Clorox Company (CLX) — Q4 2018 Earnings Call Transcript

Thank you, and welcome, everyone. On the call with me today are Benno Dorer, our Chairman and CEO; and Kevin Jacobsen, our CFO. We're broadcasting this call over the Internet, and a replay of the call will be available for seven days at our 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 enables investors to better understand and analyze our ongoing results of operations. Reconciliations with the most directly comparable financial measures determined in accordance with GAAP can be found in today's press release, this webcast's prepared remarks or supplemental information available on our 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 outcomes could differ materially from management's expectations and plans. I would also direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to the impact of tax legislation. Please review our most recent 10-K filing with the SEC and our other SEC filings for a description of important factors that could cause results or outcomes to differ materially from management's expectations and plans. The company undertakes no obligation to publicly update or revise any forward-looking statements. With that, I'll turn to our top-line commentary. I'll discuss highlights in each of our segments. Kevin will then address our financial results as well as our outlook for FY 2019. Finally, Benno will offer his perspective and we will close with Q&A. For the total company, Q4 sales grew 3% and full year sales also grew 3% with growth in three of our four segments. I will now go through our results by segment. In our Cleaning segment, Q4 sales grew 3% and full year sales also grew 3% on top of strong 5% growth in the prior fiscal year...

Thank you, Lisah. We're pleased with our fourth quarter and fiscal year results. We continue to make solid progress in a challenging environment, delivering strong sales and earnings growth while continuing to generate healthy cash flow. Turning to our financial results for the fourth quarter, Q4 sales grew 3% driven by three points of benefit from the Nutranext acquisition, partially offset by about one point of unfavorable foreign currency, largely driven by the recent devaluation of the Argentine peso and nearly one point of negative impact of the Aplicare sale. Fourth quarter sales also reflect volume growth supported by innovation as well as one point of pricing benefit which was offset by about one point of unfavorable mix. Gross margin for the quarter came in as expected at 44%, a decrease of 170 basis points compared to 46% in the year ago quarter. Fourth quarter gross margin included about 130 basis points of unfavorable commodities and about 100 basis points of logistics costs, partially offset by the benefits of 120 basis points of cost savings and 50 basis points of pricing. As previously communicated, fourth quarter gross margin also included about 60 basis points from charges related to the Nutranext acquisition...

Hi, everyone. And thanks, Kevin. I'll now offer my perspective. First, we delivered another solid year advancing our 2020 Strategy while remaining agile and aggressive in our approach to mitigate significant cost headwinds. We grew sales for the year 3% including another strong year of innovation at about 3% of incremental sales, and about a point from the acquisition from Nutranext partially offset by nearly a point of negative impact from the Aplicare divestiture. We feel very good about these results in an environment where growth is very hard to achieve. We are particularly pleased that all major innovations are doing well in markets including Fresh Step Clean Paws, the Clorox Scentiva platform, Burt's Bees cosmetics, Glad trash innovations and our Professional Products Clorox Total 360 System. And while our focus on traditional retailers remains most important, we continue to make strong progress in e-commerce and sales in these channels are estimated to be up more than 40% for the fiscal year. We achieved these results while operating through a volatile cost environment that was significantly worse than anticipated, taken an agile and aggressive approach to mitigate the impact by leaning into cost savings and moving quickly and decisively to announce cost justified price increases...

Hello, everyone. I had a question on your advertising expense. First, it was down a lot in Q4, so hoping you could help us better understand why that was. And then your guidance for organic sales growth in FY 2019 is consistent with what you generated last year despite your expectations for step-up advertising since you're expecting it to go to 10% of sales from 9.3% last year. So I guess I'm wondering if you're finding that you need to spend more to get the same level of growth. Thanks.

Yeah. Thanks, Bonnie. First on Q4, we'll remind everybody that we have always said that there are going to be quarterly variances. We don't manage the business by quarter. We don't manage the spend by quarter. We're focusing on the long-term, and there is a reason why our guidance is on an annual basis. What I will say on Q4 is that part of it certainly was Charcoal which became clear throughout the quarter was going to be significantly lower in sales, negatively impacting the company by about one point, because of the inventory hangover we had from Q3, which, as you know, was really soft behind the unusually cold weather. And that continued in April which led to lower merchandising throughout the quarter. And we certainly thought that there was no need to spend into that headwind as much as we did last year. What I will tell you though is that for fiscal year 2019, as you noted, we're committed to be about a 10% level which is in line with our target. So there's no news here. We're staying the course managing the business for the long-term...

Hi. Good afternoon. First question is on Glad pricing, which I know it made a ton of sense on – whatever I guess nine months ago to roll back that pricing because of the competitive positioning and the competitive activity in the category. But obviously on – the input environment has changed dramatically. So, how are you thinking about Glad pricing now? Is there a hope for more positive pricing? When do we lap that? Maybe a little bit more discussion about that. Thanks.

Yeah. Thank you, Wendy. So, what we did, as noted in the past was take a price cut on about 40% of the Glad trash pricing last fall just to set the table as we anticipated strong innovation in the back half of last fiscal year and to get that value right. As I think is evident in the really strong progress in volume and sales on that business, that's achieved its objectives. And we're pleased with the success of the innovation out of the gate. I'm also today announcing that we will take pricing on Glad trash. And I think that should tell you two things: first of all, that we believe in the value of the brand and the products that we offer on Glad as is evidenced by the continued shift towards the more profitable premium end of the business, which now accounts for more than two-thirds of the entire portfolio in trash. But the second thing that tells you is that our pricing efforts overall are going in line with plan as is perhaps evidenced by the first business that we announced pricing on in the last quarter, which is Cat Litter which was first out of the gate...

