The Clorox Company (CLX) Earnings Call Transcript & Summary

Well, good morning. Welcome to the Inaugural Bernstein Operational Decisions Conference. I am Callum Elliott, Bernstein's U.S. Household and Personal Products and Beverages analyst. I'm very pleased to be joined today by Linda Rendle, CEO of Clorox. Thank you for joining us, Linda.

Happy to be here today. Thank you.

Linda is going to make some brief introductory remarks, I think, before we head into Q&A. But just before that, some quick housekeeping. So on the left-hand side of your screens, you should all see a box where you can type in and anonymously send us your own questions. And there should be a mechanism where you can vote for the questions that other investors have submitted. And I'll try and integrate those with my own Q&A as we go through it. And just finally, on the right-hand side of your screen, you should see a ProSensus link where you can submit feedback on our session today. And with that, let me hand over to Linda for introductory remarks.

Hello, everyone. It's so great to have you with us today. So pleased what the Clorox team has been able to do to serve more consumers around the world, given everything that's going on and certainly evidenced by our last quarter performance, where we were able to grow double digits in 8 of our 10 business units. And as we look ahead, that is the singular opportunity we're focused on in serving more people around the world with our aspiration to accelerate the long-term performance of the company. And I know we'll have a good discussion about that today. And what we're focused on is playing 100% offense against those opportunities, where we see consumers who are changing their behaviors, they have different needs, and we're going to lean into our IGNITE Strategy to help deliver on those. But with that, I know we're going to spend a lot of time on those Callum's questions. I'll turn it back to you.

Awesome. So I just wanted to start by asking about your transition to your new job to the CEO role. And so obviously, you started in September in the midst of this global pandemic and a particularly challenging time operationally, I guess, for everybody. So how has it been? And is there anything that surprised you?

What a privilege to be able to run the Clorox company at a moment like this when we're doing so much for people around the world. So I just feel blessed as does our entire team. We're focused on activating against our purpose right now to ensure that we keep people well and help them thrive. And in that part, it's been great. Operationally, we're doing everything that we can, and I think operating at a terrific level right now as a company, executing against our priorities, activating against our #1 priority to create more supply, particularly in disinfecting products. So it's been a troubling time, obviously, for the world, but a great time for us to lean in, accelerate our strategy and do good for people around the world. So I feel nothing but privileged.

Obviously the business under that performed very, very well. Under your leadership, do you expect a change in strategic direction in any way? Obviously, you've spoken a little bit in Q1 about some of the opportunities you guys think you could see. Do you think that, that overall, would you categorize that as a change in strategic direction? Or is it just likely to be more of the same and capitalizing on small opportunities in there?

Yes. I was the architect of our strategy release last October while Benno was still our CEO. And we have found that, that set of strategic choices has really helped us perform over the last year. And what we described that as was a celebration of what has made us perform so well over the last many years, but a few leaps were places where we had created a lot of value we wanted to lean even further into. And those were the areas of innovation. We wanted to broaden innovation to delight people across the entire consumer experience. We wanted to lean into cost savings, which has been a huge part of how we have invested in our brands and ensure that we deliver good financial performance, and we took the opportunity to say we wanted to increase the target from a cost savings perspective during our strategy release, and we're still deeply committed to that. And then, of course, we believe in doing good business and doing good for the planet and for people at the same time. And one of the choices was to embed our ESG goals into our business units and into our functions, making them accountable for that, so even deeper commitment to ESG. And all of those things will continue to be true. I think what we're looking at is how can we accelerate the progress against our goals and against this IGNITE Strategy in areas where we see new growth pathways, whether that be in the cleaning and disinfecting space, serving people as they change their behaviors across our portfolio and thinking about how we can reimagine work, which was one of the core pillars of our strategy and do it even faster. And I would say COVID, unfortunately, one of the good things of it, even though it's such an unfortunate thing for our world is that we've been able to accelerate progress on reimagining work. What we set out to do in years, we've done in a matter of months, and that will just help us be a stronger company as we move forward.

Maybe that ties in quite well with a question that we've got here from the audience. So I think when you're talking about reimagining work, you're probably talking a little bit more about you guys internally. But there's also an element of reimagining work from the sense of reimagining PPD, right, reimagining your professional business and how you can serve those clients. So I wonder if you can talk a little bit about that PPD business, how significant is it for you today? And how significant do you think the opportunity can be as you start to build some of these partnerships that you've called out, things like Uber, things like airlines. I wonder if you can talk a bit around that.

