Clorox Company (CLX) — Q2 2025 Earnings Call Transcript

Thanks, Jen. Good afternoon, and thank you for joining us. Joining me today are Linda Rendle, our Chair and CEO; Kevin Jacobsen, our CFO; and Luc Bellet, our Treasurer and incoming CFO. I hope everyone has had a chance to review our earnings release and prepared remarks, both of which are available on our website. In just a moment, Linda will share a few opening comments and then we'll take your questions. During this call, we may make forward-looking statements that are based on management's current expectations but may differ from actual results or outcomes. In addition, these remarks may refer to certain non-GAAP financial measures. Please refer to our earnings release, which identifies various factors that could affect forward-looking statements and provides information that reconciles non-GAAP financial measures to the most directly comparable GAAP measures. The Risk Factors section of the company's Form 10-K also includes further discussion of forward-looking statements. Now, I'll turn it over to Linda.

Thank you for joining us today. Before we start the Q&A, I think you all know that we announced a CFO transition last week. I want to take a moment to thank Kevin for his nearly 30 years with Clorox. He has been an essential change agent through our IGNITE strategy in transforming our company. I deeply appreciate his partnership, leadership, and countless contributions to Clorox, and I wish him the very best in his retirement later this year. I also want to welcome Luc Bellet as he steps into the role of CFO starting on April 1st. Luc is a strong and experienced leader who I've worked with in many roles over my career at Clorox, and I'm confident he'll build on the strong foundation established by Kevin. With that, Kevin and Luc will take your questions.

Andrea, if you're speaking, we cannot hear you. Jen, let's move on to the next Q&A person, and then we'll come back to Andrea.

Hey, good afternoon, guys.

Hi, Dara.

So, congrats to Kevin and Luc. Maybe first, was just hoping to get your perspective on your ability to continue to drive gross margin expansion beyond fiscal 2025, your forecast to get back near peak levels based on your guidance. How confident are you in continued expansion over time, A, and then B, what are the longer-term drivers? And then maybe I'll come back with one other.

Yes, Dara, let me start there on gross margin expansion as we look forward. As we've talked, Linda and I for quite a while, our first priority has been to fully rebuild gross margins back to 44%. And as you saw in the prepared remarks, we feel very confident in our ability to do that this year. What we really want to build on is EBIT margins in that 25 basis points to 50 basis points per year going forward. And your question was how confident we feel about that. I feel very good sitting here today about our ability to continue to do that. There are a number of drivers... productivity... increasing margin through a focus on design to value and net revenue management, which are all tools we'll use going forward. That really gives us the fuel to either take to the bottom line and reinvest in the business. But without giving an outlook for next year, I feel pretty confident sitting here today about our ability to start on that 25 to 50 basis points starting in fiscal year 2026.

Great. That's helpful. And maybe switching gears, Linda, on the Glad JV change, why did this happen now? But with this change and the strength in financial profile in recent quarters, can you talk about if M&A is expected to be a more important piece of the strategy going forward and what some of the areas of opportunity you see in potentially filling in white spaces in your portfolio? Thanks.

Sure. We're excited to assume full control of our Glad business coming up a year from now. The timing is related to the end of our agreement and both parties mutually agreed not to renew. We think this is the right time for us given the transformation that's well underway at our company, our confidence in our ability to drive innovation through our enhanced capabilities, and the fact that we retain very important IP that we've worked jointly with Procter for a number of years that sets the foundation for that. In terms of M&A, there's no change there. We're always looking for business opportunities that can be accretive to our portfolio, but we're going to do deals that are right for our shareholders and that we think will offer a strong return.

Thank you.

Thank you, Operator. Good afternoon, everyone. Congrats, Kevin. Congrats, Luc. I was hoping to get some perspective on the organic sales outlook from here. Given the 4% to 7% range, it seems like there's variability in how you might exit the year after backing out the ERP shipment benefit. Can you speak to what you're embedding in the outlook for Q4 and how we should think about that exit rate as it pertains to fiscal 2026? Thanks.

Yes, Peter, happy to answer that. I think it might be helpful to talk about Q3 a little differently than Q4 because they're going to look different in terms of how they play out. Let me just start with Q3...expected from a reported sales perspective, we'll be down mid-single digits. That's approximately 5 to 6 points of impact related to our divestitures...and we've added about 1 point of FX headwinds...the organic sales growth in low single digits for Q3...and I'd expect this to be somewhere around 2% to 4%. For Q4, while we said the ERP transition will add 1 to 2 points of growth over the course of the year, it's all going to happen in Q4. I expect organic sales growth in the fourth quarter to be somewhere between mid- and high single-digits.

Got it. That's helpful. Not to get too technical, but just on the earnings guidance, when you back out the benefit from the ERP, it seems like the guidance raise is entirely that, but you also lowered your tax rate outlook. What's changed from an underlying basis that's offsetting the benefit from a tax rate standpoint?

