Clorox Company (CLX) — Q4 2020 Earnings Call Transcript

Thanks, Hillary. Welcome everyone and thank you for joining us today. We hope you and your family are safe and well. On the call with me today are Benno Dorer, our Chair and CEO; Kevin Jacobsen, our CFO; and Linda Rendle, our President and CEO-Elect. Before we go through our Q4 and full year results, I'd like to turn it over to Benno to say a few words about the leadership changes announced today. Benno?

Thank you, Lisa, and hello everyone. You've likely seen this morning's announcement about my decision to step down from my role as CEO. With our current President, Linda Rendle, being named my successor effective September 14. I will continue to serve as Executive Chair of the Board. It has been my great privilege to carry forward the legacy of generations of strong Clorox leaders in my pursuit of Good Growth. Growth that is profitable, sustainable and responsible. The idea of Good Growth was created based on the very strong belief that companies can deliver great results the right way, and that serving employees, communities, and the planet as a whole is as important as serving shareholders, and that’s how we generate profit matters. I am proud that as a company, we have always been strategy led and committed to our values, both of which have guided us successfully in making the right choices on behalf of our shareholders and all of our stakeholders. After 15 terrific years at the company, I am particularly grateful for my teams of 8,800 strong, and especially for the current executive team. I have great confidence in them. I also want to thank the Board of Directors for their support of a guy who ventured out of a small town in the German Black forest, 35 years ago to pursue a dream that led me to places and allowed me to do things I could not have possibly imagined. My thanks also go out to everyone in the investment community around the world for your support, helpful perspective and of course, your candor, which I look forward to momentarily. I appreciate all of you, and I particularly appreciate the wonderful friendships that I’ve been able to make along the way. On September 14, I could not be more pleased to hand over the reins to Linda and I look forward to supporting her and her team. I’ve worked with Linda for 13 of her 17 years with the company. She is an exceptional leader, with an outstanding track record, the right leader for this great company and I cannot wait for all of you to be able to see what she can do. Linda is joining us today and will participate in Q&A and also say a few words towards the end of the call. Thank you. It’s been an honor and a privilege. And with that, I’ll turn it back over to Lisah.

Thanks, Benno. I've really enjoyed working with you since I started at Clorox on the Glad business more than 15 years ago. And I look forward to working closely with Linda as well. A few reminders before we go into results. 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. Today's discussion contains forward-looking statements, including statements related to the expected or potential impact of COVID-19. These statements are based on management's current expectation but may differ from actual results or outcomes. In addition, we may refer to certain non-GAAP financial measures. Please refer to the forward-looking statements section, which identifies various factors that could affect such forward-looking statements and the non-GAAP financial information section, including the tables that reconcile non-GAAP financial measures to the most directly comparable GAAP measures, both of which are located at the end of today's earnings release, which has also been posted on our website and filed with the SEC. Turning to today's discussion of our results. I'll start by covering our top line commentary as usual, with highlights in each of our segments. Kevin will then address our financial results as well as outlook for the fiscal year 2021. Finally, Benno will offer his perspective and we'll close with Q&A. For the total company, Q4 sales increased 22%, reflecting double-digit growth in all four reportable segments. Full year sales were up 8%. I'll now go through our results by segment.

Thank you, Lisah. And thank you everyone for joining us today. We hope you and your families are well. I'm proud of a very strong performance in Q4 and our overall results for fiscal year '20. As we continue to navigate the global pandemic, our team has been unwavering in our efforts to maximize supply disinfectants and other essential products needed by healthcare workers, consumers and our communities. In the fourth quarter, COVID-19 continued to have a significant impact on our results. In addition to double-digit sales growth in all four of our reportable segments, we delivered our seventh consecutive quarter of gross margin expansion and another quarter of strong cash flow, all of which contributed to strong fiscal year '20 performance. As you saw in our press release, we are providing a financial outlook today, because, despite the increased challenge of anticipating how the full year will play out, we believe that in this period of heightened uncertainty, it's important to provide investors with as much transparency and perspective as possible. That said, we anticipate a higher level of variability than what you might normally expect, as the results will be heavily influenced by the depth and the duration of the ongoing health crisis. I'll comment more on our outlook shortly. Turning to our fourth quarter results. Fourth quarter sales were up 22%, driven by 21 points of volume growth and 3 points of favorable price mix, partially offset by 2 points of FX headwinds. Gross margin for the quarter increased 170 basis points to 46.8% compared to 45.1% for the year ago quarter. Fourth quarter gross margin included the benefits of higher volume as well as 170 basis points from cost savings, and 120 basis points from favorable mix. These factors were partially offset by higher manufacturing and logistics costs which included temporary spending related to increasing our production capacity and expediting transportation of our products. Fourth quarter gross margin also reflected ongoing cost favorability in commodities, more than offset by the impact from foreign currency headwinds. Selling and administrative expenses as a percentage of sales came in at 14.1% compared to 13.3% in the year ago quarter. This higher rate primarily reflects increased year-over-year incentive compensation, consistent with our pay-for-performance philosophy. Advertising and sales promotion investment levels as a percentage of sales came in at about 11%, about 0.5 point higher than the year ago quarter. We're spending for our U.S. retail business coming in at about 12% of sales for the second consecutive quarter. For additional perspective, we invested $70 million more in the back half of fiscal year '20, compared to the same period in fiscal year '19, reflecting aggressive investments consistent with our ambition to accelerate long-term profitable growth.