Sure. Yes, at our heart, we're a health and wellness company. And our professional business was born out of that idea of being able to serve people broadly, not just in their homes, but in public spaces that they're in, and of course, for the people who take care of people by cleaning spaces. And that was what the -- that business was born out of a number of years ago, and it's performed very well for us for a long period of time. It's been a strong performer financially, and we've been able to develop very strong market shares across a number of apertures in the professional space. We have a dedicated innovation team, a dedicated sales team. And we've leveraged those to really understand the differing needs of a business consumer versus a at-home use consumer, and they're very different. They're all trying to get to the same outcome, but labor is really the big focus in the business setting. So if you think for perspective, that business was about 6% of our sales 18 months ago. It's 9% today. So very, very strong growth over the last year as we face COVID. And we see the opportunity in a few ways: One is to continue to serve the needs with the business consumers that we were already strongly partnered with. And those are 2 primarily 2 areas: one would be health care, where we serve hospitals and other acute care settings with products that kill the worst of pathogens, things that we hope that we don't ever take home because they make people incredibly sick. And so we'll be continuing to be focused on health care. And of course, we prioritize that during the pandemic to keep those health care workers safe. And of course, we're so worried about that over the coming months as COVID worsens. And then the second is janitorial services, and that tends to be in a broad array of places. We have penetration in things like restaurants and public services and other businesses today, we want to grow that. But the new opportunity that we see is really the intersection of our retail consumer business and that professional business, which is providing the reassurance that a space is clean. And the Clorox brand, which is the most trusted cleaning and disinfecting brand in the U.S. really reassures people that a space is what they want it to be. If they're sitting down for a meal, if they're traveling on an airplane, if they're getting in a rideshare. And we're working with these customers to provide that experience, where we talk about the protocols that we're putting in place and we partnered with the Cleveland Clinic to help develop additional protocols for new spaces to provide the products that people need. Like we have a line of electrostatic sprayers that allow a business to cover and disinfect a really large space in a short period of time, and we're leaning into that. And then providing consumers when they're in that space, their own control. Through something like a light, for example. If you get into an Uber, you probably want to control that immediate space around you and giving consumers that product solution. So we see this as a huge growth opportunity for us moving forward. We're pursuing it aggressively. And I think the most important thing for us is to continue to prioritize in the short-term health care workers and consumers at home. And so right now, most of these partnerships are in the test and learn phase with plans to expand as we have additional capacity, but a big runway for us and a big opportunity, and we have all the capabilities already built in-house to do that.

It maybe brings me on to a little bit of -- I think over the last couple of weeks, we've seen a lot of news flow around vaccines and the share price has reacted to that, and it seems to be suggesting to us that the market perceives a vaccine and the sort of the end of the pandemic as being a negative thing for Clorox. Do you see it that way? Is that the way you guys see it? Does it mean that some of these opportunities have been missed? Do you expect those opportunities to disappear if a vaccine is widely spread?

I could not be more thrilled nor could the rest of the Clorox team with the news on vaccines. And we just want to absolutely reach out and thank those companies for the tremendous innovation work to get to the place we are. The thought of being able to see everyone live, our teammates, you, everyone on this call is absolutely heart lifting. And we don't see the change in the opportunity. We anticipated at some point, there would be a vaccine, and we're thrilled that there will be. The way that we're looking at this is really informed by a couple of things: One history, and I'll talk a little bit about that. And then two, what we expect in the future, given that we're a global economy. And based off of both of those, what we're seeing in consumer behaviors and changes in what we'd expect. So if you look at history over time, as people experience big events that are prolonged that change their behaviors, they tend to stay ingrained in those behaviors. And if you look just from a health and wellness perspective, which, of course, is a megatrend that's been in place for so many years, in major cold and flu seasons or when other pandemics have hit and their pandemics, all the time, unfortunately, consumers tend to change their behaviors. They ensure that they have cleaning products with their kids when they go to school. So if you look at history, again, those are the moments where we see people change their behavior. It becomes ingrained in what they do. And they tend to approach future pandemics or cold and flu seasons in a different way. And that has been true for a number of years. It's how we built the Disinfecting Wipes business that we invented and launched 20 years ago is helping people in those moments of time where they were tested. So that's history. Then if you look to the future, what we hear from experts as we partner across our consumer and professional business is the unfortunate downside of a global economy and a global community is that there will be more of these in the future. And we have seen that if you look at the evidence. I hope that they will never be as bad as COVID is, but we will be there for people. And so as cold and flu season rolls around, as new viruses, bacteria, et cetera enter the market, people will remember these behaviors, and they will ensure that they are thinking about keeping themselves well in the future, washing their hands more, we hope that stays, drinking more water, taking supplements, eating healthier, using cleaning and disinfecting products. Those will be things that people turn to in these times. And every time they reminded of if, and unfortunately, they will be that will further cement those behaviors. So I would just summarize, we don't see any change in the potential of what we're going after. We are going to continue to play offense. We are just as thrilled as everyone else is and look forward to Callum to seeing you live, hopefully, in the not-too-distant future.