Yes. There are a few puts and takes in the plan. If you set aside the ERP benefit, you just talk about our base business for ERP, I would highlight two benefits we've seen. The first is the tax benefit you highlighted, and then we have modestly reduced our supply chain inflation expectation for the year. So we're getting a little bit of benefit there. The flip side is we've added about 1 point of FX headwinds in the back half of the year and we've added a little bit more trade spending as competitive activity has increased in the Bags and Wraps category.

Thank you so much. I'll pass it on.

Hey, good afternoon, everyone, and congrats, Kevin and Luc. Firstly, just a quick clarification on the Q2 organic sales, was the beat relative to your guidance entirely driven by the Kingsford shipment or any size of the benefit from it?

Yes. It was a combination. We anticipated a decline in our sales on an organic basis in the low teens while we were down about 9.5%...a lot of that was based on consumer performance, and we continue to make good progress on our share growth. Shifting Kingsford shipping in front of consumption in Q2 was worth a little less than 1 point in the quarter. The strength of the business was the primary driver.

Got it. That's super helpful. On the bigger picture, has there been increasing promotional activity beyond what you were expecting? What impact does that have in the back half, and how competitive can the category get moving forward?

We're seeing competition level play out as expected. Litter anticipated to be more competitive. Promotion is up for us as well, but it's in line with what we predicted. Glad, however, is seeing more competitive activity than we originally anticipated. Price promotion from our branded competitor has increased more than expected, but we're seeing strong results from our demand creation plans. Litter should see continued competitive promotions in this environment, but we're well-equipped to handle it and grow share.

Got it. Thank you so much.

Thanks. Our next question will come from Anna Lizzul with Bank of America.

Hi, good morning and good afternoon. Thank you so much for the question. Congratulations also to Kevin and Luc. You mentioned in the prepared remarks that consumers continue to be choiceful in their spending and shopping behavior. Can you talk about the dynamics you're seeing more specifically across different retailers and channels?

On our consumers, we're seeing some value-seeking behavior. They trade up to enhanced products and packaging in different amounts. We're monitoring dynamics in larger versus smaller quantities but not seeing major shifts towards private label. Though private label shares decreased this quarter, we've been able to grow our brand share across categories despite it. Our categories remain competitive, and we're committed to investing strongly in them, growing household penetration while driving strong innovation.

Perfect. Thank you so much.

Thanks, Anna. Operator, our next question will come from Kaumil Gajrawala with Jefferies.

Hey, everybody. Can you provide more details on the 1% to 2% from turning ERP on? I don't quite understand how it works from a practical perspective. Is it a shift in inventory one direction or the other, or is it an ongoing capability driven by the data you'll be able to see to drive faster growth?

This ERP transition is a key step in our digital transformation, enabling data utilization to improve our growth speed and productivity. Luc will outline the details on this.

Sure. At the beginning of the year, we tested a new ERP in Canada that went well. In July, we're going live with our new ERP solution for US operations, transitioning in a phased approach over six months. We're planning on shipping ahead of consumption in Q4 to augment retailer inventory levels while we transition.

Got it. Well, Luc, I didn't intend to give you such a softball for your first question, but good answer. Congratulations to you and Kevin as well. Thanks, guys.

Appreciate it.

Thank you, and congrats to both Luc and Kevin. I want to clarify everything that you mentioned about what you're doing with retailers. Is it to avoid any potential risk that they can't get the product they need? Is there some concern on your side just given the transition?

This is a standard way manufacturers handle an ERP transition. We build up retailer inventories and our own to counter the periods of shutdown as we transition systems. We want to ensure there’s no disruption to consumers through that process.

Okay. That's definitely helpful. I appreciate that. I want to ask about tariffs. Could you talk about your sourcing exposure from impacted regions? How are you planning to mitigate any potential impact?

We've been evaluating this for several months now... It's not in our outlook specifically. We manufacture products close to where they're consumed with limited exposure in a number of categories. We've done significant work to offshore nearshore production, which reduces our exposure to tariffs. The team continues to work to minimize impact.

Okay. Appreciate that.

Yes.

I want to ask two questions on sales. First, in terms of organic sales outlook for low-single digits in fiscal Q3, reflective of a more challenging macro environment, how do you view that from a clean perspective? Are you still recapturing distribution points, or is this a clean underlying number? Also, can you just comment on trends in your cleaning business relative to your household business?

Cleaning is performing incredibly well right now. Our share results are higher than they were two years ago. We continue to win in those segments; cleaning maintains a strong volume despite pricing actions to manage inflation. Household business growth is similarly impacted by the retailer restock timing but remains strong.

Thanks for that.

Thanks, and congrats, Kevin and Luc. On Litter, can you discuss the level of promotion you have embedded in the second-half outlook versus what you did in the first half?

We're blending a promotional strategy that reflects competitive pressures while maintaining our innovation focus. We feel prepared to adjust to competitive pressure, with heavier advertising in the back half supporting innovation across our portfolio. For Litter, we have a strong launch planned, and we'll be allocating resources accordingly.

