The Clorox Company (CLX) Earnings Call Transcript & Summary

You could see a digital-first approach in some markets. I don't think we're not standing up DTC in our own websites, but leveraging third-party sales sites that are getting more and more prolific across many of these geographies. It gives us an opportunity to introduce the brand online, support it digitally as we're building out our digital capabilities. And so we think that in some geographies, that makes perfect sense as the right way to enter that market. In other geographies where we have a presence with retailers, it will be some combination of being on shelf in the retail environment and selling online. And so what we're really looking at is what's the right entry for each geography. And I would say, Callum, it's even much more complicated than that because not every consumer wants the same type of product. So you also have to think about each consumer in each market. What's the right way to engage and connect with that consumer based on what they're looking for in terms of a cleaning and disinfecting solution. And so you also have to think about how do you customize your product for local market conditions, and we have to be very thoughtful about that, and we're learning that as we go. But we also recognize it's not one size fits all in terms of how do you go to market, what type of product you sell in each market. And that's really the work of this dedicated team is to make sure we get the offering right, and I'd say, all aspects of that offering for the environment we're entering. And it's definitely different by geography.

Okay. That makes a lot of sense. I'm a little bit conscious of time, so I want to move on soon from the international angle, but maybe one last question before we do. I guess the big question from my perspective is, because I think most of what you're saying, or even all of what you're saying makes sense. But the question I have is, what gives you the confidence at this stage or even back in February when you made this change, the long-term algorithm, it seems so early in this international push to have so much confidence in that accelerated growth in international markets without knowing how competitors are going to react, et cetera, if you're talking about expanding into markets where you have big established international competition. And what gives you such confidence at such an early stage in that expansion that caused you to raise your guidance?

Yes. And Callum, if you allow me, I'll talk about it in international, but it's probably also helpful to think about broadly, we raised our guidance. And how do we -- the confidence we have in broadly taking up our sales expectations. In international and total companies, same, we raised international to 3% to 5%. And same thing we did with our total enterprise expectations. For international, what we're seeing is the success -- the early success of the work I just described. We've gone from 15 countries to 35. We're seeing good results on this. And while it's early, we're seeing good results on the progress we're making, expanding our portfolio. You couple that with the progress we're making on IGNITE Strategy as we're evolving our exposure away from Latin America, the joint venture we did in Saudi Arabia. These are all building blocks that are building our confidence in our long-term success in international. And that's really why we raised our goal in the international. If I think broadly about the opportunity for the company, if you think about cleaning and disinfection, for us, the way we describe the TAM is about $30 billion globally. And if you think about our share, we have a low-teen share globally in the cleaning and disinfecting category the way we described it, higher in the U.S. were more developed, lower in international. Our belief is, over the balance of our strategy period, which runs through 2025, we can generate an incremental $500 million to $600 million in sales as a result of the pandemic and the increased need for our products with consumers. That means we have to assume we're going to grow another 1.5% or so. So from the low teens where we're at right now, we'd add about 1.5% share growth globally over the next 4 years as a result of the pandemic. That equates to about $500 million to $600 million in incremental sales. That's really the math we've done that leads us to believe that we can deliver 3% to 5% sales ongoing as we move through this next phase of the pandemic. And through these new growth runways, expanding international, expanding our out-of-home partnerships were 2 of the growth ways that we think will get us there. And then I'll just also tell you there's a number of trends we're seeing broadly across our portfolio. While we mostly talk cleaning, disinfecting, and we'll tell you, it's very hard to quantify the value of these consumer tailwinds. I believe they're generally favorable to our business. Callum, if you look at pet adoptions in the U.S. over the last year, they've grown significantly, which means the opportunity to sell more cat litter. If you look at grill sales in the U.S., there are at all-time high, a larger installed consumer base of grills that will buy charcoal and pellets going forward. Water filtration sales are up 25%, 30%, and that means an installed base to buy filters. That's all occurred over the last 12 months, which we think creates long-term tailwinds. And then the last one we're talking about, and again, it's hard to quantify. But certainly in the U.S., we don't expect people to go back to working in the office 5 days a week. We think there'll be some form of hybrid work going forward. And what we know about our business is as consumers spend more time at home, they naturally consume more of our products, they consume more of our categories. They create more trash, they need trash bags. They grill more often on a weekday, they eat more salads. People spending more time at home is generally a good thing for our business. And so hard to quantify it, but I think a hybrid work environment is a tailwind to our portfolio over the long term. And so when you put all that together, that's really what gave us the confidence to raise our long-term sales expectation of 3% to 5% going forward.

