The Clorox Company (CLX) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Dara Mohsenian, Morgan Stanley's household products, beverage and food analyst. And I'm pleased to welcome Clorox to Morgan Stanley's Global Consumer & Retail Conference. Before we begin, I have to note for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com. If you have any questions, you can reach out to your Morgan Stanley sales representative. And we're very pleased that Clorox is here with us today. They've had recent record sales driven partially by COVID-related demand. But also a lot of the portfolio is outside of wipes and hygiene products have also posted very strong growth recently, and we see market share improvements in a number of segments over the last year or so here. So it's certainly an interesting time to have Kevin here with us today, particularly given the recent CEO transition. So joining us, we have Kevin Jacobsen, who's Clorox' Executive Vice President and CFO. Kevin, thanks so much for being here.

Yes. Thanks for having me.

So maybe first, we can just start with the discussion. Obviously, there's been a CEO change recently under Linda's leadership. Any sort of strategy tweaks, areas of increased emphasis under Linda's leadership? And maybe you can also tie that in with sort of the COVID situation, too. But any big strategy changes here?

Yes. I would not describe it as a strategy. And just I'm not sure if folks all know, but Linda has obviously been with the company for a very long time. Linda was our architect of our IGNITE Strategy in her previous position as President. And so as she stepped into the CEO role, you should not expect any changes in our strategy versus what we rolled out about a year ago. But having said that, what I would say is there's clearly going to be some shifts in priorities as a result of the pandemic, and that's really related to our disinfecting portfolio. And so we see a number of opportunities to accelerate the financial performance of the company. That was our commitment at IGNITE. And we've seen a number of new growth potentials present themselves really in the out-of-home space as it relates to disinfecting as well as an international opportunities to expand our international portfolio. So I'm sure, Dara, we can talk more about that over the course of this discussion. But we see a number of new priorities we'll be pursuing as a result of the pandemic.

Okay. And on the disinfecting and the sanitizing piece of the portfolio, about 1/3 of total sales. Obviously, there's an unprecedented level of higher demand during COVID. Short term, can you just discuss capacity constraints on that business? How much progress do you expect to make in added capacity both this quarter as well as early next calendar year? And maybe how much of that also is internal versus external? And then I'll come back on some longer-term questions.

Yes. As it relates to capacity, and look, we -- this is what is we spend the most time talking about right now in the company, is our focus on increasing capacity. And that's been the case since this pandemic started in March. I would say we've made good progress to date. As some of you folks may know, we continue to bring on third-party contract manufacturers to produce product for us. We're also investing to expand our wipes facility in Georgia. That takes a little bit longer to bring online. Dara, I'd tell you, my expectation is by the end of our fiscal year, which ends in June, I think we'll have more than doubled our ability to produce Clorox Disinfecting Wipes. In addition to what we're doing in the U.S., we've also stood up a brand-new supply chain internationally. It's producing wipes for us, it's pursuing our international expansion opportunity. And so we're making good progress, but we are still in a mode where we can sell every canister of wipes we can produce. And so it continues to be our #1 priority is to increase capacity.

Okay. And how much of the mix is sort of shifting to external versus internal versus maybe where you were a year ago, if you look out a year as you've added this capacity? And internationally, can you sort of describe how you're adding capacity internationally also?

Yes. So as it relates to the mix of capacity, for the most part, we've been bringing capacity online to contract manufacturers. We took some action very early in the pandemic to get as much capacity to our existing facilities. We reduced SKUs, we started running them 24/7. But most of the capacity we've been bringing online over the last quarter or 2 has been from third parties while we're investing in our plants. And that takes 7 to 8 months to bring that capacity online. That really has 2 benefits for us, Dara. The first is it's more instantaneous. So by using contract manufacturers, I can more quickly get product to market. But it also gives us the flexibility over time is where we figure out the long-term demand signal, we can go back and look at that third-party capacity and decide how we want to rationalize it up or down to get the right balance. I'd tell you, longer term, we prefer to produce our products internally. We are the lowest-cost producer of wipes and so long term, we'll look to in-house as much of that as we can. But I'd say in the very near term, we want to make sure we don't get ahead of ourselves. And so that's why we like using some mix of third parties. And as it relates to international, before the pandemic, our wipes business internationally, we're actually supplying from the U.S. And so we're shipping product from the U.S. to international markets. As a result of the increased demand we're seeing not only in the U.S., but outside the U.S. We've now stood up, just this quarter, a new contract manufacturer that will supply our international portfolio. And so that really hasn't impacted the results yet. You'll start to see that, the sales from that facility start this quarter. And you should see them build over time as we build that business.

