Clorox Company (CLX) — Q2 2019 Earnings Call Transcript

Thanks, 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'll refer to certain non-GAAP financial measures. Management believes that providing insights on these measures enables investors to better understand 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 and this webcast's prepared remarks. Please also recognize that today's discussion contains forward-looking statements. Actual results or outcomes could differ materially from management's expectations. I would direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to tax legislation. Our Q2 sales grew 4%, reflecting about 3 points of unfavorable foreign currency impact, mainly due to the devaluation of the Argentine peso, and about 4 points of benefit from the Nutranext acquisition. In our cleaning segment, Q2 sales grew 6%. The cleaning segment sales growth was led by homecare, benefiting from strong innovation, including new products on the Clorox Scentiva platform. Our laundry business also grew sales strongly in the quarter. While competition has not followed our pricing actions as anticipated, total liquid bleach share was up nearly 1 point in the last 13 weeks in tracked channels. Within the cleaning segment, our professional products business grew sales supported by broad-based double-digit volume growth. In the household segment, Q2 sales decreased 4%, reflecting declines in glad, Charcoal, and RenewLife, partially offset by gains in Cat Litter. We remain confident in our plans for the 2019 grilling season. In Glad bags and wraps, sales declined mainly due to lower shipments of food storage products and trash bags due to an increased price gap compared to competitors who did not follow our recent price increase. We have a successful track record of trading consumers up to our premium innovations. We continue to make progress in RenewLife as we saw share growth in Q2 with the largest national retailer in the Natural Channel. Our Cat Litter business had another strong quarter of double-digit sales growth supported by Fresh Step Clean Paws innovation. In our Lifestyle segment, we grew sales in every single business with a 25% increase in Q2, mainly reflecting the Nutranext acquisition. We're also turning on the innovation machine with a steady stream of new products in the back half. Food sales grew strongly in Q2, primarily behind shipments of Hidden Valley Ranch. Lastly, our international segment saw sales decrease 8% due to unfavorable foreign currency impact. Now, I'll turn it over to Kevin who will discuss our second quarter financial performance and outlook for FY'19.

Thank you, Lisah. We are pleased to deliver another quarter of strong sales growth and return to gross margin expansion. Importantly, we remain on track to deliver our fiscal year 2019 outlook. Sales grew 4%, which included 4 points of benefit from Nutranext acquisition, partially offset by 3 points of negative impact from foreign currencies. Gross margin for the quarter came in at 43.7%. Our second quarter effective tax rate came in at about 19% versus about minus 3% in the year ago quarter. Turning to year-to-date cash flow, net cash provided by continuing operations increased 39% to $449 million. Our fiscal year sales outlook continues to be in the range of 2% to 4%, now reflecting 3 points of negative impact from unfavorable currencies. We also anticipate more pronounced currency headwinds, primarily from Argentina. Our outlook continues to assume about 3 points of incremental sales from our innovation program. We have a robust pipeline of new products in the second half of the fiscal year. We continue to expect fiscal year gross margin to be about flat, as the benefits of pricing and cost savings are expected to be offset by increased cost and currency pressures. We also expect fiscal year diluted EPS to be in the range of 6.20 to 6.40, reflecting our estimate of 0.08 to 0.12 of EPS dilution from Nutranext acquisition in addition to 0.05 to 0.07 of negative impact from tariffs. In closing, we are very pleased with our second quarter performance and our overall first half results. Strong execution of our strategic plans is helping us address cost and foreign exchange pressures.

Thanks, Kevin. Let me share my three key messages for you today. First, I’m pleased with our first half results. Our sales increase to 4% is especially strong considering we absorbed about 3 points of unfavorable foreign currencies. Clorox continues to sustain top line momentum. We are differentiating our products and brands through innovation, investing strongly in marketing communications, and leveraging our strength in e-commerce. Integration remains on track with Nutranext. My second point is that Clorox continues to execute strongly against our strategic priorities. We have now completed most of our pricing actions, and we can focus on growing our categories and brands for the long-term. Lastly, we remain confident in having the right strategy to drive long-term shareholder value. Our 2020 strategy has been the bedrock of our focus on long-term profitable growth. We look forward to introducing our updated strategy to you in early October.

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

What I would say, as you mentioned, tax rates are a little bit better. I wouldn’t read too much into that. I think we’re maintaining our outlook for the year. As we mentioned in our prepared remarks, we do think the FX environment is a little bit worse, particularly in Argentina. I think within our range, those are both offsetting.

Given the current situation with oil prices returning to levels seen in the fall of 2017, many are curious about its impact. In household care, particularly in bags and wraps, there hasn't been a significant response from competitors. We have also observed some effects in charcoal and other areas. Does this signal that there may be a need to adjust promotions in response to recent price increases across other categories?

As it relates to commodities and specifically oil, I would say for us it's driven by supply and demand and nat gas rather than oil. We feel good in aggregate about our ability to execute pricing. The one exception is our bags and wraps business where we are seeing some difficulties, and we're aware of that and managing it. But I'll reassure you that outside of Glad, pricing is following through successfully.

If you look at our attachment, you can see our inventory levels were up a bit. We’re up a little bit, and I would say the bulk of that is Nutranext. Because we have such a strong innovation pipeline in the back half of this year, we did pre-build in preparation for launching new innovations.

I would emphasize that a good portion of that inventory build is indeed Nutranext. Additionally, we have some innovation coming on Nutranext, so there's some pre-build as well.

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

The bulk of the movement in Charcoal is based on just the timing of the shipment. It won't have much impact on margin as Charcoal is close to the company average in terms of margin.

So if you think about the Charcoal business, we expect Q3 to be better than Q2, and we believe in the strength of our innovation in this space.

Could you guys talk a little bit further about some of the innovation that you're bringing to the marketplace? Just in terms of what we're seeing with the slowdown in trends and how you expect some of this innovation to resonate better than maybe some of your existing product?

We are very excited about our strong innovation plan in the back half across most of our portfolio. We will launch the first available product that combines Clorox cleaning performance with disinfecting. We're also excited about Hidden Valley where we will be launching into ready-to-eat dips. Innovation continues to be our lifeblood and sets us apart. We will continue to lean more into our proven innovation capabilities to win in the marketplace.

A couple of questions, first I'm trying to get a better understanding of the price contribution this quarter versus the last quarter. On that math, it suggests that price mix was about 200 basis points in the first quarter and again in the second. Is it fair to assume that the reason for is that absolute price grew substantially from 1Q to 2Q, and there was a healthy mix benefit in the first quarter that stayed in the second? So is that thought process reasonable?

I wouldn’t say that's the case. Pricing is generating very little benefit to revenue. What I would tell you is that we are taking pricing to recover cost pressures and allow us to continue investments in brands.

Okay, it was just from your part of results. But I will follow up with these offline.

I was curious for the RenewLife and charcoal business, do you think those businesses can grow, particularly charcoal as you put through some pricing?

Pricing will help. Significant packaging upgrade will help. The 100% hardwood briquettes launch in the back half will help. I would say we expect the rest of this fiscal year to be better than Q2.

I was hoping you could just talk a little bit about litter, because the numbers you discussed and some of this business is doing really well. I was curious about competitive pricing activity.

We see strong performance from Clean Paws innovation. In e-com, it's one of our faster-growing businesses. We're pleased to see competition follow in pricing and the brand strength we've built. We are confident that growing e-commerce is a terrific opportunity, and we expect ongoing success in this category. Thank you all for joining us today. I look forward to speaking with you in May when we share our third quarter results. Have a good day.