Thanks, Kevin. Here are my three key messages for our Q4 and fiscal year '20 results. First, I continue to be proud of our people's leadership and commitment to serving public health and supporting our consumers and communities during this global health crisis. The dedication has led to outstanding Q4 results, contributing to very strong performance in fiscal year '20. I'm pleased we delivered fiscal year 2020 sales growth of 8% reflecting growth in all reportable segments and organic sales were up 24%, our highest organic sales growth on record. We also delivered total company gross margin expansion reflecting gross margin increases in all four segments for the fiscal year, supported by the strength of our volume results and robust cost savings. And even with significant advertising investments, we were able to expand fiscal year EBIT margin by 110 basis points. And we delivered a 16% increase in diluted earnings per share for fiscal year '20. While our financials for the quarter and full year were very strong, there's one area of ongoing focus for us, keeping up with continued elevated demand. We take very seriously the important role we play in this pandemic and customers are counting on all our products. Frankly, we thought we would be in a better position by now, but demand in Q4 exceeded our expectations. We're certainly not at all happy with our service levels for our retail customers on many products, as demand for our products exceeded our own expectations in the face of this persistent pandemic. We have a high sense of urgency on this with all hands on deck. We're accessing third-party supply sources and focusing our manufacturing on those products that can be supplied more quickly. Before I go on to my next message, I'd like to say again, how much I've valued the commitment of Clorox people and their contributions to our Q4 and fiscal year results. Our team of 8,800 strong continues to step up every day to contribute to our efforts of supporting our consumers, customers and communities.

Thanks, Benno. And hello to everyone on the call today. First, let me start off by saying just how excited I am to be Clorox's next CEO. After 17 years with the company, what makes me most proud about taking the reins from Benno is that Clorox is truly a special company. We have iconic brands people love and a wonderful values-led team that takes to heart our role in making people's lives better. Second, I'm optimistic about the company's future and look forward to working with the executive team to accelerate growth. This is a pivotal time for the company and there is no better time to be CEO at Clorox. What's become even clearer during this pandemic is that we're a Health and Wellness company at heart. Whether through our disinfecting products that support public health, our Vitamins, Minerals and Supplements that enhance wellness, or other essential products that people count on for their families and homes, I firmly believe that our global portfolio of trusted brands is in a strong position to address the shifting consumer mindsets and behaviors related to health and wellbeing. What's also clear is that we have a big opportunity to build on our momentum from fiscal year '20 for long-term value creation. And we're investing behind this momentum to support our ambition to accelerate profitable growth in fiscal year '21 and beyond.

Thank you, and congratulations to Linda on her promotion. Benno, I appreciate your outstanding leadership over the years and the time you've dedicated to our business. It's great to see that at Clorox, you can now focus more on strategic initiatives moving forward. I would like to hear your thoughts on the agreements with the 10 new production partners and the partnership with the Cleveland Clinic, along with business partners like Uber, United, and AMC Theaters. I'm curious about how you plan to leverage this opportunity. I understand this segment currently represents about 7% of your sales, up from 6% in the previous fiscal year. Could you provide some insights into how you intend to sustain this growth, especially with the capacity from debottlenecking? Additionally, how should we consider the balance between B2B and B2C moving ahead? Thank you again, and congratulations to both.