Great. Thanks. So, to build on what you just said – I agree you've been at the forefront of the industry's effort to drive prices these past several months, and you seem pretty determined to carry that forward into 2019. I was just hoping you could maybe step back and provide a few more details on what your experience has been thus far and any color as you look forward on what percentage of list price increases you expect to really show up in the market as an incremental pricing net of kind of promotional offsets and whether you expect that incrementality to differ materially across different product categories as you push for list price. So, I'm just curious. I have no doubt you're going to push the list prices through. I'm just – my question is really about how much of that will drive true incrementality to the fiscal 2019 P&L? Thanks.

Yes. Thanks, Steve. So, I can't comment on individual percentages because those vary by category and because we're still talking to retailers. But two things perhaps are helpful. First of all, the increases that we're seeing on Cat Litter are precisely in line with our plans. And then perhaps to your broader point, we are not planning to spend any of those price increase dollars back in trade and we also did not do that in fiscal year 2018. So, our expectation is that the pass-through, while pricing certainly is at the discretion of retailers, will be in line with our plans.

Hey, guys. So, I want to follow-up on a couple of questions. One is back to the EBIT being flat, so gross margin is flat to up modestly, which were the words you used. The S&A is going to go to about 14%, which is 40 basis points. The A&P goes up by about 70 basis points to roughly 10%. How do you get to flat EBIT margins? Unless R&D is coming down a lot or modestly means not modestly in terms of gross margin? Or is there something else going on that I don't understand?

Yeah. Ali, this is Kevin. What I would say is, obviously, it's still very early in the year, so these are the outlooks we provided are ranges around each of those estimates. We'll have to see how the commodity environment plays out. We certainly provided a range around gross margin accretion and we'll have to see where that plays out as well as our admin spending. We said about 14%. Part of that is driven by the Nutranext acquisition and the integration spending we're doing as we're integrating our people, processes and systems. And so, I would take those as ranges and we'll have to see how that plays out and we'll clearly update you folks as we move through the year.

Hey, good afternoon, guys. Thank you for letting me ask questions. A few housekeeping items kind of run through quickly. You mentioned expectations for manufacturing logistics for next year. It's stepped down quite a bit, just in terms of magnitude and headwind in the fourth quarter. Anything notable changed there?

Yeah, Olivia. What I would say is certainly on transportation, we think we saw the high watermark in fiscal 2018. While I do think it's still an inflationary environment, I don't expect to see the type of rate increases we saw in 2018. I would expect transportation in the mid to high single-digit rate increases. And last year, we were experiencing high double-digit increases. And so, I think we've done some nice things to get to a lower level of inflation on transportation. And then our manufacturing as well, manufactures – manufacturing expense can move around by quarter as we invest in our supply chain, but I'd expect a similar amount on an annual basis of what we saw in 2018...

Just had a question about kind of retailer dynamics, right? So part of the big conversation across the industry, of course, has been retailer receptiveness to pricing, not just the consumer impact. And you guys have long talked about the idea that for companies that are innovating and driving growth if the retail relationship can be in a good spot as it has been for the last couple of years. Anything that you can share now on how that may have evolved as the ask for pricing across the industry is getting a lot more broader, more companies asking for it even though that may be haven't been quite as innovative or driving as much category growth. Anything you can offer on that broad industry perspective in terms of retailers and the understanding of the price that needs to be showing up on shelf would be great.

Yeah. Thanks, Lauren. You could speak for Clorox perhaps more so than for the industry. Several things are important in order to do pricing effectively. The first thing is, as I've said earlier, it's got to be cost justified, right? So, all our price increases are cost justified. And we're pretty transparent with retailers and truthful, of course, with retailers, because they see what we see in terms of cost. The second thing that matters certainly is to have leading brands that offer better value for consumers. If you have that pricing discussions with retailers, which are never easy, because they want to make sure that you're doing the right thing. But they are going to be more productive than in situations where you perhaps don't offer better value where you don't have leading brands and where your spot in the markets is less clearly defined...

Thank you for squeezing me in. Hello, everybody. So just a clarification on the volume and the mix effect for Nutranext. And if you do the math I mean obviously you gave us the components. But just, if you have to assume any mix effect for Nutranext going into next year like for this following fiscal year. And also related to that, in some ways, like I remember like RenewLife had a lot of distribution gains. How far are you from that? And if you kind of also embed Nutranext in that comment? Thank you.

Hi, Andrea, this is Kevin. I can certainly take your question on Nutranext mix. We don't provide mix at the SBU level. But what I'd tell you is what we saw in Q4 as it relates to Nutranext, I'd expect to see a consistent impact as we go forward. That business is still relatively small in the overall portfolio of Clorox. It won't be that material to the company...

Yeah. For a moment I thought you'll take the Burt's Bees question, it would have been entertaining. The cosmetics launch is performing well. As Lisah has noted earlier, this is a launch that's building over multiple quarters, which is driven by two things. First of all, retailer shelf presets timings, but also our commitments to be disciplined in this, we don't want to get hung up in some of the industry dynamics in cosmetics. We want to make sure that we're disciplined and that we're driving this based on solid SKU velocities and with the right amount of SKUs and complexity. But one way perhaps how you can see that we're confident in this future platform is the launch of liquid lipsticks now, which we're really excited about, because it's a fast-growing segment and one where we have a great product...

Yeah. Thank you, everyone, and hope you have a good rest of the day. And I look forward to speaking with you in November when we share our first quarter results. Thank you.