Amen. Building on that, do you think the -- if I can describe it as that, the permanence maybe of those behavioral changes. Do you think that, that permanence might be different across categories? So you've spoken a bit about the health and wellness. But obviously, some of your other business lines as well have seen a big boost from COVID. So I'm thinking particularly about Charcoal, for example, where will everybody is spending a lot more time at home, that business seems to have benefited hugely this year. Do you think that, that permanence in some of those other divisions like Charcoal might be a bit less ingrained than maybe it is in health and wellness? Or do you see people staying at home more into the future even post vaccine as well?

We do believe that there will be some permanence across a number of our categories. And if you think about people stay-at-home behavior, there are 2 things that are going on: One, they're staying home. And we'll see some people -- and even as, I would say, mobility across the world has opened up, we have still seen that people have retained a lot of their stay-at-home behaviors that they have ingrained in, eating at home more, et cetera. So we do expect some permits of people changing that behavior, building home as a haven. We're seeing people invest in outdoor spaces right now. Grill sales are on the rise. So people are starting to nest a little bit more at their home, and we think they're going to want to take advantage of that. They'll probably do it by inviting more people to come to their home than they have during this pandemic. But we do see some permanence on that. The other thing I would talk about, meals has been one that people have brought up, oh, my goodness, there's been this massive swing of people eating at home. Actually, 80% of meals pre-COVID were eaten at home. And now it's about 87% is what studies show. So what we're focused on right now is investing to help build new habits in something that people did the vast majority of time anyway. Showing them that you can use a grill during the week just as easily as you can on the weekends, that you can use it to do quick things like heat up leftovers or repurpose food that you can build new habits around having a salad with Hidden Valley Ranch. So that's part of the reason why we are investing very strongly in our brands right now is to establish those new behaviors with consumers. So that when we do have this vaccine and the world opens up, those behaviors will continue to move forward. So yes, I think it's fair to say across our categories, it will vary. But what we are focused on right now is helping people to create great new routines that help them long into the future regardless of whether or not we have the same effect from COVID.

So just talking a bit about, I think the 2 areas where you'd called out some of these incremental opportunities from COVID were professional and also international. And we've spoken a bit about PPD. So I wonder if we can talk a little bit about international. And I wonder if I can sort of tempt you into speaking specifically about, do you see -- when you're talking about opportunities in international, are you talking about the international markets where you're currently playing and expanding into adjacent categories? Are you talking about furthering your dominance in some of those categories where you're already paying? Or are you talking about maybe expanding into markets where you're not present today, but where you think maybe some of the supply shortages in some of your key categories present you an opportunity to enter a market organically or maybe inorganically?

Yes. Let me maybe start with where we were in our IGNITE Strategy, and that goal still persists. But now what we see the new opportunity as. And then I'll talk about our approach because I think that's really important for people to understand how we're thinking about capital allocation in this and being true to who we are as Clorox, which will continue. So the first in our Ignite strategy, we wanted to accelerate the growth rate of international, and we wanted it to be a more stable and profitable business. So today, we have exposure, about 50% of our business is Latin America. Pretty exposed to currency volatility. And we wanted to, over time, pivot away from Latin America to ensure that we could deliver year after year, that type of profitable growth people expect from Clorox. A good articulation of that is the majority ownership that we just took in our Saudi joint venture, where we have a strong cleaning and disinfecting business in the Middle East. We've had that business for 50 years, and we see that as a way to continue to grow in a nice manner stably and profitably. So that's a good articulation of where we were before the pandemic in terms of the goal. What we saw was growth opportunities as part of IGNITE in Burt's Bees, Cat Litter, countries where we thought we could thoughtfully expand our business and country profile to do just that. So we were already focused on that pre pandemic. What the pandemic has highlighted for us is that we have a larger opportunity in the core of our business in international, which is a cleaning and disinfecting business. Over 50% of our business is in that. And we're set out to do 3 things, which you actually articulated really well, Callum: First is -- thank you. The first is in the markets we compete today, one, getting increased supply and then, like you said, growing the strength of our business in those markets. We have brands that have very strong market shares today, but we were looking to expand that, continuing to invest like we are in the U.S. and deepening that personal relationship that we have with consumers. The second was in markets that we compete, looking where we could broaden our product offering through innovation. So in a lot of markets that we're in today, for example, there's no wipes penetration or very little. And we were seeing a lot of interest from consumers in the markets that we're in today, looking for easier disinfecting solutions given what COVID has thrown their way and the fact that they have to disinfect not only in their home, but outside of their home. So we're looking to expand wipes. And we've built a dedicated supply chain in markets to help us do that in international that we just have up and running to serve those markets starting in Q1. And then the third was looking at additional markets that we could serve with our products, given what's going on. And we have seen in markets that we don't compete today, a high interest in the Clorox brand or brands that are local in the market that we manufacture that are close to the Clorox brand. And so we are looking to say what countries could we enter? How would we do that, et cetera? And that gets to the third point on how we will do this. We are incredibly disciplined as a company, particularly when it comes to international and how we think about expansion. And we do that because we want to see a return in the right amount of time for our investors. And we have seen many times been asked about countries we haven't entered in the past, and that's because we didn't see a return in our lifetimes and certainly didn't think that was the right thing to do for our investors. What's changed is the opportunity to enter in new ways like e-commerce, for example, where you can test and learn, you can get real live consumer feedback in a very small way to understand your probability of success. And even that business model allows you to do it in a more affordable way instead of having to build an entire team on the ground in the country in order to execute. So we're thinking about those tools to continue to operate in that disciplined manner. But what you can expect for us is activating and executing in the same way, but we're going to be aggressive about where we think our brand can add value for people around the world.

