The Clorox Company (CLX) Earnings Call Transcript & Summary

Good morning, everybody, and thank you for joining us. I am delighted to welcome Linda Rendle, who is the CEO of Clorox; and Kevin Jacobsen, who is the CFO. Just a couple of quick housekeeping items before we get started. On the right-hand side of your screen, I think you should have a live Q&A window, where you can type questions, send them to us. You can also vote on the questions of other people, and we'll try and integrate some of the most highly rated questions throughout the presentation and throughout the Q&A, should I say. And if you have any technical difficulties, please do reach out to your Bernstein sales person. But without much further ado, I do want to sort of get stuck into it. We've got a reasonably limited time frame. So I want to make the best use possible of Linda and Kevin's time. Linda, Kevin, thank you for joining us.

We do have a unifying question that we're asking to all of the management teams today that we want to start with, and it's sort of is particularly relevant, I think, for you guys and the Clorox business today. So I hope we just start then. The question is, what is the single biggest execution challenge that your company faces today?

One word, volatility. And thanks, everyone, for being with us today. I think we are facing an incredible amount of volatility. And that means everything that we do consistently has to change across planning, and that is definitely playing out, particularly in the supply chain. I think, for everyone in the industry and for us, when consumer demand is swinging plus 20% to down 5%, these are very big swings that go all the way back through raw materials. And given the challenged supply chain globally right now, that's a huge executional challenge, particularly for companies who are used to being more steady state. And we have been a very consistent company that has grown low single digits over time. So I would say, volatility.

Okay. That's very clear. And sort of segues quite nicely into the first question that we wanted to ask, which is around some of this volatility. So I think through the pandemic, and we've been very lucky to have you with a couple of our conferences over there the course of the past 12 months. Through the pandemic, you've been quite clear that you expected cleaning product demand to sort of be sticky post-pandemic. And then in Q3, Q4, as in your fiscal Q3 and Q4 last year, we saw it moderate probably quicker, I think, than most people had expected. And then in Q1, with the Delta wave, we've seen a bit of a spike again. So I wonder just in light of some of that volatility you've seen and the swings you've seen, are you still expecting demand post-pandemic to the extent that we have a reach of post-pandemic world, are you still expecting that demand to be sticky and you're still expecting to retain some of that elevated cleaning demand?

Yes. It's -- all the evidence points to yes. And that's across the board. And I'll give you the evidence that's very close to our categories, but also the evidence that's broader that you're starting to see pervasive and culture around cleaning and disinfecting. And just so that we're -- everyone is clear, we always believed that demand was going to moderate. We did not believe it would stay at the levels at the peak of the pandemic that we experienced. Now the peak now has moved into this last quarter that we had because we actually did grow our Cleaning business on top of the quarter that we had last year. But we did expect that demand would moderate. But given the length of the pandemic and what we've seen in history, we do believe this behavior will be significantly higher than it was before COVID. So the evidence. First, if you just look to history, any time that we've had a really severe, even just cold and flu season, that's the time that we have seen households categories and cleaning and disinfecting. And that, over time, have built from maybe light users up to medium to heavy users. There are times when people have used a disinfecting wipe. And maybe their family didn't get sick that season, and so they turn to that trusted solution every cold and flu season. So we see it in history. We see it in the data today. Our Clorox brand household penetration is up significantly, and we've retained that household penetration throughout all the highs and lows of this pandemic. We are having higher repeat rates, buy rates are up, retention rates are up, claims behavior is up, what we're observing is up. And we're just seeing heightened awareness in society. So if you look at this year's holiday list, for example, you'll see that many of the products that are listed there talk about cleaning and disinfecting your phones, surfaces. I even saw a bag that was highlighted that you can wear your phone around your neck, so that you don't have to put it down on a dirty surface. So this is really prevalent in people's minds. We believe the behavior is here to stay, and it's sticky. We'll see exactly where it levels off, and we do expect it to level off, but at a higher place. And if you look at our quarters, I think this is also helpful, even in Q3 and Q4, it was moderating. Our Health and Wellness segment was still significantly bigger than it was pre-pandemic. So even in those moderating times, the business itself was bigger.

