior consumer value.
On a long track record of doing the successfully and I continue to believe that once we work through the challenges we're facing on bags and wraps in trouble courts will be up position to deliver results that are more in line with the long term financial goals.
And with that I'll turn it over to battle.
Hello, everyone and thank you Kevin.
Hi, My three key messages first Q1 results came in generally as expected.
As we discussed last quarter, we anticipate fiscal year, 21st half sales to be lower than the second half as we continue working through the persistent challenges in bags and wraps and chocolate.
Hi, I'm pleased to be delivered volume growth and gross margin expansion in three or four segments.
And notwithstanding a tougher foreign currency environment, which drove flat sales in our international business for the quarter.
The National team continues to make strong progress delivering 8% organic sales growth and the seventh consecutive quarter of profit growth.
But clearly we're not satisfied without topline results.
I do want to reinforce that improving bags and wraps and charcoal is a top priority for us.
We are actively working with customers to significantly strengthen our business plans with the kenai on sustainable long term improvement.
This includes innovation that we believe will deliver meaningful value to our consumers in categories.
Importantly, I'm pleased about the green shoots we're starting to see are these businesses and I continue to anticipate improvement on back threats and charcoal in the second half of the fiscal year.
My second message is that we're on track to deliver our outlook for the fiscal year 2020.
This fiscal year brings another robust pipeline of innovation.
By the complexion of Clorox liquid bleach as well as the launch of Clorox compostable cleaning wipes books fabrics advertisers kingsford pellets and several innovations in back to reps and natural personal care.
We will drive awareness and trial these new products, while continuing to invest behind significant upside opportunity in ongoing innovation platforms, such as Clarkson FEIBA.
Fresh step clean pause.
It up filtering water bottles and hidden valley ready to eat dips.
I believe that consumer and retail engagement in the strength of innovation program, along with stronger business plans for back to reps unshackle supported by our commitment to excellent execution.
We will contribute to improved overall results in the back half of sophisticated.
It's also mentioned previously a 50 or 2020 outlook continues to reflect our commitment to balancing on shorter term focused on addressing the challenges on bags and wraps and Chaco with strategic plan aimed at driving long term profitable growth.
Finally, my third messages. This I'm confident a new ignite strategy will guide us see the ongoing pursuit of delivering long term shareholder value.
As we discussed at analyst day earlier this month.
Nation to strengthen and extend our competitive advantage is front and center ignite strategy.
The integrated choices, we've established for ignite create a virtuous circle of fueling growth and investing behind innovation to deliver superior value.
By the end of 50 or 23.
We expect to have begun activating brand purpose on all major brands laying the groundwork to drive significant marketing ROI in the future.
We expect to have engaged all major customers in new ways to create frictionless sop shopping experiences in stores and online leading to meaningful opportunities to drive category growth.
We also expect to have surpassed 150 basis points of annual cost savings supported by meaningful productivity improvements moving steadily towards new annual cost savings target of about 175 basis points.
And finally, we expect to have made significant investments to drive stickier multiyear innovation platforms that differentiate our products and brands.
With a robust innovation pipeline in the back half of fiscal 2020.
Everything we do is in service of superior value because we know it's the key to winning with consumers.
And of course will continue our focus on growing the right way with U.S.G. integrated into our business. So the goal so creating value for society.
A recent announcements to join the Ellenbecker Arthur foundations, New plastics economy Global commitment is an example of this.
As we reinforced at analyst day, ignite innovates for good growth growth, that's profitable sustainable and responsible.
Operator, you May now open up the life of questions.
Thank you Mr. door, ladies and gentlemen, if you have a question. Please press star one on your Touchtone telephone first question comes from Olivia Tong with Bank of America.
Good morning, Bino good afternoon.
In terms of the just near term trajectory I know you're quite a few initiatives slated for second half across several businesses, but what about Q2, you talked a little bit about green shoots do any of those help already or are those all sort of second half weighted.
Hey, Olivia Kevin Good morning, let me if I can take out one you know what I expected in Q2 is you'll see improved organic sales growth.