So just one final question on this before I move on. I'm doing mental math in the back of my head as you're talking. So I'm fascinated that you gave the $30 billion TAM and you said that the 150 bps-or-so expansion of your shares should drive this $500 million kind of incremental dollars of sales for you guys. I'm surprised that none of that $500 million in your equation comes from expanding the $30 billion rather than gaining share, like I would have expected that expanding wipes at very premium price points relative to some of the products that they're replacing and some of it is incremental, I guess, but it's not more driven by growing the $30 billion rather than gaining share, but maybe I misunderstood. So I just wanted to clarify.

Yes, there's certainly an element of that. This is some rough math as you're trying to look at our global TAM for cleaning and disinfection. So I think the truth is that $500 million to $600 million will be some combination of -- the pie will certainly get bigger. We see increased interest in cleaning and disinfection, and we believe we can grow share. And we think that combination supports our ability to add incremental sales beyond what we anticipated when we built our IGNITE Strategy back about 18 months ago.

Okay. Makes sense. But I want to move on to professional, and we have conveniently a question from the audience on professional. So maybe I'll start there because it's a nice intro question, I think. So the question is, how do you go about building the professional business? Do you have a dedicated sales team supporting it? Do you need to build out that team to support the expansion? I think that's a nice kind of introductory question to, maybe you can start by just talking a little bit about that professional business where it stands today? And where you think the opportunities lie?

Yes. And I appreciate the question because I think our professional business, historically, we had -- before the pandemic, I don't think we talked about as much, and I don't think investors are as aware of the business. And so for our professional business, we've been in this business for decades, and it's been a really nice business for us. It really has 3 distinct businesses within what we call our PPD, or Professional Products Division. It has a health care business, it has a janitorial business, and it has a food service business. And as I said, it's been a very attractive space for us for decades. If you go back 10 years, it probably represented about 3% of our sales. More recently, it's closer to about 7% of sales for our portfolio. But it's always been fast growing. It's grown at mid to high single digits for very long periods of time. It's margin accretive to the company. So this has been a space that we've been investing in and doing quite well for a very long period of time. The pandemic has only increased the opportunity we see in this space really in this out-of-home area. And so we've had a dedicated team supporting professional products. We've got a GM cross-functional team that runs that business. We have a dedicated sales team that calls on accounts that they've been doing this for a very long period of time. What we have done, though, is 2 things. When the pandemic hit, and we saw the increased interest in this space, we stood up a dedicated team that's exploring these out-of-home opportunities. So these partnerships that we've been announcing over the last 12 months, we stood up a dedicated team just to pursue these partnerships. And we've also increased our supply chain production capacity as we've seen this business grow. And I think, Callum, if you look at the 2-year stack, we'll see where things land in Q4, we're probably going to be up 35%, 40% on our PPD business over the last 2 years. So we've seen tremendous growth in this business over the last 2 years. And so we've increased resources to pursue these growth opportunities, and we built out our supply chain to be able to keep up with the demand. And that's really the new opportunity for us. And what we're seeing, Callum, is in PPD, and particularly on the partnership side, what's really new is this intersection of the efficacy and products we've always been providing to these channels, but businesses now understand that their customers want assurances of the cleanliness of the environments they're going into. And our equity has become even more valuable prior to where it was in the pandemic. And so businesses are coming to us. They want to partner with us to have access to our protocols, our products and the use of our name because they understand that's what their customers want. The days when you walk into a restaurant and somebody drag a dirty towel across the table, they understand that's no longer acceptable to their customers. And so the partnerships we've been signing up, these are long-term strategic relationships. These businesses understand, this is not going away in 3 to 6 months, but this is a change in consumer behavior that they want to be able to meet over the long term. So these are long-term agreements to use our products, use our protocols and deliver a different standard of clean in their facilities to make sure their customers know it's safe to come back and use their facilities. And so we signed up a number of partnerships. I would say they've created limited value for us this year because they've mostly been in pilot mode because of our lack of production capacity. As an example, United is probably the longest partnership we have. It started with just a test in 2 of their terminals in the U.S. I think now we're up to about 35 terminals, including we're starting to expand into their international terminals, this partnership. That will continue to grow as we keep increasing our production capacity. And that's true with many of these relationships that they'll grow over time. And so they've created some value this year. I expect to see more value as we go forward over the next several years.