So I guess just a follow-up. You mentioned Q3, Q4 was still elevated relative to pre-pandemic. Do you think that sort of Q3, Q4 run rate is what we should think of as being kind of like the floor? Obviously, COVID-19 cases during those couple of quarters were quite low, but not zero, and cleaning and disinfecting maybe still was a little bit more elevated, relative to what hopefully and eventually might become if we can sort of exit the pandemic at some stage. Do you think that can be a floor? Or do you think it could get worse than that?

I think it's too early to say, Callum. And I would just say, we are not out of this pandemic yet. And we also have a cold and flu season that's starting around the world, at least in the Northern Hemisphere. Southern Hemisphere has gone through it. And that looks to be a more normalized cold and flu season. And so I think we're going to continue to see those behaviors be ingrained, and we'll continue to update people on what we see. But given the fact that we're going to be heading into really 2 years of pandemic and then a cold and flu season, it's difficult to say right now. We are just maintaining that we think it will be significantly elevated. And we're not exactly sure when we're going to reach the new normal given it's really hard to predict the pandemic.

Okay. Got it. That's clear. One of the other elements of volatility that you mentioned was supply chains. And one of the things that, Kevin, you spoke quite a lot about on your conference call on Monday, was about the use of co-packers and how that has had an impact on gross margins. Of the 470 basis points drag, I think you had from manufacturing logistics, are you able to help us sort of quantify how much of that is co-packers and how much of it is freight, which obviously is another challenge that sits within that bucket?

Callum, thanks for the question. And you're right, as Linda talked about the biggest challenge we're dealing with is volatility, particularly in our supply chain. As a result of that, I'd say we've done 2 things. The first is, as you mentioned, we've had to extend our use of contract manufacturers to keep up with demand. But in addition to that, we've significantly extended our broader supply chain, including suppliers, both to keep up with demand, but also to build more resiliency into our supply chain to be able to manage through this level of disruption we have right now. All of that is putting increased costs into the system. And so while we are definitely using more contract manufacturers keep up with demand, we have suppliers now that we've extended that network that, in many cases, are much further away from our facilities, in fact, our global suppliers. And we have increased transportation, bringing product to market. All that is adding a cost to our system. It's somewhere in that 100 to 150 basis points of increased costs that we're absorbing. We think it's absolutely the right thing to do in the near term to manage through this volatility. We also feel quite comfortable that over time, as we assume demand normalizes, the supply chain normalizes, we'll be able to step out of these costs. We're probably 12 to 24 months away from that. A lot of that is going to be driven by factors we don't directly control. But I do feel good that over time, we'll be able to step out of those charges.

And I guess just a quick follow-up. Have you got to the stage where the supply chain now, that the increased complexity that you put in place has stopped increasing? And at what point do you sort of annualize the increases in complexity that you've put in place?

Yes, I think so. I think we're at a point. If you think about the contract manufacturers, as you may recall, we've talked in the past, we typically produce about 80% of our product historically in-house and use contract manufacturers for a little bit of extra capacity. That was pre-pandemic. We're closer to 50-50 now in terms of how much we produce versus third-party manufacturers. We have, I think, gotten to the point we've gotten the right supply chain. As Linda mentioned on Monday, we are now at a point where we mostly can supply demand. If you recall, it wasn't that long ago, 6 months ago, about half of our portfolio is on allocation. But based on all the very good work we're doing, we're mostly at a point now where we can fully supply that demand. So I would think over time that demand continues to moderate, which is our expectation. We'll be able to start stepping out of those relationships, and that's likely over the next 12, 18, 24 months. Now if there's an increase in demand because of the pandemic takes a different turn, clearly, that will change our plans. But if it moderates the way we expect, I would expect us to start stepping out of those as we move into the back half of this year and then likely continuing on into fiscal year '23.