Now, having said that I expect our Q2 results to look similar to Q1 with a worsening FX environment, but improving organic sales growth and really because we're going to see improvement on both glad and charcoal as you know those are the two challenge businesses that were working to turn around and I expect to see improvements next quarter, and then already and of course.
That means that growth will come into back half first of all but have easier comps I think everybody's aware that but we're also beginning to anniversary distribution losses in Q3, and as you know we're very focused on strengthening distribution now two things I'm, most important we need to glad and kingsford stuff to improve and we expect improve.
Went on both.
And we're seeing green shoots some mentioned that kingsford.
Is growing.
Mid single digits and consumption.
Lately and glad is.
Starting to grow share well plans are implemented so headquarters. So we feel good about that then of course, we have a robust innovation program in the back half as state. It. So you know the back half is where a improvements or expected.
Realized we have work to do this but theres enough there to give us confidence.
Got it that's helpful.
If I could ask a question about tracked versus untracked I mean, the spread between the two seems to be increasing obviously on line continues to be a big driver, but is it growing even faster than it had been is accelerating or are there more efforts or just more opportunity it across a broad spectrum of non tracked channels, whether its club online or other retailers.
Yes, I wouldn't be counted on is that the spread between tracked and on track is indeed widening right.
That's for two reasons first it was probably most evident in home care, where you know we've seen the business down slightly but growing double digits in non tracked channels.
First of all I would say you know the consumer in part due not categories is migrating towards non tracked channels, that's where a lot as a category growth is.
We do know that outperformance also marketshare wise.
It's better in non tracked channels and perhaps at this point as we think about.
The post pricing Bumpiness that we talked about you'll find moral that which relates to distribution losses and Brad that's the merchandising in track channels than in non tracked channels and what that gives.
As is.
Oh confidence in the expect the back half turn around because we know that were all brands are able to perform they do and that's why the gap between traction on track to has been widening hopefully.
Got it thank you.
Next question comes from Camille Gosh, or Rolla with credit Suisse.
Hello.
Everybody a couple of questions of Inc. singed on.
The issues over the recent period has been in trash bags and in wipes and such but you know you mentioned distribution losses and in bleach as well some tough comps I suppose on later, but it looks like soon so the issues are are expanding beyond some of the categories and were converted initially the area.
Focus can you talk about what's going on there is there something connected between the various categories that we should be aware.
Hi, Thanks, Camille no the issue remains.
Ladies first if we think about the rest of the portfolio. There's there's actually quite a quite a bit of strength you know birds grew double digits.
Food 19 quarters of share growth the professional business growing high single digits, a British now our fastest growing business in terms of share.
Parts of home care are seeing strength toilets, which is a strategic segments as an all time high and shipments.
International performing well so it's it's really glad and Kingsford. If you if you take out guidance takes for it actually grew organic sales for the quarter now it will tell you that if you just look at share of course, you know, there's always a ups and downs right.
But what I'd tell you is if you look at it over the longer term, which I think is perhaps helpful. We track eight businesses in terms of share and six out of those eight if you compare the last quarter against three years ago are in line or higher okay.
There is in line coming off of a 14 quarters of share growth.
Bleach is higher than three years ago hidden valley is higher than three years ago upgrade is doing well lit up later is about in line birds is higher it's really cold and trash. So no news on on the portfolio fraud.
Clearly not not everything is performing as well as we want to but much of the short term noise can be attributed to the.
Well illustrated issues around.
Lower merchandising and distribution losses post pricing and as such we believe that they will be temporary.
Okay understood and then just finally on this.
The expectations from the back half seems to be rooted in return of distribution from some of the losses from last year at what point do you know now if you going to be put back into a point, we have a good Samsung.
Going to be going into a period, where there's distribution gains as opposed to distribution losses.
Yeah. It back have clearly you know that does.
So assuming that some of the distribution losses, which were anniversary in Q3 will be mitigated and that will start to make progress there along with easier comps and the strong innovation program.