And we touched on the supply side. As you think about the increase in demand from COVID, as you look out longer term from a multiyear standpoint, how do you sort of judge how much of that is sustainable or not? And do you think consumer behavior will be changed even post assuming successful vaccines are developed and implemented in the communities out there? How do you think about the longer-term demand outlook?

And I think that's really the key question I hear from investors most frequently is in a post-vaccine environment, what's your expectation as it relates to demand? The way we think about this internally, what we're looking at is we expect to see an ongoing elevated level of demand well beyond the vaccine. Now I expect that to moderate from the level of demand we're seeing now, but I expect it to end up at a higher level than the pre-pandemic environment. And there's probably 3 areas I'd point to. And Dara, I tell you, that comment is not just on disinfecting products, but I think that also relates broadly across our portfolio as we're seeing pretty significant increases in household penetration across the bulk of our portfolio. But what we're looking at that leads us out to hold this belief, the first is, as you hear many folks talk about, when you look at consumer behaviors, you usually think about 2 months for consumers to adopt new behaviors. We're likely going to be in this pandemic environment for the better part of the year. So the expectation is lots of increased household penetration, habits are being formed, and we expect some level of that to continue well beyond the vaccine. The other way we look at it is, if we look at past health scares and so we've gone back and we've looked at -- if you look at H1N1, I think back in 2009, or you look at Ebola health scare back in 2015, what we saw during those health scares was that's a period when consumers come into the category. We tend to see elevated household penetration during those periods of time. And we tend to hang on to some portion of those consumers after the health scare abates. And now this health care is much greater than those, so we'd expect an even greater level of retention post the health scare. And then the last one we're talking about internally, which is interesting is, if you think about how consumers are going to work in the future and this really speaks more broadly to our portfolio, our businesses tend to perform better where consumers spend more time at home. I mean we saw during the initial phase of the pandemic, when we had lots of shelter-in-place rules, some of our strongest performance in our brands is because consumers are home more. And it's probably pretty obvious, but they're eating more salads, they're creating more garbage, they're grilling more, they're using more water filtration. And so the more time consumers spend at home, the more of our products they tend to use. Dara, you and I were talking about this before the recession. I think the new work environment in a post-vaccine world would never return to the environment we had pre-pandemic. I don't think people are going to be going back and working 5 days a week in the office. I think it will be some hybrid model that we'll develop, which means consumers may be working 1, 2, 3 days a week from home. And when they're home, they just tend to consume more of our products. And so that's a long-term trend, I think, was a result of the pandemic that will continue well beyond the vaccine.

Okay. That's helpful. And maybe looking a little more at the short term, looking at guidance this year. You raised your full year organic sales growth guidance last quarter; you're expecting another double-digit increase in fiscal Q2. It's obviously very strong results near term. But you are assuming a pretty substantial revenue decline in the back half of the year. So just help us understand why that's the case post the recent strong growth you've seen. Are you sort of embedding more conservatism just given the uncertainty around COVID and volatility? And how should we think about that from a top line standpoint?