Thanks, Andrea. I'll get us started here. So as Benno mentioned earlier, we're very serious about the role that we play in public health. And as we look at our cleaning and disinfecting portfolio, we see opportunity broadly in the U.S. and International across several spaces and I'll outline high level what those are. The first is continuing to delight people with products in the retail space. We know that we are not able to meet the demands and that is priority number one is getting as much supply as we possibly can into the retail space to ensure that consumers have products they need during this time. The same is true in our traditional professional business, which you highlighted is about 7% of sales in fiscal year '20 and has been a high single-digit grower for us over a number of years. So working on supply in both of those. With the opportunity that you highlighted is one that we're aggressively pursuing and that is the merger of those two areas. As people re-enter public life, they are looking to be reassured that the spaces they enter are clean and disinfected. And what they would be reassured by as a trusted brands like the brand Clorox, is to ensure that that space is clean. They have that reassurance in their mind. And we're helping businesses do is welcome people back, whether that would be their employees or their guests and by using and partnering with Clorox's protocols and brands, they can offer their guests that reassurance that the space is safe. That's how we're thinking about that broader out of home opportunity.

No, that's great. And can you also like the capacity growth, I think you exit the last quarter with growing like 20%. I see debottleneck your capacity, how you're tracking now as you exit the quarter?

Yes. Our plan is progressing to increase supply compared to our commitment in Q4, but the key point is that demand has been significantly higher than we anticipated in Q4, and we expect this elevated demand to continue into fiscal year '21. The supply increase we achieved supported strong double-digit growth in our Cleaning businesses. However, we are not satisfied with our current service levels and are urgently focused on making improvements. On a positive note, our supply chain remains very stable with minimal COVID-related disruptions, and we successfully brought on over 10 new suppliers, mostly in disinfecting, to help meet the rising demand.

That's great. Thank you again, and best of luck. I'll pass it on.

Hi. Congratulations to both of you, and Benno we will miss you. My question had to do with advertising. I'm a little bit surprised that you're increasing or you're targeting right now sort of 100 basis point increase for fiscal '21, number one, because I assume as your revenues to those partners grow that's actually revenue that you don't need to spend advertising behind. And I know that's kind of a rounding your probably in the great scheme of things. But still that's a big increase. It would be the highest level of ad spending that we've seen in a long time for you. And it's coming at a time where you are having a hard time meeting demand. So I would buy Clorox Life, whether I saw an ad or not. So can you talk a little bit more about the decision to increase ad spending by that magnitude, maybe which businesses you're targeting it to, and whether this is a new level going forward that we should expect or is there something specific in 2021 that that's driving that increase? Thanks.

Yes. Thank you, Wendy. What you should take away is that this is an aggressive investment that is into the momentum that we have in the business. It also signals confidence in our strategy. And of course, as always with our company that's done with an eye on the long-term. For us advertising sales promotion is not a quarterly expense, it's a long-term investment in the health of our brands. And while 10% continues to be the level long-term that we're comfortable with, we see a particular opportunity at this time to invest in this pivotal opportunity that we have for our company to accelerate growth. It will go into demand building across all businesses both in the core as well as in innovation. I mentioned earlier, we have a very strong innovation program, in spite of the supply challenges right now, that we have great confidence and we have so much opportunity ahead. So we feel like this is the right thing to do. It is an investment in the long-term health of the business. And, if you look at the fundamental business drivers of our business; as I mentioned them in Q4 with rising market shares, with household penetration growing or stable in north of 90% of our US portfolio. With market shares growing in International, with further opportunity to build out our International business to serve more consumers in the face of the pandemic. With consumer value perception being at its all-time high with well north of 50% of our portfolio being seen as superior. All those things are particularly strong indicators of future business momentum. So, against all of that and in particular also with the looming recession, which we think is going to be significant and is perhaps underestimated or somewhat overlooked at this time, in particular here in the US, we think this is simply the right thing to do, and it's certainly part of our recession playbook that we've successfully applied once before about 11 years ago. So, we have great confidence in this choice as part of a long-term growth strategy for our company.

And specifically, just first half versus second half. so to those comments, specifically, if the economic environment really deteriorates is there a scenario where you would say, wow, these marketing dollars would be better spent in price rollbacks or promotional spending. How much of the ad spending itself are you expecting first half versus second half or kind of no difference?