Categories generally are healthy err on the distribution side Weve comedy that that were not.
We haven't been where we want to be in the last 12 months post pricing.
And a focus is to make those are temporary discussions are happening this quarter. So that's all work in progress at this point.
Reasons that gives us optimism as we're focused on achieving these improvements starting it's way too. Many instead, we have do have a long track record of partnering with retailers.
It's obviously, a very strong organizational focus area right now I'm looking at our business plans for puts ready in particular on glad and kingsford they need to be better and they will be better including robust innovation and then our new ignite strategy of course gives us plenty of partnership.
Opportunities around creating categories for the future to drive profitable growth for retailers. So work in progress many of them are happening as we speak but a big area of organizational focus now.
Okay got it thank you.
Next question comes from Jason English of Goldman Sachs.
Hey, good morning folks.
Good afternoon, I should say, but its once the days, it's all blended together now.
A quick housekeeping question and the logistics and manufacturing flying in your gross margin bridge, it's been sort of a persistent drag for quite some time.
But it's good to know moderated for two consecutive quarters to be reasonably marginal now in the first quarter.
Instead of trend line, we can expect to continue.
Yeah, Jason I would say add a separate transportation remanufacturing on the transportation side as you mentioned, we're pleased to see favorable transportation rates for the first time in probably better party. Two years, we had about 20 bips or favorability as we're seeing a decline of the spot carrier market.
We talked about this before but just as reminder, about 85% of our transportation has contracts, where there are eight carriers and and those rates are set but we are seeing a reduction in spot market that I believe we'll continue it also bodes well, but as we renegotiate rates in the future that may generate ongoing benefit as we look out the fiscal or 21.
Beyond so.
I started the year thinking transportation would be up low single digit said, what I'm seeing right now I suspect it will be flat to down low single digits nice improvement there.
Then manufacturing a little favorable this time, we had some delays and some of our investments for our new litter plan.
You'll see that play out later on in the year as I've mentioned, we're going to have about 20 to 25 gets on investment and the supply chain. It was pretty late in Q1, but I tell expense expected spend not wanting to year. So we'll pick that up later in the year.
All right that's helpful and I guess I want to come back to the question.
All everything excluding.
Yeah, charcoal and and waves switch don't seem to be really a whole lot worse than it was expecting but.
Your cleaning segment, it's one of the weakest quarters, you know very very long time and professionals growing high singles. It implies the consumer facing side of that business is now contracting somewhere to 3% to 4% range [laughter] I love some contracts and color on what's what's causing that business too.
It's kind of get to rail and as we look at the data.
I think your biggest innovation platform in recent years has been sent teed up and in Nielsen, Yes, and Telus now it's declining high singles, even with sort of a 14 point benefit coming from the sleeper refills.
Yeah. It begs the question or whether or not the issue there's just.
A lack of innovation effectiveness love to your opinion on all those friends. Thank you.
Yeah first of all Jason out strongly disagree with the statements that the business histogram of actually okay with the with where the businesses at this point and let me maybe take the two and turret first of all laundry additives.
Sales is down behind post a pricing distribution losses, we have anticipated those we have commented on those several times and talked about them consistently.
You know if you look at the bleach share for instance, a quota shares versus three years ago, because sometimes it's helped it looks at the forest did not look at trees fleet shows up a point that a half where it's a three years ago I hope that provides perspective and now we're gearing up for significant innovation in the spring which include.
It's bleach compaction and.
A new platform in the fast growing loan laundry sanitizer segment behind us.
An equity that is particularly well fitting there.
Home care.
You know if you just look at shares its coming off a free to half years of share growth its normal to have some up and down, especially post pricing again lost some distribution well documented at the same type volume grew and Q1.
Sales is down to two a long track channels.
The outgrew track channels by a wide margin.
Out of the non tracked channels grew double digits in absolute.
So that's a negative mix effect wipes is growing mid single digits since keep up with a record is growing which perhaps helps you understand the strength in non tracked channels.