Okay. That's super helpful. And just a follow-up. I know you mentioned as well that the sort of 50-50 actually on the call on Monday. And I think you said then that it used to be 80-20. To get from 80-20 to 50-50, either you need an increase in volumes of 60% for the 20 to become 80, and I don't think you've seen 60% volume growth. So the flip side is the other way to get to 50-50 is for the 80 to come down, the 80 you used to produce in house. Is that the case, sort of in-house production face such meaningful challenges? Is that why we're at a 50-50 ratio today? Or have you made active decisions to reduce sort of in-house production and shift it away to go co-packers?

Yes. We're not shifting away. In fact, we've been adding capacity in our plants. One of the biggest investments we made last year was to double our ability to produce wipes in-house as we double the capacity of our largest facility in Atlanta. But what I would say is if you think about where we've been, we've had 20-plus percent growth in our business and even more outsized in cleaning and disinfecting. That increased demand has required us to shift production. Now as that demand moderates and we get back into this 3% to 5% growth rate, which is what we expect long term, that's we're going to be able to bring that business back in-house. But we'll see over time exactly where that balances out. As we say 80-20 right now, that makes sense. But depending on where demand shakes out, and with the ongoing work we're doing to increase production capacity. At the end of the day, we'd prefer to produce as much volume in-house as possible. We think we have the lowest cost structure and are the best at doing it. And so over time, we'll look to bring more volume in-house. Right now, 80-20 is where we're operating before the pandemic. But ideally, if we get to a better ratio than that, I think it will only give us more opportunity to improve margins.

Okay. That's super helpful. So one other element of the sort of volatility puzzle, I guess, has been the swings in inventory at retail and consumer level, I guess. And you mentioned that at the height of the pandemic, I think 50% of the portfolio on allocation. And that volatility again sort of continued into your Q1 results. So I think you mentioned that there was some inventory build in Q1, and you expect that largely to reverse in Q2. But I think maybe the magnitude of what that inventory looks like in Q1 has been sort of a little bit of a question mark for some of the investors we've been speaking to. Sort of on the one hand, you seem to sort of explicitly say that it wasn't that big, I think, on the conference call whereas on the other hand, the 1H guide implies that there will be a pretty material slowdown in the second quarter relative to the first quarter. So can you just help us with understanding how material was that inventory building in Q1? And is that sequential slowdown of your first half guidance as you're buying, is that sort of really materially driven by this inventory build reversing? Or is it sort of some conservatism around underlying demand given the Delta wave is slightly in decline now. I wonder if you could help us on that.

Why don't I give the dynamics on Q1, and Kevin can build on any points as we talk about the first half forecast. So if you think about Q1, I think what's important to understand is there were many things going on during the quarter. But there were 3 main ones that we should speak about. The first would be Delta. And we knew, if Delta were to pick up in the U.S., that we would have a bump, and we certainly saw that in our business. And we don't expect Delta to be as prevalent in Q2. Although again, we don't know. Based on what we're seeing on the numbers, though, particularly in the U.S., it has slowed down. The second thing is we return to merchandising on 2 businesses: our Home Care business, particularly Wipes and the Brita business. And back-to-school is one of our most important and biggest merchandising periods of the year, and we saw tremendous results during that. So share up on Clorox Disinfecting Wipes and Brita all in double digits. And so it was a very sizable promotion that we wouldn't expect to continue into Q2 because we don't have it planned for Q2. And then we talked a little bit about the inventory piece. And this is not, as we said, the headline for the quarter at all or the over delivery. It really is those 2 other factors. But we do see inventory high in places in Kingsford. And Q2 tends to be a relatively small quarter for Kingsford. So we think those are going to balance out between the quarters. And then we do see a little bit of pantry loading from consumers on coming out of back-to-school, but it's nothing again that we would say is any type of sizable impact, but we see some consumers loaded up during back-to-school. And then from a retail perspective, because we brought -- the quarter was relatively large, we just think there will be some shifting between Q1 and Q2. So again, we wanted to call it out because we think it will happen between the Q1 and Q2 dynamic, but really the biggest impact was the fact that we had the Delta wave and back-to-school merchandising, and we're able to fully supply, of course, as Kevin just highlighted.