Yes. It's probably appropriate for me to preface this and say, it is clearly a reduced visibility environment as we try to forecast. So I'll put it out there right away. There's no regression models we have in the company that help us predict exactly what's going on right now. But having said that, if I sort of just unpack our expectations, and maybe the best way for me to describe it is if I just take the midpoint of our outlook. So we said, as you just mentioned, 5% to 9% top line growth. If you assume we deliver the midpoint, 7% growth for the year, what that implies is we would have our -- our sales would decline about mid-single digits in the back half of this fiscal year. If I think about that forecast, and I'd break our portfolio up into 3 buckets. If you think about our U.S. Cleaning business, our expectation is that business to be relatively flat in the back half of the year. Now keep in mind, we are lapping a 40% comp in the back half of fiscal year '20. So the business grew 40%. And essentially, our belief is we're going to hold on to that growth. So in the back half of this year, we'll retain all those incremental consumers that came in to the category last year. The second bucket I think about is international. International, I expect will be up low single digits. And so I'm lapping double-digit growth last year. And I think because of our opportunities to expand wipes internationally, there's another leg of growth for us that will continue to grow that business in the back half of this year, low single digits. And then the rest of my portfolio, I describe that as our essentials portfolio. It's charcoal, salad dressing, cat litter, et cetera, Glad trash bags. That's about 50% of our sales. I expect that business to decline high single digits off a double-digit growth in the prior year. And as we're lapping the initial phase of the pandemic, the pantry loading for some of those brands, I expect there'll be some give back in the back half of this year. I think, Dara, the way we're talking about it internally and what we're focused on is, while the business will be down mid-single digits is our expectations, if I compare that to a pre-pandemic environment, so if I go back to the back half of fiscal year '19, our forecast would represent double-digit sales growth in the back half of this year. And I think that's really the way we're thinking about it is what were we delivering before the pandemic? And what is -- what are we delivering in a post-pandemic environment? And right now, we still would expect double-digit growth in that comparison, even in the back half of the year in spite of the very challenging comps we have.

Great. Okay. That's helpful. And switching to margins. You've talked about a flattish gross margin forecast for this fiscal year with some cost savings and obviously strong sales growth, offset by higher commodity costs and transportation costs as well as COVID costs. I guess, can you give us a little more detail behind that, particularly the commodity cost front, with the resin run-up we've seen recently in freight pressure? Maybe some assumptions on the commodity side, how much pressure you expect to see there? And then the other buckets I mentioned, some sense for order of magnitude between them.

Yes. And you're right. I mean I'd say there's been 2 drivers as it relates to the cost environment, both resin within the commodity portfolio and transportation. I'd say in commodities, that's mostly a fairly benign environment with the exception of resin. And resin is something we'd anticipated would be a headwind for us this year. So for the most part, resin is playing out as we expected, that we assume it turn into a headwind. And it's doing just that, and that's something we had anticipated very early in the year. I'd tell you, what has surprised us this year is the increases we're seeing in the transportation environment. That has been a much stiffer headwind than we anticipate going into the year. I think what we did not anticipate fully is probably 2 areas. One is the move we're seeing that consumers moving online. And so there's a lot more product being delivered to people's doors, and we anticipate that's driving up the need for transportation, transportation rates as well as what we're seeing is and our belief is, we are slowly rebuilding the supply chain for both retailers and manufacturers as we're getting past the initial phase of the pandemic, and that's causing a much greater number of carriers being required to get inventory levels rebuilt broadly across the system. We've assumed this transportation environment is going to continue at this elevated rate for the balance of the year. We'll see how it plays out. And so those are the 2 areas we're dealing with in the cost environment. And maybe Dara, if you'll allow me to, if I just step back and maybe a broader view of margins. If you look at our gross margins as a company, we operate about a 44% gross margin prior to the pandemic if you look at our fiscal year '18 or '19. Last year, we were able to step those margins up to about 150 bps higher. This year, our intent is to retain that increase. And so we stepped the margin profile up for the company. We're able to hold on to it this year. And what we're working on internally within the company is setting this as the new water level and then how do we grow margins from this point. And over the long term, that's how we create value, is our ability to maintain the stepped-up margin profile and then work to grow it going forward. And so that's what quite a bit of the planning internally is against. It's how to maintain this increase and then grow it going forward over the next several years.

Right. Okay. And sticking to margins, you guys have had productivity initiatives in place for a number of years. Pre-COVID, is there continued confidence that you can generate a similar level of productivity going forward? How do you think about that relative to the progress historically? And then in this COVID environment, I'd imagine for you guys, it's different than a lot of other companies, you're more sort of chasing the top line opportunity at this point. But are there longer opportunities as revenues sort of balance out for potential cost savings coming out of COVID that maybe wouldn't have been apparent a year ago pre-COVID that you're thinking?