And you know if you look at the past 13 weeks tracked channel shares slower than year ago, but it's it's higher than past 52 weeks, So we're making progress.
I'll focus on this a category obviously important category for us is on profitable growth.
We will continue to activates a the clock spread purpose, which has been working so well and so of course, we have a lotta innovation.
I know you're well aware of.
Lined up in the back half, including our compostable cleaning whites launch, which.
Is starting to go out in Q2 and then.
Widely available in in Q3 so.
Ups and downs, but I feel solid about where cleaning is.
And optimistic about the back half with old innovation coming up.
Okay. Thanks, a lot I'll pass it on.
Next question comes from Wendy Nicholson with Citi.
Hi, good afternoon.
My first question just housekeeping how much longer do we think the private label exit in the new products business is going to continue to be had went I know you said, it's like 80% of the business is healthy and good but just just when should we expect that head went to go away and then my second question is just taking a step back on.
The the fix it initiatives you're undertaking for glad and charcoal are obviously huge.
Yeah, and important and between the two of them. Those are I think what 15, 20% of your revenues and so I'm just surprised that your guidance. Both for you know the SNA line on the piano and advertising isn't higher than normal I know, 10% for advertising and 14% for us night.
A kind of your long term objectives, but I am I'm kind of questioning why in this year, where it's so important to get those two big businesses really back on track you wouldn't sort of take a holiday from your long term targets and just say this year, we're going to spend more and an absolutely make sure.
We get those businesses right it.
Thanks.
Hey, when it maybe I'll take the first question had on renew life and how long it as we exit some of that business as both private label on contract manufacturing.
I would expect to see that a drag for the balance of this year, we will continue to step out of that business over the next several quarters.
And that's a pretty natural sort of transition out as we use that capacity for our own needs and so you should expect to see that drag from next several quarters.
And then the second part Wendy.
No more money is not the option here.
Certainly on the people and on the advertising side. If you think about flat what we're trying to do is fixed the widen price gaps and we feel good about the progress that we're making and towards the end of the quarter.
And also in October where the plans are now fully implemented which they are we're seeing a return to share growth, but are they increased spending there is going into trade.
Where we are spending more but we feel good about advertising.
And certainly people on Kingsford, it's all about better plan as a as we've commented at analyst day.
Let the money issue and again, we've certainly spend quite a bit of trade muddy. The this last quarter to get rid of excess inventory, but a we're pleased with the amount of money that we're spending behind those two businesses.
You know as as we have committed in the past will always willing to look at spending will also willing to lead into spending where that's indicated that an important and necessary, but we don't think that's more advertising or people is the solution here, we're certainly spending more trade but.
The progress starts to be evident and we expect more progress to be had in the backup.
And I'm just surprised I guess the feedback from the retailers I mean, there's always the the hope I know is to regain some lost share, but there's also a whole bias town of growing the category, particularly in charcoal and and I I'm surprised that part of the conversation with the retailers isn't hey, Clorox, you've got the biggest than most well known.
Brandon please spend more money on advertising to get people to stop ordering there you there [laughter] ribs term grubhub and cooking at home that's is that not part of the conversation.
So part of the conversation certainly is engaging their consumer and like I said when the worst we spent quite a bit against the consumer.
And we're making sure that the money counts.
With retailers as well, but if you think about the chocolate category. The chocolate category passed a 13 weeks I believe is up.
Double double digits and our business, while it's still a little softer in shares is growing mid single digits. So the conversations that we have are starting to bear fruits and we're certainly seeing in this category as well as in other categories like glad and in wipes the strong correlation between the health of our.
Categories in the health of our brands if our brands are doing well. The category is generally tend to perform better if all brands are not doing well the categories are performing worse and that very part certainly is a key component of our discussions with retailers.
Well I.
Hi, good if I, just broaden out a little bit from just change for and glad the other perspective I'd offer you think about our at night strategy, we want to create fuel and we want to reinvest that back in the business, but I feel really good if you look at our gross margin performance that we've expanded gross margins for each of the last four quarters at the same time we.