Callum, I think the only thing I would add is if you step back from the quarters and really acknowledge and we've talked about this in the past, it is very difficult to predict in 90-day increments as demand moderates from 20-plus percent to 3% to 5% long term. We won't get that right by quarter, every quarter. But overall, in the front half of the year, we feel better. We're now projecting to have a stronger front half than we thought back in August. There will be some movement between quarters. But at the end of the day, if I take a broader view, we feel like the front half is going to be slightly stronger than what we thought coming into the year.

Okay. And I guess the other side of inventory that I also wanted to ask about is inventory on your balance sheet. One of the contributing factors to the sort of reduced cash flow delivery in the quarter was that, I think, for the fourth consecutive quarter, you continue to build inventory on the balance sheet. I wonder if you can talk about sort of what's driving that? Is that a sort of a purposeful decision, given some of the supply chain volatility, you think you want to be sitting on more stock and more inputs, I guess, as well? And then sort of a follow-up, I guess, related to it is because you have increased inventory on the balance sheet, is that sort of implying that as its cost have continued -- input costs have continued to increase, that the flow-through of commodities into your P&L hasn't yet got to its worst possible stage because the worst, if you're operating on a sort of first in, first out inventory system, then I guess the stuff sitting on the balance sheet today is the stock with the highest cost. Is that the right way to think about it?

Yes, I think that's right. But let me answer both of your questions. Let me talk about our inventory levels. If you look at finished goods inventory at Clorox before the pandemic, we typically carry 55 to 60 days on hand. We did Q1 at about 62 days. So from a finished goods inventory, we're carrying more inventory. Most of that is driven by our intent try to create a more resilient supply chain. And it's not just finished goods. We're carrying more raw materials, packaging materials as well. As I talked earlier, as we've extended the supply chain, it has created more risk in the environment. And you folks all know what's going on within the extended supply chain and the lack of reliability right now that's going on. So we need to carry more inventory to make sure that we can continue to produce product and continue to ship to meet demand. I'll just give you a couple of examples that maybe illustrate this. Through this pandemic, and we haven't talked about this quite a bit, we probably had 200-plus force majeures declared on us, and that is various contract manufacturers, suppliers; for various reasons, coming to us saying that they can no longer supply product against our demands. And that could be because of their labor shortages, COVID outbreaks, inability to ship product for a number of reasons. We've been managing through that. We probably have 40 active force majeures in place right now. So that level of disruption in the supply chain, it really requires us to elevate finished goods, elevate raw material inventory levels to make sure that we're prepared to manage through those. One example I gave, I believe I mentioned this on the call on Monday, a really good example, it just happened last quarter, was with Hurricane Ida. As part of our preparation, to make sure that we can continue to produce product, we carried more resin inventory on hand at our facilities. We've qualified additional suppliers to produce resin. And that was a perfect example, was put to the test. Our largest resin manufacturer in Louisiana went down. For the better part of 2 months, they declared a force majeure because of lack of electricity to their facility. And in spite of that, we did not miss a beat in terms of our ability to produce bags and wraps. And why this really matters is we kept shipping demand, we kept product on shelf. And if you look at our performance on our Glad business, we grew share over the last 13 weeks in spite of having our biggest supplier declare a force majeure and stopped shipping product to us, and it had no impact on the consumer or the retailers. That's the real value here. Now we know that comes at a cost, but we think that generates a very good return. If you can keep product on shelf, you never give a consumer a reason to leave your franchises, that will create good value. They come better cost in the near term. But we have a lot of confidence we'll be able to take that cost out over time. And then, Callum, on your comment related to how we account for inventory, you're right, the more inventory we carry, that will delay when it hits your P&L. And as part of that, some of you may have heard in our call on Monday, originally, we anticipated that we'd see peak cost inputs to our P&L in the first quarter. We have now updated that assumption that we think this quarter, Q2, we'll see peak resin costs. And that will mean that the biggest challenge to margin will occur this quarter. Some of that is just based on the delayed timing of when it actually flows through to our P&L. And then we expect to see improvements as we move into the back half of the year.