Yes. I think that's exactly right. I think it's both. I feel very good about our cost savings program. For those of you who know the company, we have a very disciplined approach to cost savings. And in fact, when we rolled out our IGNITE Strategy about a year ago, we took up our cost savings goals. So historically, we've targeted delivering about 150 bps of EBIT margin expansion through cost savings. As part of IGNITE, we took that up to 175 bps. And that was really driven by our desire to aggressively go after the reduction of packaging materials. So as a company, as part of our ESG goals, we've committed to reducing our packaging of fiber and resin content by 50% over the next 10 years. As a company, we spent hundreds of millions of dollars a year on packaging. So our ability to reduce packaging content creates a whole new cost savings initiative for us to pursue. That was the genesis of raising our goal as part of IGNITE. Now since then, as a result of COVID, I see a number of additional opportunities that weren't on our radar screen 12 months ago. Some of the areas beyond packaging is, we've significantly reduced SKU count to increase manufacturing capacity as we are previously talking about. I don't expect to bring back all those SKUs. We'll bring some back, but I don't ever expect us to go back to the pre-COVID environment in terms of SKU count. That creates tremendous savings for a company, both in our production capacity and efficiency there, the extended supply chain. There's a lot of benefits to both manufacturers and retailers, and we could all get more efficient with the use of SKUs. I also think, as we were talking about our use of co-packers, co-packers come at a higher cost. They have a tolling fee embedded in what we pay them. At some point, we'll be able to rationalize that as demand moderates. And so longer term, you'll see us be able to go back and rethink our manufacturing footprint, which we'll probably look at more self-manufacturing, which would be a margin expansion opportunity for us. And then the last one I would highlight is as a company this year, we're probably incurring 50 to 75 bps of margin compression as a result of temporary COVID costs. That's sanitization, hygiene activities in our plants, that's expedited transportation. At some point, we'll be able to step out of those, and that will be another embedded opportunity to reduce costs. And so I think we had a pretty aggressive plan as part of IGNITE, and COVID has only created a number of new opportunities that we're going to pursue. I think collectively, that gives me quite a bit of confidence in our ability to keep driving productivity improvements for the foreseeable future. I think you're on mute.

Sorry. Ad spend this year looks like it's -- well, it increased last year. It looks like it's up again in the first part of the year, fiscal year. You're up to about 11% of sales from 10%. Can you just discuss the level of ROI you've been receiving from higher ad spend? And then as we think about sort of this year as a base, can you come down off this higher level that's been inflated to some extent by probably reinvesting some top line upside and chasing this COVID opportunity? Or is this new higher level sort of a new normal for you guys going forward, and you're seeing strong ROI behind it? How do you think about that play out from a longer-term perspective?

It's a great question. Maybe I'll take my time in the near-term ROI and then talk about what we see as the longer-term investment rates for the company. And I'd be the first to admit, the ROI region, a little messy right now. They're not as things it used to be because it's hard to know what the true unconstrained demand for our products are right now. We continue to sell as much as we can produce, but ROIs are certainly higher. If I step back and think about ROI, I think the way I think about it, Dara, is for us, what I've learned in my career is the strongest returns you can generate is if you can convert trial to loyal repeat users. And that's really what we're focused on as a company. We have millions of new consumers coming into our franchise, trying our products for the first time or they haven't used it in over a year. Our ability to engage those consumers and work to convert them into long-term loyal consumers, that generates tremendous return. And in my very long career with Clorox, I've never seen anything like this in terms of the number of new consumers coming in to our categories. And so we are investing aggressively this year, pursuing that opportunity to engage those consumers, educate those consumers and generate loyalty. That's really where a lot of the money is going. And that's happening broadly across our portfolio because we're seeing increased household penetration broadly across our portfolio. So that's certainly the near-term opportunity. I think longer term, I don't know exactly where this is going to land. The one thing we're always going to do is we're going to invest where we get a return. That's what's going to drive our decisions. And so historically, spending about 10% of sales was about the right level for us as a company to generate the returns on investment we thought were appropriate. This year, we think it's 11% because we have so many new opportunities. We are in the process right now. We're just starting to build our plans for '22. We're looking at that, and so that's something we're going to take a look at. But the one thing I can assure folks is we'll spend at a level that we think we generate a good return for our investors. There's no mandate for Linda and I to say it's 10% or 11%. We're going to follow the money. And if there's a good opportunity for us to keep spending at 11%, we'll do that. But if that doesn't make sense, you'll see us start to pull back to maybe our historical levels. But that's ongoing work right now. But at the end of the day, no matter what, it will be determined based on the returns we can generate.