<unk> increased advertising levels for each of the last three quarters, so very consistent with our long term strategic intent is we're going to drive waste out and we're going to reinvest at the brands to drive superior consumer value added you really see you've had a lot of several quarters.
Got it thanks, so much.
Next question comes from Lauren Lieberman with Barclays.
Great. Thanks, first I had two clarifying questions.
Versus just a follow up when do you think it asked about neutral next but I believe Kevin you respond to ask talking about renew life. So.
I want to go back and even when you acquired new Tenax.
I mean to what degree did you have an understanding of the portfolio and that there'll be this decision to cut so much of the business because some of the brands that were held up I think there are described to kind of core seem to be what your deemphasizing. So just sort of almost like a post mortem I'm, where it's a new tenax would be great. That's not the first follow up thanks.
Yeah, and what the new checks I apologize Lauren thousand new tracks answer so when we acquired the business and this is typical when we acquire businesses in many cases it comes along with pieces of the portfolio. There we don't have any interest in strategically.
And this case they had done a number of acquisitions as though they picked up private label Essam contract manufacturing.
They have a number of minor brands in DTC that don't we don't see that having long term value and so pretty typical for the first year or do you, we will clean that up and get the portfolio focus on what we think have long term value for our shareholders and that's certainly what we're doing so we're stepping out of private label, we're stepping out of the contract manufacturing sharply.
Aspects of DTC, as well and really getting this to the core portfolio that we believe had long term value.
Okay, Great and then the second thing with just about the second quarter, you talked about things will improve but then you also said you know the growth will come in the back half. So it's going to be clear second quarter sales are expected to be down, albeit a bit better than what we saw in Q1.
Yes, that's correct I expect second quarter Diller fairly similar to the first quarter in terms of sale, but the drivers will be different the FX environment is getting worse.
Keep in mind, the bulk of our FX exposures in Argentina, probably 70, 75% the big step down in the peso happened late in August , but you've got a partial impact in Q1.
Okay, a bigger impact going forward and then that will be offset.
By improving organic sales.
Okay, all right great and then the other thing I was curious sort of post analyst day, and sort of look back and we've been thinking back.
Years prior to I guess, maybe four years prior analyst day, where.
Amit introduced the concept of fuel versus grow brands and started thinking about the degree to which that approach kind of got you to where you are now on somebody's big more challenged businesses.
And so I just wanted to talk about sort of.
Theres the steps to improve the short term challenges, but also maybe.
It's structural change in how you addressed.
Businesses across the portfolio.
And is that sort of a fair thought process because I. It feels like maybe these businesses are just start for like a good for five years and that's sort of how we got here.
And also what may be led to.
Some of the pricing decisions being as on a cost stubborn as they sort of proved to be.
They are not really so if they think about glad trash, that's a growth business and kingsford as a feel business you know so.
Theres no correlation there as I look at those two businesses I think it makes perfect sense for us to disproportionately invest in businesses that are faster growing and that are more profitable and I feel good about that.
Britain has returned to growth Burts bees has had a strong run the food business has had a strong run and many of those businesses are performing better than they did before we started the concept of fuel versus growth.
No I would point to post pricing issues on those two businesses, we feel good about.
Pricing, we have always said that this is a short term versus long term trade off it's absolutely necessary for us to offset cost increases through pricing to be able to ensure that we're able to drive long term shareholder value. We continue to manage our business with an eye on the long term and.
You know as difficult as.
You know these some of these distribution losses and certainly the challenges on glavine kingsford or the reality is that.
We must power through then as part of our focus on long term profitable growth. So.
Feel good about the fact that we're offsetting pricing aggressively.
We feel good about how we're managing the portfolio as a whole and see none of this related to the choice that we made four years ago.
Okay, great. Thank you so much.
Next question comes from Kevin Grundy with Jefferies.
Hey, good afternoon guys.
We haven't first.