Okay. Very, very clear. I think that's very helpful. And just as we're on resin, I guess, I have a couple of questions there. So one of the things you mentioned on the Q1 call was that you are sort of baking into your guidance a forecast that resin prices will fall in the second half of your fiscal year. I wonder if you can talk and sort of give us any more color about how much you're expecting it to fall by? And whether that is an assumption that's also baked into other commodity prices? Or is it sort of you see resin as a one-off, it's the only thing that you're forecasting will fall in your guidance?

Yes. It's really primarily resin. If I think broadly about our input costs, we're expecting significant inflation broadly across our portfolio, just about all our buys, raw materials, packaging materials, labor, transportation. But we went into the year without expectation. That's not a change for us. So if you recall back in August, we thought there would be about $300 million worth of cost inputs on commodities and transportation. Now for Clorox in a given year, we -- on a bad year of inflation, it's $50 million or $60 million. So we went into the year expecting 6x, 7x a normal inflationary cycle. We made a couple of changes to that expectation. So the 2 adjustments we made this week versus our going-in expectation was on transportation. We thought we would see some improvements in transportation costs in the back half of the year. We now are of the belief that the imbalance in supply and demand is going to continue for all of fiscal year '22. So we have updated our assumptions to assume that transportation stays elevated. We continue though to expect resin to moderate in the back half of the year. It is going to peak, we believe, this quarter, and then we'll start to see it come down. And keep in mind, when we say moderate, we still expect resin to be up 50%, 75% for the year, so a significant cost increase for resin. But right now, we're dealing with resin cost increases well over 100% in the front half of the year. I mean this is an unheard-of level of inflation we're seeing in a very short period of time. We expect it to come off those peaks a little bit, but still end up much higher on an annual basis and where it ends at the end of the year. So that's the expectation we have. It's very consistent if you look at consensus estimates for resin. So this is by no means a non-consensus estimate, but we have to see that play out. And importantly, what we've been doing through this entire pandemic is we'll adjust if things don't play out like we expect, we'll adjust our plans. You saw on Monday, you heard us say we're pricing more of our portfolio. That's because cost headwinds are a bit more than we thought, and we'll take the necessary actions. What I think is most important to Linda and I is we have to continue to be agile in this environment. Things will continue to change. And our commitment is we're going to recover cost. We will rebuild margins. That will take a little while to do, but that is absolutely our commitment to do that over time. And we're going to continue to adjust our plans. As the things we don't control play out, we'll adjust what we control as necessary. But we feel very comfortable with our ability to recover these cost increases over time.

So I do want to move on to some sort of bigger picture, longer-term strategic questions, but sort of maybe just one last one on some of this commodity cost inflation. And again, on resins. Can you sort of walk us through what resins it is you are using, I think that it's LDPE, low density polyethylene, that goes into glass. I guess that's the biggest bucket of resins. They seem to be not moving in tandem. So I think it's important to understand which ones you're exposed to. And if I'm right, that it is LDPE, that it's the biggest bucket, seems like there was a lot of skepticism about your comments on the call on Monday based on the questions you had around your forecast that it will fall. But if I'm not mistaken, LDPE is already down about 15% from peak about a month ago. So I wonder if you can just sort of walk us through, is it LDPE that's the big bucket? And if we don't track those spot prices, but maybe you can walk us through how do those changes in spot prices? And how long do they take to flow through into your P&L? And how does that work?

Yes, you're right, Callum. So we buy a whole different basket of resins, high-density polyethylene, PET, but specific to bags and wraps and where we have the most exposure is linear low-density resin. And that's what we're using in our bags and wraps business. And so we expect all those resin commodities to inflate this year. The one we're basically speaking to in terms of seeing moderation in the back half of the year is our linear low-density resin, that primarily goes into our bags and wraps business. And as I said, if you look at the third-party services that provide resin forecast, whether it's IHS or CDI, this is a fairly standard expectation that you'll see moderation in the back half of the year. And that's consistent with our expectation. Now look, we could be wrong, we will have to see how this plays out, but everything we're looking at suggests that we'll see resin prices, particularly in linear lower resin start to decline in the back half of the year, and that's embedded in our outlook.