And as you think about the higher household penetration you mentioned and keeping consumers in the category, is the strategy to keep demand is it mainly related to marketing? What are the strategies you employ to try to take advantage of this higher category and higher Clorox household penetration near term?

Yes. And so it will be leveraging all the assets of the company to do this. Advertising is certainly one initiative we talked quite a bit about is our desire to know 100 million consumers in the U.S. We're about 1/4 of our way towards that goal. And what that does is the more we know about the consumer, the more we can personalize messaging. And the more we can personalize messaging, we find that we can generate much stronger returns on that advertising spend. So we're leveraging our IGNITE Strategy to continue to learn about consumers and personalized messaging. We're thinking about the product innovation. We are pulling forward innovation into fiscal year '21 in the back half. You'll see new innovation coming from us that's attacking new unmet consumer needs. And so consumers are operating differently in this environment, and we're thinking about how we innovate. We're thinking about price pack architecture as well. We're thinking about the SKUs we introduced. And so I -- you should expect to see from Clorox the full complement of our capabilities being applied to engaging these consumers well beyond just advertising. And maybe just one example to make it a bit more tangible. One area we're seeing is consumers have now become much more aware of the cleanliness and hygiene of their environment outside their home. And they're looking for solutions to leave their home and feel good about maintaining the hygiene of their space as they're out in their grocery stores, on a plane, wherever that might be, taking a rideshare. And so we're starting to innovate around that opportunity. And you'll see us bring this year to market new products that help consumers when they leave their homes. Obviously, that was not something we are working on prior to the pandemic. And right now, what consumers are doing is they're taking their in-house forum, say a canister of wipes. It's not -- it was never designed to be put in your purse or carried around in your car. And so it gives us many new opportunities to innovate around consumer needs as they leave their home. And so as I said, expect to see the full complement of tools being applied to this opportunity to engage consumers.

Okay. That's helpful. And then the professional division is, I think it's reached 9% of sales recently. You've established a number of partnerships there also. Can you talk about the growth opportunity in that business? How big a piece of mix can it be a few years out? Theoretically, there's greater opportunity with the greater commercial focus on health, even if the COVID situation is resolved. So how do you think about that business and the long-term opportunity there?

Yes. I think for us, we think about this as a long-term growth right away for the company. Now I would tell you, this has always been a very nice business for us. It's always grown mid- to high single digits. As you said, you go back a year or 2 ago, it was about 6% of our sales. I suspect by the end of the year, it will be closer to 10% because it is growing at an accelerated rate relative to the company. And then we're seeing all new growth potential runways coming out of this and particularly out-of-home opportunities, particularly in the institutional space. And many of you folks have seen many of our recent announcements about the partnerships we've created with a number of businesses. And the opportunity as we see it is consumers now want to be reassured when they leave their homes, they're operating in spaces that they know have been cleaned and they can assume it's a safe space for themselves and their family. And what we're also finding as we're talking to retailers is, they want to be able to assure their customers, it's okay to use their services and they should assume it's a disinfecting space. And so we have lots of retailers coming to us asking to partner with us that use our products, to use our protocols to help them create that sense of comfort with their consumers. What the difference is, I think, for us is we want these to be strategic relationships. So our intent is not to pursue sales for the next quarter or 2, but to create long-term strategic partnerships that we are truly creating a safer space for customers. And so when we work with these partners, we want to make sure that they're adopting protocols that we develop in consultation with the Cleveland Clinic, and consumers truly have an improved experience when they use these facilities. With our partnership, they see the difference. That's important to us. And so we've got really good relationship with the partners we signed up to date. We're leveraging the protocols that we've -- that I've talked about, and we'll continue to do that. And I would tell you, I think this is a growth rate for multiple -- our growth runway for multiple years. It's hard to know exactly how big this can be because I'd tell you, this is not just a U.S. opportunity, this is a global opportunity for us, and that's certainly how we're approaching it. And so we're investing in this space. We stood up a dedicated out-of-home team that is solely focused on expanding opportunities in this space. And I think it creates a new opportunity for us. It will take years to fully develop.