Typically we don't provide quarterly outlook. But it can certainly vary by quarter depending on, for instance, the timing of innovation launches. So you should expect that variation. Based on what we know today, even though you can never say never, right, in this business. But I cannot see us touch advertising sales promotion because like I said, it's not a tactical expense. It's an investment in long-term growth. So we will remain committed to spending the dollars. And frankly, if the recession gets worse, that's even more of a reason for us to spend in advertising sales promotion, in particular at this time, when people are looking at trusted brands to meet their needs. And as you know, we have many of those trusted brands that people rely on in particular doing a recession.

Yes. Good afternoon, everyone. Benno kudos to you for a remarkable career, and Linda congrats on your appointment. The question I had was on capacity. And I guess Clorox, like most CPG companies is in a really tough spot in terms of how do you make a decision on long-term capacity decisions, when the category growth profile two years out is very uncertain. So I guess, I'm just asking, like how you guys at Clorox with all of your analytics are thinking about longer term category growth and how that's feeding into your decisions on capacity? I'm not just talking about disinfecting, because obviously that's going to remain elevated for a long time, but I'm also talking about charcoal and Hidden Valley Ranch and it's clearly at home food consumption is also elevated at the moment and may continue in the future? Thanks.

Hi, Nik. Thanks for the question. So you're right, we're at a time where it is not a precise science right now to predict what the future is going to hole given what we're facing, but we are putting our analytics hard at work to understand what we think that future will look like. And if you take cleaning and disinfecting for example, we do strongly believe the category will remain elevated for the mid to long-term future and we're building capacity to address that. But how we're taking the approach on this one is to make sure that we build the right mid to long-term that allows us to have flexibility, and whether we in-house or we use co-packers for that production. So right now, as we've said we've added 10 new suppliers to help us with this incremental production and over time, if it's appropriate, we can insource that production, which helps us balance quality and cost, and also gets us to the right ratio from an efficiency perspective. So I feel really confident about our ability to do that and we're making choices that allow us to pivot depending on where this all shakes out. For a good portion of our businesses, Kingsford, Brita, Glad, Nutranext, for example, we feel like will be normalized by the end of the calendar, where we have a really good supply and demand match. From cleaning and disinfecting perspective, we do expect this to continue to be a ramp-up over the entire fiscal year. And we'll see sequential improvement throughout the fiscal year, but given the fact that cold and flu sits in the middle of the year, and then we expect the pandemic to be with us for the entirety of the year. It will take the full year to get up to the supply levels that we need to be at.

Thank you. Benno and Linda, I would like to congratulate both of you as well. My question ties in elements from Wendy and Nik's inquiries, focusing on the company's long-term outlook. Currently, there's an expectation of 2% to 4% core sales growth for fiscal '21. However, aiming for the lower to mid-point seems insufficient considering the various dynamics we've discussed, particularly the increased structural demand in areas like Cleanliness and Health and Wellness. As Wendy pointed out, you are making significant investments in capacity, and we are closely monitoring the advertising and marketing efforts, which have not reached this percentage of sales since fiscal 2003. There's a considerable investment in both operating and capital expenditures happening. This certainly suggests that the stock is not reflecting growth figures in the 2% to 3% range. Given all this, when will the company be ready to update investors? If you can share any thoughts today, I would appreciate insights regarding your planning related to capacity and other investments in the profit and loss statement. Thank you.

Hey Kevin, I can address that question. Currently, our outlook as part of our IGNITE initiative is set for 2% to 4% growth. However, what you’re hearing from me, Linda, and Benno today is that we aim to accelerate the profitable growth of this company. We are actively engaging with millions of new consumers entering our categories and exploring new growth opportunities, especially in the out-of-home sector. We are committed to pursuing these opportunities with the goal of enhancing the company's performance. It's still too soon for us to raise our long-term goals, which are set over a five-year period. I’d say we are in the early stages of the work we’re undertaking. At some point, we will return to the investor community to share updates on our expectations, but it’s a bit premature for that right now. Rest assured, our intention is to boost performance, and we are focused on making that happen.

Thank you. Good afternoon and congratulations to Linda and Benno. It's been a pleasure. Best wishes to you both, and Benno in your future endeavors. I wanted to discuss the performance of your categories during a recession, as you are clearly increasing spending. Could you provide more specifics on your expectations by segment? You are anticipating a rapid slowdown compared to the COVID period. You mentioned attracting new customers while retaining existing ones, as well as the potential to enhance your professional partnerships, which seems significant in the current environment. You also appear open to potential international expansion, such as the Saudi joint venture, along with innovation. Additionally, you're still working to meet demand. Could you outline how severe the last recession was for some of your categories or what promotional strategies you implemented to help us better understand the outlook? That would be very helpful. Thank you.