Do you have a sense within this professional opportunity of how much of it is incremental spending? So if you get on a United plane, you might be given a single packaged wipe that you never used to get pre-pandemic as incremental spend versus businesses switching to your brands because they want that, you mentioned the point around the brand equity, right? The consumers want reassurance around the timeliness that they get with the Clorox brand. Do you have a sense from your guys' perspective of how much of this opportunity is the total increase in the size of the market? And how much of it is Clorox gaining share because of the brand equity point?

Yes. It's difficult to piece those apart, but I'd say, we expect both. We think the pie is getting bigger. There's no question, businesses, health care facilities, they're investing more in cleaning and disinfection than they did before the pandemic, and we think that's going to continue as we get to this new normal. So we think the pie is bigger, and we think our share will grow in these spaces as brand equity has become much more important than where it was before the pandemic. So I think it's a combination of both, a bigger pie as more cleaning and disinfecting will occur, and then we expect to grow share in that bigger pie.

Can you talk a little bit about the competitive situation? So my understanding is that in that professional business, you guys are what I would describe as a super premium player, selling at very high price points relative to the more mainstream guys in the market. Is that correct? And what gives you the confidence that in the long term, and I'm talking your 2025 strategy, right? So what gives you the confidence that by the time we get to 2025, and hopefully, fingers crossed, the pandemic is in the rearview mirror that these businesses will still be willing to pay those super premium prices for the brand equity when consumers maybe don't care so much as they do today?

Yes, it's a great question. And what I'd tell you is you really have to look at our track record. As I said, we've been very successful in these channels well before the pandemic began. And it goes back to a similar belief we have in the retail environment, which is you have to offer superior consumer value. And that's no different if you're talking about a business in a health care environment or you're talking to a consumer in a retail environment. Fundamentally, that's how you win long term. And so for us, if you think about what we've been able to provide in these professional settings, we provide the best chemistry, EPA approved, if you think about health care settings that kill the nastiest viruses and bacteria, think, C. diff and kill times, that matters to these health care environments that worry about hospital-acquired infections and their financial liability of that. And so they're looking for the best, most efficacious products that help keep their, I'd say, customers, but the folks going to hospital safe. And so it's not that different, Callum, what it takes to win. You have to innovate, you have to have the best-performing products that can justify your price premiums. They give superior consumer value. I'll give you an example on the janitorial space where we've been very successful. If you think about the janitorial environment, a lot of cases, the biggest expense they have is labor. They take dilutable chemistries, and then they have to have somebody go around and clean all the spaces in their facilities. And one of their biggest expenses is labor. We also, as you know, we provide value through innovation. So we developed in partnership with a company we work with, something we call T360. It's an electrostatic cleaning device. We've talked about that before. It provides a couple of benefits. One, you get the best cleaning environment. It's an patent-protected technology that electrifies the molecules, the cleaning molecules, not only do you clean the surface but it wraps around and cleans the entire item you're spraying, so you get better efficacy. You put it in a device where one person can clean large spaces very economically in terms of labor costs. So there's an example where you're providing value to a business. It may be at a higher price point, but it's -- it overall creates value to that business because they can cut down on the labor costs. And so that's always been the case. We've been successful through the efficacy of our products and the innovation we bring to market. The added benefit that I'd say didn't exist a year ago was the value of the equity. And so what's additive now, as businesses understand, that equity has real value to assure their customers or the cleanliness of their facilities. So I'd say we've been historic -- we've been successful historically, and the equity is taking on more importance. And that's why we think we'll continue to be successful going forward, everything we've been doing plus the strength of our equity going forward.