In terms of a lag, are you paying spot prices? Or you have sort of a lag?

Yes, I won't speak to our pricing relative to the spot markets. But what I will say is to your earlier comment, there's usually a couple of month lag from the time we purchase resin until the time it flows through our P&L. So you'll see a little bit of a lag between when we get a price and we like to see it here in our P&L.

Okay. Very helpful. Look, I wanted to sort of switch gears a little bit and talk a little bit about the health of the consumer. You've spoken a lot about how private label has lost market share through the pandemic, how -- there's an element of consumer trust that is being rebuilt, how you're expecting to see less price elasticity now because of that increased trust. And I sort of want to push you on that a little bit because, on the flip side, I would say the consumer, especially in the U.S., has obviously benefited in a huge way from an income perspective, unparalleled disposable income growth through the pandemic because of some of the stimulus checks. Do you think it's possible that, that sort of elevated share gain for brands and shareholders for private label is actually just a function of the elevated consumer incomes? What is driving your belief that this is about consumer trust rather than just an income benefit?

I think first, it would be helpful just to step back and take a picture of what private label has been to this time because I think it is easier to contrast against a period that has been relatively stable. So if you look at our categories, private label has not grown meaningful share over the last 10 years. And so, it plays a very particular role for consumer that is very price sensitive. It will continue to play a role and retailers have done nice job building their store brands, and we would expect that to continue and that role to continue. We are watching the consumer very closely given everything you just highlighted, there is a lot of dynamics at play. We have absolutely build trust a lot through that, and then we have invested in our brands and innovation over this period of time. But we are heading into a period where consumers are more concerned about the economy, we are seeing stimulus back off and we do think they will be more challenged. But I would say is we play in essential categories. We play in places where consumers dedicate a portion of their wallet because it is about taking care of themselves, the basics of cleaning their home, it is about drinking clean water and they cannot afford for these products to fail, every consumers that are very value conscious, and we have very good strong shares with low income consumers, that has always been the case and we always focus on that and that is why we are so focused Callum on superior consumer value, and if you look at our portfolio, the portion of our portfolio that consumers deem superior has never been higher, 70%, so we feel really good that we are in a position of strength with consumer, that what we are seeing in our share right now. We have had strong share growth across our portfolio is really due to the fact that we build that trust that we are showing superior value with innovation, that they're understanding the role that our brands can plan their lives. And frankly, because they've been more exposed to them over this period of time, we've built that relationship. They know that it's great to have a trash bag where your trash doesn't smell when you're at home. And they're trusting a brand like Clorox to help them beat this pandemic. So we think that trust is going to continue. And again, if you go back to all those metrics I spoke about at the beginning, around household penetration, repeat rates, retention rates, buy rates all up. And again, that superior value measure, we think that we're really well positioned even heading into a period that's going to be more troubling for the U.S. consumer to continue to win in that period. We'll always watch private label and other branded players closely, but we're going to be focused on what we do best, which is the right combination of product, brand and price.

So just one follow-up, I guess. And you mentioned that in most [indiscernible] for 10 years. And I think the last time that it did was the last time that consumer incomes were really pressured into 2008, 2009. So with that in mind, and as we're now sort of lapping these periods of stimulus checks and consumer savings are starting to sort of normalize in the U.S., do you think that 2022, calendar 2022 could start to see a resurgence of private label? Or you're not too concerned about that threat.

If you look back 2008, it's a great period, Callum, to look at, to have a baseline. And in 2008, our categories went from up plus 1 to plus 2 to about flat. So not a huge impact on our categories. But if you looked at our businesses, we grew in 6 out of 8 of our U.S. retail businesses. So I think that's a good indicator that our brands are very resilient during times when consumers have less disposable income. And again, it's about the ability for them to not fail. So I would, again, expect those people who need a private-label solution that are really, really price-focused continue to do that. But I see our brands well positioned during this time, and 2008 is a great history lesson for that.