Housekeeping question for Kevin So first quarter, obviously, a bit saw sounds like second quarter challenged as well, although contemplated in your guidance to some degree Kevin I apologize if I missed this is it your preference to kind of level set expectations towards the lower end of the 1% to 3% organic sales guidance.
For the year or you still see it's possible to do the higher end, which would imply something like 5% organic sales growth in for the balance of the year, which feels a little bit ambitions.
Yeah, Kevin. Thanks for the question you know what I would say as I am comfortable with our 1% to 3% organic sales.
I don't plan to provide any more insights in terms of high low I think thats a good solid range for us and feel comfortable with where we're at this point.
Okay.
Alright, and then a follow up question on on the margin structure in the household business understanding the significant price investment and advertising and marketing going on there, but the margin in the quarter not 6.5% call. It for operating margin was one of the lowest that we've seen that segment.
In a very long time this had been low 20% operating margin business.
I'm not going back to too far.
How do you see the margin structure for that business now going forward. How much of this is sort of a permanent impairment higher cost of business higher advertising marketing trade promotion levels with some of your big important businesses charcoal trash bags litter et cetera, do you see this is more sort of a permanent impairment or you think.
You know kind of out of the woods after a challenging year this year middle pass it on thank you.
Yeah. Thanks, Kevin you know what I think about in terms of margin in household.
One thing to keep in mind, the two businesses that are challenged glad and charcoal their most capital intensive businesses.
And so when you lose volume in those two businesses, you've got a lot of fixed cost that gets spread over a lot fewer units and have an outsized impact on margin. So my expectation is as we get those businesses back on track and growing you'll see that reflected more positively in the margin line.
Okay. Thank you guys I'll pass it on.
Thanks next question next question comes from Ali Dibadj with Bernstein.
Sure.
Hi, guys.
So I have two questions one Ben I, just wanted to take a step back around the pricing strategy.
So I look I get the Bumpiness commentary I get that we've seen this before commentary, but honestly I guess I would've thought the bumpiness was going to be more from the consumer elasticities.
Which has certainly been a case historically, but but they're they're just they're many perhaps perhaps too many.
Instances of the retailers reacting badly to that price increases and I guess I just want to ask a very simple question that part of this naive, but but why do you think there retailers are kicking you off the shelf now when you're taking the price increases.
Yes, so as you so.
Good consumer elasticities are good right. So we have covenants that they're largely unchanged.
Versus before price increases.
We've also commented on the fact that consumer value measure.
Actually is really positive with 54%.
Of our portfolio being seen as a superior which compares to 53% before price increases so a pricing generally is performing as expected.
Why do why are we experiencing.
These.
Distribution issues, we certainly went out earlier confidently.
So perhaps point to that other than that you'd have to ask retailers, but clearly what we're seeing in some categories is that.
Some competitors Didnt follow where we might have expected them to follow and as a result, we get an outsized reaction, but look I understand this.
In many cases.
You know categories, where we've lost distribution are softer too I commented on the.
Correlation between.
Our performance and category performance and that's really what we're focused on right now losing distribution as hard as it was is water under the bridge, we're focused on getting distribution back and we're working with retailers now to make progress and 2020.
So yes, it so helpful, but I just.
Because I just I don't I'm, sorry, I, just so I don't understand so that's just is there a good.
The consumer doesn't respond fully today and that's all great them either brands are good. So why are the retail is making it sounds like a mistake like what what's going on.
Because it really doesn't believe or I'm sorry.
Is it that they disagree and their debuted last diseases worse or they don't think your brands are good enough for like why did they kick you guys off shelf in many instances now when you're taking prices up if you also see their go to consumers. Okay with it helps our comp so I just like we got it lets take let's take that as the Best example, perhaps you know we took pricing before a resident fit.
And then the question there were questions about the cost justification on pricing to be clear pricing continues to be cost justified, but that doesn't mean that retailers like it. So you know that parts while isn't.
That's something that's.
It's helping the category, it's also pretty consistent with what we've seen in the past with the one exception that.
Resin flips after we took pricing.
But this is not uncommon Ali.