Okay. Sort of final question in this kind of an area, I guess. So when you're thinking about this, you mentioned United, and there have been a couple of other sort of, what I would call, very high-profile deals. Should we be thinking about these high-profile deals as being what's going to drive the growth? Or is it actually about the long tail of hospitals and janitorial small wins that add up? And food service, I guess, is also because of the consumer-facing aspect of the angle. Are the blockbuster deals just actually a little bit of a red herring and really responsible about the long tail?

Yes. I wouldn't describe this as a red herring. Here's what I'd say. Again, if you look at our PPD business, mid- to high single-digit growth for a very long period of time, probably over a decade. That's where we've been growing that business. We see no reason why that should stop. And now we've added another growth runway with the out-of-home partnerships. So I think it will very much be both. We'll continue to sign up these long-term partnerships, which clearly add incremental sales and are nice additional growth runway for that business. But we expect to continue to build the base as we've been doing for a very long period of time. So we like this business, and we think it's only been enhanced in terms of the growth opportunities as a result of the pandemic. And we are innovating to support folks at all aspects of that size continuum because ultimately, I'd say, Callum, the common denominator we're seeing is businesses whether they are large and small, all understand the same dynamic. My customers want a higher assurance of cleanliness, whether you're a big customer or a little customer. And so as I said, we just innovated with a new, what we call, Clorox Turbo Pro gun. You can buy on Amazon for less than $200, along with Clorox Chemistry that's EPA approved to use with that device, and small businesses can clean their facilities with it. It's a fairly efficient way if you have a small office and want to disinfect it to use that device that you can order on Amazon for less than $200, or if you are a big partnership like United, it's obviously a much larger partnership. We want to provide a solution for everyone. Now clearly, the bigger deals will be more meaningful in terms of what it generates sales for our company. But we're really committed to providing a solution regardless of where you sit on that continuum of size. What is clear, though, is everyone is looking for solutions about how to elevate their standard of clean and coming to us asking, how can we help them do that? That's really the common denominator we're seeing.

Okay. Makes sense. We've got limited time, and I just want to dive into kind of one last area that we've got a bunch of questions from the audience around pricing. So a couple of questions from the audience are more kind of short-term based, and I have one of my own that's kind of much longer term, I think that I will kind of add to them. So the 2 questions from the audience are around scanner data showing that the pricing, looks like it's been quite competitive in your kind of big cleaning categories in the U.S. So just asking whether that's reflective of what you are seeing as well. The second sort of shorter-term one from the audience is around how you weigh up? What's -- as you're thinking about the merits of taking pricing in that competitive environment, but whilst your input costs are also going up and you've lost a bunch of market share over the course of the past 12 months because of the capacity constraints, how you weigh up the pros and cons of those? So those are the 2 short-term ones. And maybe I can add a long-term element, which is over the course of the past 15 months, we've seen a massive amounts of incremental capacity added by yourselves and other big CPG companies and other third-party manufacturers as well in this cleaning space. So as we exit the pandemic, and we're already starting to see demand fall off, are you at all worried about the long-term implications of spare capacity sitting around?