Okay. On the e-commerce side, it's been an area that Clorox has excelled at historically, even pre-COVID. Can you just give us a bit of an update on your strategy there? How you think you're differentiated from the competition, your market share levels relative to brick-and-mortar and how you're positioned longer term?

Yes. I view e-comm like I look -- reviewed any emerging channel. And if you go back and look at Clorox over decades, every time we've seen a new emerging channel, we've invested very early and very aggressively to set ourselves up for long-term success. And that's true if you go all the way back to -- I've been around a long time, mass, club, the dollar channel and e-comm when it first started. We invested aggressively with very senior teams with our desire to set it up for long-term success. I think we feel we've done that with e-comm. We feel very good about the success we've had. If you look at the end of fiscal year '20, e-comm represent about 12% of our total sales. The year before represent about 8% of our sales. So growth was over 50% in our last fiscal year, and I expect that to continue. From a share perspective, our shares tend to be equal to or higher than they are in brick-and-mortar. So we have very strong performance online and we have a very profitable business. Margins tend to be similar to the margins we have in brick-and-mortar. So our desire is to be agnostic. Wherever the consumer wants to shop, we're happy for them to shop there and we'll have products for them that have similar margin profiles for us. We see more consumers moving online as the same trend that everyone talks about, we see the same thing. We continue to invest in that channel to make sure that we can engage consumers and continue to attract consumers to our brands. I would say we were probably, I think, pretty early from everything I read in terms of our level of advertising being spent online. We spend over 60% of our advertising online. We do that because we see very high returns, and I would expect that to continue. But I feel great about our e-comm business. We'll continue to invest in that channel, but it continues to perform very well for us, and I expect to see that going forward.

Okay. And would you expect that percentage of digital mix to move up over time as a percent of marketing? Or do you think you're now at the right level longer term?

Yes. It's interesting. We don't have a mandate. Linda and I don't have a mandate that says it's got to be 60%, it's got to be 65%. We're going to continue to follow the money. The one mandate we have at Clorox is with our general managers, we require them to improve the ROI in their investment every year. And then we give our general managers all the tools to decide how to spend their money. And so we don't mandate that at the corporate level. Each GM looks at their advertising budget and decide how best to deploy it. And the only requirement we have is that their ROI increases every year. And then we have a very capable advanced analytics organization in the company that helps our GMs understand the returns we're getting on all the different ways they can spend their money. And what we're seeing is the GMs in our portfolio of businesses continue to move more money online because they continue to see higher returns in that vehicle versus other choices. That may change at some point. And that's why I'd say for now, 60% is the right amount for us. But every day, the GMs are deciding where to spend that money. And we'll see how the different media vehicles develop over time, it could change. But in the near term, I expect to see more going to digital just because of the returns we're seeing.

Right. Okay. Can you spend some time discussing the international opportunity? We talked about it specifically on the wipes side of the business. But from an overall perspective, what you see as the growth opportunities there over time? What are the biggest opportunities and how much of sort of a growth enabler could international be? I know you laid out targets with the IGNITE Strategy. But obviously, there have been some changes since then with COVID. So just trying to understand what the biggest growth opportunities are.