I have a sort of a super big picture follow-up, which is, obviously, I am British, I'm basically in London. And frankly, nobody in the U.K. buys branded bleach or branded bin bags either for that matter or trash bags. And there's a lot of skepticism and sort of disbelief, I would say, from a lot of the investment community about the job that you guys have done historically to combat private label in those -- in the rest of the world are challenging categories. You guys have obviously done an incredible job of combating that pressure in the U.S. Can you give us a sense of how you think you've done that? Is it about innovation and sort of driving superiority, as you said? Is it about branding and marketing? Is it some combination of the 2? Can you sort of give us a sort of a big picture walk-through of that?

Sure. Callum, I feel like you need to try a Glad trash bag if you haven't. My goodness. You'll see what you're missing. So you hit it. You listed all those things that we're focused on. When you want to deliver a superior value product to consumers, it really is about innovation. And that is why our IGNITE Strategy is focused with innovation as the central theme of the whole thing. We have to give products and benefits to consumers in the category that are leading. So we're always studying them to say what they love about a trash bag, what they hate. And then we're innovating over time to give them better and better solutions. So they really don't have to think about these things. We don't want them to have to worry about a trash bag failing. We don't want them to smell their trash in their home. We just want to make their lives easier. And if you look at the purpose that we have in our company, we want them to be well and thrive. And we do those little things around the house to do that, and it makes a big difference to them. And they are willing to pay a premium when we give them those benefits. And we've seen that time and time again. So innovation is going to continue to be the focus, investing in our brands from an advertising perspective, so they know about these benefits. We've talked a lot about in the pandemic the fact that we increased advertising, and people said, "Why would you do that when you have all these people entering your category?" We do that just for this reason because we're trying to build that loyal relationship with them. And we're able to do that even more now as we move into a digital realm. We spend about 2/3 of our advertising dollars in digital today. And we have a goal to know, in the U.S., about 100 million consumers. That allows us to get very personal with them to know what life stages they're in, to offer them solutions that help them in their life experience. And that has been the key to our success, continuing to invest in the brands, continuing to innovate, building those relationships with consumers. And then if they ever do try another product, they realize it's not as good, and it fails and they come back. I mean we see that time and time again, and it will continue to be the recipe of success for us as we grow our brands.

I think it's a nice segue into innovation, which sort of I guess for good reason, dried up a little bit in 2020 through the pandemic. And it seems like, especially based on some of your comments on Monday, that the innovation pipeline is back working again. Can you give us a sort of a high-level overview of what some of these new products are? And in particular, I guess, how that can start to flow through the P&L kind of start to offset some of the negative mix, for example, that we're seeing if some of these new innovations start to gain traction?

Yes. I think a good clarifier. There were a couple of places where we had to pull back innovations that we had in market to focus on running as fast and hard as we could. So we did that in wipes, for example. We stopped producing compostable wipes, which is a new innovation of the category. It was off to a terrific start, but we ended up flowing that to our core cleaning and disinfecting wipe business to do that. But innovation remains across the remainder of the portfolio largely, and we did not stop innovating internally to be ready for the fact when we had more capacity and we're able to fully supply. So I think that's the key message I want people to hear. There was no stop internally. We rolled off resources, and we have the best innovation pipeline, I think, we've had at least in my 19 years at Clorox coming up here. And we're seeing it play out in market. So we're building on platforms. That's what we intended to do in our IGNITE Strategy. We wanted to create platform innovation that we could invest in for many years. You're seeing that play out in things like Glad, where we have innovation that we can put sense in trash bags. We've been able to thin out and remove resin out of trash bags over time. And last year, we launched Glad with Clorox. That continues to do very well. It removes the stinky odors that bacteria can cause in your trash. And of course, right now it's really top of mind for consumers given the Clorox brand, and that's been off to a really strong start. We have terrific innovation in our Litter business. And given more consumers own cats now after the pandemic than ever before, we've seen a really nice bump in that business due to innovation. So we have added gain. And we've seen the scent profiles first up really perform well over time. And we also continue to build on our litter technology with our new outstretch litter, which lasts 50% longer. Consumers have to change the litter bin less frequently, but still get that same great freshed up experience. I'm really excited about innovation we have in Burt's, now that we're seeing the health and beauty business swing back up again as consumers are getting back into retail. Burt's grew double digits this quarter. And we've launched some great innovation building on our lip care business. One example of that is our cold sore treatment. It's the first 100% natural OTC cold sore treatment, and it's the #1 item in the cough and cold set in retail right now. So we think our innovation program across the board is very strong. And of course, in cleaning, you would expect us to innovate, and that is absolutely the case. We've reintroduced compostable wipes, which are again off to a good restart. We've launched paper towel wipes. We have a clinical line in place, and we have much more innovation coming in this calendar year. So the innovation program is strong and healthy. We're seeing the net impact of innovation up in the range of 2% to 3% versus our prior strategy period and it will be an area that we continue to invest in.