Yes. I'll try to get through all those and keep me honest if I miss one. On the promotional environment, I'd say a couple of things. One, we expect to see a return to more normalized promotional environment as supply catches up with demand, and there's more opportunity to promote. So that part is not surprising that we were in an environment of -- an extreme environment of almost no promotion on these categories, and we expect that to normalize, and that's certainly starting. I think what you're going to see though, which may not be as obvious to folks is there's going to be a bumpiness, I would describe it, for the next quarter or 2. When we were not on shelf and other manufacturers were not on shelf, a number of tertiary brands were brought in to fill up that shelf space. And for obvious reasons, during the pandemic, when you couldn't provide product, retailers are trying to put something on shelf to provide to their consumers who are willing to buy almost anything that would disinfect. And so right now, what we're seeing is retailers have a lot of that product and inventory that they've got to work through these tertiary brands as we are recovering our supply, and we're able to ship more, they've got to work through all this. And so I expect you to see a heightened level of promotional activity, trying to work through all those tertiary brands to move them off the shelf as we get back on shelf. As an example, and this is early reads, if you look at our wipes business and our spray disinfecting, and Callum, you're absolutely right, we've been losing share through the pandemic, primarily because of our lack of supply, and we weren't on shelf. As we've been increasing production capacity and as demand has been moderating, more frequently, you can find our product on shelf, and we're starting to return to share growth again. And so this is very early data. But if you look at the last 4 to 5 weeks, at least, we use IRI, you'll see our wipes business, our spray businesses are back to growing share as we're back on shelf. But I do expect in the very near term, some bumpiness there. They've got to work through these tertiary brands. They've got to promote them likely to get them out of the stores. That will go on. But I think if you take a longer-term view, I feel very good about our ability to get back on shelf. And our ability to be in a position to grow share once we work through the noise over the next quarter or so. And so I think that's how we're viewing the promotional environment, at least in that cleaning and disinfecting category. As it relates to pricing, I think was the other question. I'd tell you, and I'm sure you're hearing this from all of my peers, this is becoming a very challenging cost environment, both on the commodity side and the transportation. We're expecting in fiscal year '22, the balance of this year, and certainly next year, a challenging cost environment with rising input costs across a number of our key buys. We are evaluating our plans right now for pricing. Because resin is one of the key drivers we're seeing inflation, we moved pretty quickly in our Glad business. We took -- we announced a price increase in March to retailers. It will be effective in July. We're actually evaluating another price increase in that business based on where we're seeing the resin market go over the next 6 months or so. Each of our general managers are developing their plans. What I would tell you is I don't expect one answer for each of our businesses. We've got 10 business units, 10 general managers. They're going to look at what's right for each of their categories based on the competitive dynamic, based on a multitude of levers they can pull. Pricing is not the only way we address inflations. We've talked about this. We have a very robust cost savings program that we use. We look at trade spending levels, and we'll also look at margin accretive innovation. And every business is probably in a different place in terms of what are the right levers to pull to address cost inflation. As an example, if you can imagine, if a business has a big cost savings project they've been working on that's coming to market in '22, they may rely more on that as a way to address cost inflation. But having said that, I would tell you, we will take pricing across a number of our brands. We've announced Glad. We'll announce our outlook in August, and we'll share with you all our plans in terms of pricing, but you should expect to see more pricing more broadly across our portfolio when we talk about our outlook in August, but necessary given the near-term cost environment we're dealing with. And then, Callum, I think the last question was on production capacity. And you're right, we've significantly expanded capacity in the marketplace, particularly for cleaning and disinfecting products. And as demand moderates, there will be excess supply. In the near term, that will create some disruption. I really liked how you framed it, which is taking a longer-term view. The near term, there will be some disruption. And you're seeing in the market right now. If you look at hand sanitizers, if you look at these tertiary brands for wipes, retailers have to work those out of the system. And that will take some time. There'll be some bumpiness in share as they promote to get that stuff off the shelf. I think longer term, I worry less about that because I don't think you win in consumer packaged goods based on production capacity. You can always go out and get capacity if that was all that was stopping you. I think, ultimately, it always comes down to superior consumer value. And that's the innovation you bring to market, that's the strength of your equity, that's the price you charge. It's that combination of getting that right is how you win long term. It's not about do you have supply or not. That rarely is a determining factor in winning with consumers over the long term. So noise in the near term, yes. Long term, that's not something I worry about in terms of that will create long-term disruption to our business.

Okay. Fantastic. But I can see my instant messenger is flashing at me, which tells me we're up on time. But Kevin, I want to thank you very much for the time today, and thank you, everybody, on the line for joining us. It's been great sort of having this discussion, Kevin, I think we've really taken quite a lot away from that.

Great. Thank you, Callum. Thank you, everyone, for joining us today. I appreciate it.