It's worse, but in part it is that we took pricing early on and perhaps very confidently, whereas some of our peers did not.
Okay. Okay, and then so on this on the confidence going forward topics in the second half.
It is lapping distribution losses in your second half guidance, Kevin or is the actual.
New distribution gains, which is in which is in your guidance.
Yeah, I'd say, it's a it's a combination above certainly lapping distribution losses is a big element. When you look at our costs will be lapping in the back half the year, particularly Q4.
It's been on commented to a certain extent roughly working on rebuilding distribution and have some expectation it turns out to play out.
But as we said earlier those decisions are being made you know right now next quarter. So so want to see how that goes it's still fairly early but there's there's certainly an expectation that we make progress there as well.
Okay, and just my last question around cleaning.
You went through it and details thank you benefit for doing that.
Our the laundry.
Shelf space losses or laundry issues.
Is that anything in anticipation of the complexion of the product or was it just an isolated different different incident.
No I wouldn't call that related to compaction Ali.
It's a loss of of distribution post pricing as we come with it but nothing related to complexion.
Okay, alright, thanks, very much though.
Once again, if you like ask a question. Please press star one on your telephone keypad.
Question from Steve Strycula would you be yes.
Hi, good afternoon.
So a quick question for you on the gross margin you talked about timing cadence a little bit, saying first quarter was a little bit better can you walk us through some of the puts and takes for the gross margin should we expect it down for the next several quarters of the year for the balance of the year.
That'd be my first question.
Sure, Steve as you're thinking about gross margin phasing as you know from for your outlook is will be down slightly.
This was the easiest comp we had we were down 150 basis points in Q1 last year. So.
We had a pretty easy comp the other items to think about though is on cost savings. We had a very strong quarter. We delivered 180 basis points of benefit to margin that was the strongest quarter, we've had five years.
I am pleased with the performance, but we have a big number we're trying to hit this year.
Quite a bit of work ahead of us so while I'm pleased with Q1, I don't expect to be taken a number up.
At this point as I said previously our expectation on cost savings to be close to last year, maybe a little bit better as a 150 basis points. So you kind of phased out through the year also do you think about pricing the bulk of the pricing. We took last year was front loaded and so in Q1 with a 120 basis points to benefit I'd expect to see that decline as.
We moved through the year.
Same with FX.
We have a partial impact this year.
Our excuse me this quarter. So as you get the full impact from Argentina, plus the ongoing devaluation I'd expect FX impact to be more negative going forward.
And then finally as I mentioned earlier the supply chain investments, we're making fairly late in Q1, we will make those investments over the balance of the year. So you'll see that pick up in manufacturing line over the course here. So what I play all that out I still think if it's a balanced view about down slightly for the year and that would suggest you will see negative gross margins going.
Forward, whether plus 60 began the year.
Okay, and then Benno a quick question as we lap last year's weaker flu season have you seen retailer start to build back up for the cleaning in the wife's business as they think about arguably an easy flu season compare and then can you remind us. So it's been a few years since we've had a compaction cycle just do you think about the various.
<unk>.
Well, there's volume or margin implications that investors should think about as we move through that period in spring. Thank you.
Thanks, Steve on on the flu season, we're always working with retailers to prepare for flu season, no matter, whether a flu season, it's good or bad so we will be prepared to serve consumers as they.
I look at four disinfecting products, they don't compaction typically what you see.
If we can.
Repeat what happened in the last few times, a babysitter compaction was one that gross margin expansion.
So we would expect that I think that's a pretty obvious as logistics and packaging materials.
Costs are lower predominantly a and then what you often see is consumers migrates to larger sizes and with that usually comes with an expansion of consumption, which.
In the previous two times also had a positive topline effect. So the primary benefit is on gross margin, but it does have a topline effect there can be persistent for the first 12 24 months post launch.
Thank you.
This concludes the question answer session. Mr door, I would now like to trying to program, but back over to you.
Yeah. Thank you and thank you for joining everyone I wish all of you a happy Halloween I look forward to talking with you again in February when we report on Okay too.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.