It's a great segue into some of the strategic and digital kind of questions, but I just want to get one more question on this expansion element, if I can ask it around. You're not the only CPG company. You're not the only HPP company that's spoken about allocating money to expanding capacities as a result of the pandemic. And I wonder, especially for you guys because you are so capital disciplined. Are you concerned about this kind of title wave of capital that seems to be heading towards, in particular, a lot of the categories where you guys are very, very strong? And in particular, the result of that is if we're wrong about demand and demand doesn't stay strong and actually that permanence that we were talking about earlier, if that doesn't hold up, is there a risk that we end up with a whole lot of excess capacity down the line as you guys and a bunch of your peers have invested a whole bunch of money in expanding capacities at the same time?

We, first of all, just to reiterate, we have really strong conviction in the consumer behaviors that we think will persist coming out of this pandemic. And particularly, I think you would highlight competition focused on cleaning and disinfecting. So we are highly convicted in those. And I think that's important. And that's why you're seeing so many people interested in it because they see the exact same thing that we do. Our approach, we play in competitive categories today, and they've been highly competitive for a number of years. And we will be very serious about competition. We are always monitoring it. We're always thinking about do we offer a superior value proposition and experience to consumers. And that's really what we're going to be focused on is playing our game and our game consists of the following: We believe that if you create a proposition that is composed of the right brands. And in the U.S. with Clorox, we have the leading disinfecting brand with the high household penetration, the biggest market share that competes in the largest number of segments with what we think is the best technology-based on science. We have the right brands. The right product is about leaning into innovation to ensure that you're meeting consumer needs. Not only does the product need to kill the bad bacteria that's around, but it has to have all the aesthetics that a consumer or a professional user would expect. For a consumer, they're looking for things like smell and hand feel and dispensing and packaging. And we have strong disciplines and focus on innovation across all of those. In the professional space, they're looking for ways to save labor because it's very intensive to clean big spaces. And we have technologies and pillars of excellence built against those. So we're going to continue to focus on innovation and in fact, double down our efforts on innovation, and you're going to see starting this year and next year, some of the fruits of that. Leaning into platforms we already had in place, but new platforms that we'll be launching into the market. And then third, making sure that we have the right value, and that's all about making sure that price at shelf is right and we'll continue on that discipline. That's what we're going to be focused on is playing our game. That's why you're seeing us lean and invest right now in advertising, in innovation and building personalized relationships with people. And I think if you think about the broader capital question, Callum, that you asked, the way that we always do this is think about contingency plans. It's just the way that we plan. We do lot of scenarios. If we're 10% on either way or we're 50% either way and guessing what we think the long-term demand would be, what would we do. And we have plans in place that can allow us to pivot and thinking about capital allocation. It can allow us to lean into different innovation opportunities and use that capital in a different way. So we feel really good that on a range of scenarios, we have built the right plan and that we can pivot if we need to. We're really more focused on what would take if we're wrong on the slow side. If this continues to be stronger, and it certainly is stronger than we predicted at the beginning, much stronger. Can we go fast enough to capture that demand, and that's why you've seen us lean in so much and why we're going to continue to play offense because I think that's the place that we could be wrong, more so than on the downside.