I'll start and then Kevin can build on that. So typically what we see in a recession, if you take the last recession. You see about a 0.2 growth in our categories lower than what you'd see in an average year. And then if you double click, there is a number of categories in a normal recession and again right now you have the pandemic, of course, as an additional impact. But you have a number of categories that actually see stronger sales during a recession. And intuitively, that makes sense to see businesses like Kingsford, as people grill more at-home, Brita as people use less bottled water and move to filtered water for it's much superior value, Hidden Valley for more at-home eating occasions, those categories have historically performed very well. And we'd expect to continue to drive strong growth as part of our category performance. So there will be puts and takes, and again the difficulty of course, for this outlook is in the volatility created by recession, but also the pandemic as an outlook. And of course, fiscal year '21 back half that will lapse some pretty formidable numbers. But what's been part of the recipe last time in 2008 - '09 was to really focus on investing into the consumer, play offense as we call it, which is our intention now. The playbook includes innovation and we have a strong innovation portfolio in fiscal year '21. And the playbook includes to emphasize consumer value and of course, we're going into this recession with a lot of momentum being seen as superior value on so many of our brands at this point. So we have a strong recession playbook. Our portfolio typically has been recession-resilient, and importantly, we have a very experienced team where nine out of 10 BU General Managers have been with the business at the time of the last recession and a very experienced Senior Management team knowing how to handle this. So we feel like we have an established playbook, and we will certainly continue to invest in the long-term health of the business and the elevated advertising sales promotion spend is certainly part of that.

Thank you. Benno and Linda, I want to congratulate you both. My question ties together aspects from Wendy and Nik's inquiries, focusing on the long-term outlook for the company. While the current forecast anticipates a core sales growth of 2% to 4%, it appears that the lower to mid-point of this range may not be sufficient given the current dynamics we’ve discussed, including increased structural demand in areas like Cleanliness and Health and Wellness. As Wendy pointed out, there is significant investment being made in capacity, and we are tracking advertising and marketing levels that we haven’t seen since fiscal 2003. There’s a substantial amount of investment, both operating expenses and capital expenditures, going into the business. It certainly seems that the stock reflects this with no indication of growth within the 2% to 3% range. With all that in mind, when can we expect the company to provide an update to investors? If you can comment today, what are your thoughts regarding planning around capacity and other investments in the profit and loss statement? Any insights would be appreciated. Thank you.

Hey Kevin, it's Kevin. I can address that question. You're correct that we currently have an outlook as part of our IGNITE initiative, projecting 2% to 4% growth. However, as you've heard from myself, Linda, and Benno today, our clear goal is to accelerate the profitable growth of the company. We are focusing on this initiative. We are seeing millions of new consumers entering our categories and have new growth opportunities, especially in out-of-home markets, which we aim to capitalize on to enhance the company’s performance. It is too early for us to adjust our long-term goals, which are set over a five-year horizon. I would consider this just the initial stage of the efforts we are undertaking. At some point, we will return to the investor community to share updates on our expectations, but I believe it’s a bit premature for that at the moment. Please understand that our intent is to improve performance, and we are actively pursuing that.

Thank you. Good afternoon and congratulations to Linda and Benno. It's been a pleasure. I wish you both all the best. Benno, good luck with your future endeavors. I wanted to discuss how your categories performed during the recession since you are significantly increasing your spending. Could you share more details about your expectations for each segment? You're expecting a rapid slowdown compared to the COVID period. You mentioned attracting new customers while retaining existing ones and the opportunity to expand your professional partnerships, which appears important in the current environment. You also seem open to potential international expansion, especially with the Saudi joint venture, and there's ongoing innovation. Additionally, you are still trying to meet demand. Could you explain how severe the last recession was for some of your categories and what promotional advertising strategies you implemented to help clarify the outlook? That information would be very helpful. Thank you.

Thanks, everyone. I appreciate your questions and insights. I look forward to leading this team, and the collaboration with all of you as we start this new chapter under my guidance. We remain committed to executing on our IGNITE strategy, ensuring we continue to bring value to all stakeholders while meeting the needs of consumers around the world. Thank you, and now I will turn it back to Operator.