Thank you so much.

Thanks, Olivia.

Thank you and congrats, Kevin and Luc. Can you comment on the pace at which you've regained distribution? What are your expectations for distribution growth as you implement the ERP solution?

Distribution is fully restored, and we're working to build on it further by consistently innovating and offering consumer value. We're fully committed to maintaining distribution and expanding it as part of our strategy.

Thank you, Linda. I'll pass it on.

Can you provide color on what's driving the strong growth in both professional and international segments? What insights are you seeing from customers in the professional channel that are driving this growth?

Internationally, we've focused on stabilizing portfolios and leveraging growth opportunities. Our cleaning business continues to perform well globally, and our cat litter category is expanding in new markets... With professional, we’re seeing growth driven by new verticals and demand for our cleaning solutions—a recovery from COVID impacts.

Thank you.

On category growth trends, how do we get back to the 3% to 5% growth? With a relatively fatigued consumer, is the low end of the range a good outcome?

Yes, Kevin, I think that's fair. We expect consumers to feel more secure, which will increase their willingness to trade up from value options to premium products. We remain committed to our long-term growth algorithm of 3% to 5% as we stimulate demand through innovation and effective marketing. The opening question is when that will happen.

Luc, from a capital structure perspective, do you have any thoughts on opportunities moving forward? Will there be continuity in financial discipline, or will there be an additional focus on growth?

You can expect a lot of continuity. I will continue focusing on discipline in capital allocation, as we’re heading into a rewarding era. The ERP implementation is vital for modernizing operations and will help strengthen long-term competitive advantages. We’re dedicated to driving growth and transformation as we complete these initiatives.

Thank you.

Could you put a number on consumer sentiment—what level historically would you equate to higher category growth? What would it be like to see increased growth in your categories?

It's difficult to pinpoint a number because many factors shape consumer spending behaviors. We look at overall economic stability and consumer employment trends. These elements collectively indicate the willingness to spend. While we can't define a specific metric, we observe that consumers are more resilient at higher points.

Thank you. Also, how does your investment spending trajectory look for the upcoming years? Will it begin to taper off?

This year’s digital transformation investment is expected to peak, we’ll spend about $0.70 per share. We estimate this will taper off in the coming years, and next year will be the final year of the program. After fiscal year 2026, we won’t have these transformation charges appearing any longer.

Okay. Thanks a lot.

Thanks, Linda.

Can you clarify your SG&A spending and how those digital capabilities relate? Are there differences in spending categories? How do you explain the expense variation?

The investments we're making are pivotal parts of our digital transformation, which includes both ERP upgrades and capabilities for advanced analytics. We believe this will enhance overall operating strength. Every aspect of this transition has business owners accountable for delivering expected value.

Thank you very much.

Congrats, Luc. Can we talk about cash flow? Year-to-date, we're running closer to 9%. Can you comment on cash generation satisfaction so far, and how the ERP transition will influence?

We're likely at the high end of our target range of 11% to 13%. I expect to hit the high-end before the ERP impact. We will invest additional cash on inventories and suppliers for the transition but assess this as timing noise. Operationally, we will stay close to our target cash flow performance.

And about the estimated fair value for P&G's interest in the Glad joint venture; is that a good anchor point for when the transition takes place?

Yes, that's correct. That is our estimate of fair value for the business should we repurchase it. This will eventually enhance our margins since we will no longer be paying 20% of cash flows to P&G.

Okay, great.

Just a couple of questions. Firstly, household volumes were down, but Kingsford was strong. Can you give an overview of what's going on in the rest of your portfolio?

Household volumes are experiencing a decline similar to other segments, primarily because of timing restocks from retailers. So the impact is consistent across the board.

Okay. And on gross margins in Q4, I know there are higher logistical costs with the ERP shift. Can you explain what might offset those impacts?

In Q4, while we expect margins to be well north of 44%, they will still be lower than the previous year due to lapping an outsized previous quarter. Efforts to mitigate logistics costs will also play into the overall gross margin line.

Okay. Thank you.

Sure.

Thank you, everyone. As we close today's call, I want to step back and look at our performance within the context of the past several years. We have navigated through significant disruptions, including a pandemic which led to an unprecedented level of demand surge and supply constraints, rampant inflation, and a cyber-attack and subsequent recovery. Simultaneously, we've taken significant steps to transform our company, including the implementation of a new streamlined operating model and divestiture of two underperforming businesses as we continue evolving our portfolio. Throughout all of this, we've delivered strong compounded annual sales growth within our target over the last five years and more recently, stabilized and rebuilt our gross margin and delivered strong earnings growth, which enables us to further invest in our business. We're excited to continue building on this progress with our US ERP implementation early next fiscal year, which is another important step in becoming a stronger company that continues to deliver consistent, profitable growth and enhance long-term shareholder value. We look forward to sharing more with you in our upcoming presentation at the CAGNY Conference in a few weeks. Until then, please stay well.