Yes. And Dara, like a frame that which is starting with IGNITE, because as part of IGNITE, our intent was to accelerate the financial performance of international and create a more stable, predictable and profitable business. And one of the areas we're focused on is, I describe our portfolio to a certain extent, as geographically disadvantaged. About 50% of our sales are generated out in Latin America. That has been a pretty tough region to do business in for probably the better part of the last decade, primarily because of the foreign currency headwinds. And so our intent was to rotate our portfolio to more stable, profitable geographies. That was the basis for IGNITE. And last quarter, we announced that we purchased a majority control of our Saudi Arabia joint venture. That was part of our IGNITE Strategy, continue to rotate our business away from Latin America in these more stable geographies. Saudi Arabia is a perfect example of the Gulf region. That is a fast-growing business, margin accretive, not only to our international business, but it's margin accretive to the company. So it's a nice expression of that IGNITE Strategy. What's happened since the pandemic is we've identified even more growth opportunities internationally. And I describe it sort of in concentric circles in terms of the opportunities for us that have come along as a result of the pandemic. The first opportunity for us in job 1 is very similar to the U.S. We can't keep product on shelf internationally, just like the U.S. demand, particularly for cleaning and disinfecting products, far outsees our ability to supply right now. So job 1 for us is to continue to get as much product as we can in the hands of consumers. And so we're continuing to focus on increasing international production capacity. I would say the second opportunity for us is to extend the products we have in the markets where we currently participate, and that starts with wipes. Wipes is a fairly developed category in the U.S. It's got about 50% household penetration in the category, not Clark's, but the category itself. Outside the U.S., wipes household penetration is very low. It's always been a long-term opportunity for us. What the pandemic has done is educated consumers on a much more convenient, easier way to maintain their spaces and create a disinfecting space and a more clean space in the environments they operate. And so they're turning to wipes, and they're looking for better solutions to disinfect their homes and the spaces they go into outside their own. And so as I mentioned earlier, we started up a wide supply chain internationally dedicated to this opportunity. We have just started that facility up this quarter. We're just starting to launch wipes internationally this quarter. You'll see that build over time. And I expect, for several years, we'll continue to build the wipes opportunity because it has such low household penetration to begin with. And then the third opportunity for us would be to expand to geographies where we don't currently operate. And that's a little further out for us. But similar to how we described our out-of-home opportunity in the U.S., we have a dedicated team internationally just looking at this expansion opportunity, and we're right in the middle of that evaluation right now. And so I expect between all these opportunities, both the initial IGNITE Strategy, plus what I described as these 3 additional rings we're pursuing, these create long-term growth runways out for the next several years. And likely, if we're successful, this go well beyond 5 years, our ability to grow these businesses to the extent we're successful doing it.

Okay. And that's probably a good time to move into cash flow priorities at this point. I'm particularly interested in your perspective on the M&A environment. Has COVID increased the number of opportunities out there, decrease the number of opportunities? You're probably more internally focused on meeting demand in this COVID environment near term. But as you look out over the next couple of years, do you think M&A opportunities will materialize? Is that a focus for the company? And how do you think about it in the context of your broader cash flow priorities?

Yes. And I'll talk about M&A in the context of how we allocate cash. And Dara, you and I have talked quite a bit, there's no change in our cash allocation priorities. Job 1 for us will continue to be to invest in our core portfolio. And what Linda and I know very well in the entire leadership team is how we generate the strongest returns for our investors is by focus on maintaining a healthy growing core portfolio. When you look within our peer set, we have one of the highest returns on invested capital within consumer packaged goods. We've generated that because the bulk of our investment goes against our base portfolio versus M&A, and you can create very nice returns when you have an installed asset base and you focus on organic growth. And so that will continue to be our top priority. Now having said that, we have areas of strategic interest to us as it relates to M&A. And we certainly are open to M&A if we can find the right properties and, importantly, at the right price. But what I'd tell you is I don't think -- if you think about Clorox over the next 2 to 5 years, I don't ever expect the focus to shift away from the core portfolio to M&A. I think M&A will always be an opportunity for us, and we'll look forward, but I never think it will be the primary source of growth for this company. And I think that's a good thing as you think about returns and how we generate them. But having said this, we continue to be very interested in health and wellness. That hasn't changed. We look at lots of properties. I think what you can count on is if you know Clorox, we're going to continue to be very disciplined in our approach to M&A. If we find the right properties at the right price, we'll move very aggressively. We have a very strong balance sheet. We have plenty of cash to pursue M&A and we'll certainly pursue it if we find the right opportunities. But I think you'll continue to see the bulk of our focus on organic sales growth as we move forward. And maybe just a last comment on that. That was always true before the pandemic. And Dara, you and I have been talking for the last half hour, there's only been a number of new growth opportunities that have presented themselves, and we're really going to focus on pursuing those. And at the same time, if the right deal comes along, we'll certainly do it. But I think that the good place we're in as a company is, I don't feel any pressure to do a deal. If the right opportunity comes along, we'll pursue it. But I feel very good about the financial value we can drive for our investors focused solely on our core portfolio given the opportunities we see in front of us.

Yes. That's helpful. And then in the U.S., we've seen particularly strong growth in untracked channels. Obviously, a piece of that is e-commerce which we discussed, a piece of it is club channel. Can you just talk about demand growth in those channels, put some perspective on what you're seeing there recently? And if that can continue going forward? And how you think about the growth opportunity there longer term?

Yes. I think it will continue going forward. One of the things we see is that if you look at Nielsen data, it's becoming more and more difficult to extrapolate Nielsen data to our company performance, and that's because growth in nontracked channels has accelerated to a significant level, and they continue to becoming a larger portion of our portfolio. And it's really in 2 areas. It's e-comm, as you mentioned, and it's our PPD business. Both those segments are growing at an accelerated rate. And so as an example, I think if you go back before the pandemic, Nielsen probably reflected, I don't know, 70%, 75% of our portfolio, the performance of our portfolio. The last read I saw is getting closer to 60%. Everything I'm seeing in terms of I expect e-comm to continue to grow at an accelerated rate, I expect PPD to continue as well. And because of that, I think you'll see nontracked channels continue to grow at a faster rate than tracked channels. And I think that will continue to mean Nielsen will be less and less predictive of the performance of the company as we look forward.

Okay. And then perhaps we can shift to talk a little bit about pricing. In the U.S., we've obviously seen curtailed promotional activity in the last few quarters here during COVID. Just thoughts on sort of promotional level as you look out to next calendar year after the middle of your fiscal year here. But also longer term, I'd love any perspective on if anything has changed from a promotional environment standpoint. You think longer term coming out of COVID, with sort of learnings of the lower promotional levels during COVID.

Yes. I think there's lots of phases on the promotional environment. Clearly, in the near term, you're seeing a depressed level of promotional activity for all the obvious reasons, primarily driven by the lack of supply capacity. And I would expect that to continue for the near term. I think as you get to the back half of the year, our expectation is you'll see a return to more normalized promotional environment. And what I think is more interesting and what we spend more time talking about internally is typically in a recessionary environment, you see elevated promotional activity. And we clearly continue to operate in a recessionary environment in the U.S. I think the counter to that is every manufacturer, every retailer is lapping some pretty significant comps from the prior period in terms of trying to comp the top line growth rate. I think that's going to create some pressure on keeping promotional activity in check because everyone's thinking about how they're going to lap the top line growth comps. And as you know, the more promotional activity, you're taking dollars out of the category and you're reducing top line sales. And so I think there's going to be more pressure to reduce promotional activity that typically has been in existence in a recessionary environment. And I think the net of those 2 will be likely a more normalized environment but not the elevated environment you normally see during recession. And then longer term, we're going to continue to focus on value. I think that's how you ultimately win with the consumers. You provide superior value, which is not just price and certainly not just promotion. And so I think that resonates with retailers, that resonates with the consumers. And so for us, we'll continue to drive superior consumer value. That's about innovation, that's about building the equity and that's about having the right price point. And I think that's how you win long term, not by driving more or less promotions necessarily.

Right. Okay. And in general, it doesn't sound like there's a lot of focus on price increases in this environment as commodities ramp back up looking forward over the next year or so. Is that the right way to think about things? Or are there some opportunities to install list price increases? How do you think about pricing across your portfolio?

Yes. I'll talk about pricing. In the near term, we've been very clear, we are not going to price in a pandemic. And so in the U.S., we have not been taking price because we just think that's the right thing to do. And no matter what commodities are doing, no matter what demand is doing, that's how we want to operate. And that's consistent with our values. Longer term, as we think about pricing, we tend to price towards what we describe as medium term. We don't want to be taking pricing every year. So we tend to look out at commodity expectations out multiple years. And if you look at Clorox, usually every 3 years or so, we are taking pricing to recover commodities as they build up over longer periods of time. That strategy, I think, still works for us, and you should expect that going forward. And so we took pricing about 18 months ago. We'll let commodities build up to the extent that continues. We'll cover that in the near term with cost savings. But usually, every 3 to 4 years, we take pricing to recover cost increases, but certainly trying to avoid that every year. And then specifically in this environment, as we said, we're not taking pricing in the near term because of the pandemic.

Right. Okay. Well, great. We are running out of time here, so I appreciate you joining us. It's been a very helpful conversation. Great to see your face on screen, and thanks again for joining us.

My pleasure, Dara. Thanks for having me. And again, as we said, sometime, hopefully soon, we'll be able to see each other in person. But thank you, everyone, for joining us today. I certainly appreciate your time.

Stay safe, everyone.