And is there a positive mix impact that, I guess, is just being offset by the reintroduction of value packs and things like that?

Yes, that's -- we're going to see that build over time. Our intention is whenever we can launch margin-accretive innovation that we do that. But what you're seeing right now is just the massive cost pressures come out. And as Kevin has talked about, we're going to start to see that reverse out in Q4 as we get pricing and innovation really takes hold. But up until then, you're going to continue to see that negative price/mix even with the innovation and pricing that we have in place.

Okay. Kevin, when we spoke, I think, back in August, you gave a really sort of useful, I think, explanation about what exactly is going on with the negative mix and the reintroduction of the value packs. I wonder if you could just sort of quickly run us through that, because I think it would be super helpful for everybody on the line.

Sure, happy to. And so when we were in during the pandemic, we knew we were getting a temporary price/mix benefit that would, at some point, reverse out. And the driver of that benefit was really twofold. The first was, for the most part, we were not merchandising our products for obvious reasons that we couldn't keep product on shelf. So there's very little merchandising activity going on, which generated a benefit to price/mix. And then the other item was, in our effort to increase our ability to supply product, we significantly reduced the number of products that we produce or offer to consumers. And we mostly focused on single pack, smaller sizes. Those are the sizes we could run most quickly in our plants. So in an effort to get more product to shelf, we significantly reduced our SKU count. So less larger sizes, less multipacks. That was also a temporary benefit. And so if you look back over the previous 12 months, we generate about 3 to 4 points of favorable price/mix pretty consistently every quarter as a result of those 2 choices. As we're now coming out of pandemic and as we've been talking today, we could now, for the most part, fully produce our entire product offering, which means larger sizes, multipacks. And we're just starting to get back into a more normalized merchandising level of activity, which really started this last quarter. As both of those items return, we expect this temporary benefit to reverse out. It started in our fourth quarter. We had about 2 points of negative price/mix. We saw that again this most recent quarter with about 3 points of negative price/mix. I'd expect that for 2 more quarters until we lap this. And then by the time we get to our fourth quarter, we'll have fully lapped this temporary benefit. We'll also get the full benefit of the pricing. Keep in mind, we're pricing 70% of our portfolio. That will all be in market by that point, so to see the full benefit of the pricing. And then as Linda just mentioned, you'd also see the benefits of some of that margin-accretive innovation. And so I'd expect us to return to favorable price/mix by the fourth quarter. And that really supports our broader objective, which is we expect to return to the low end of our long-term sales goal, 3% to 5% by the fourth quarter. That is helped by a return to volume growth as well as return to favorable price/mix.

Got it. And I guess the other part of the price/mix puzzle is the pricing -- the list pricing, where I think you've been quite clear that you're taking price increases on 50% of the portfolio in November. Can you just sort of walk us through, those negotiations are finished, that these price increases are sort of ready to go now? That's kind of done and dusted basically?

Yes. So the 50%, we have already announced and have worked it with retail, and you'll start to see that flow through in this quarter. And so we're largely past that. We did announce in our call on Monday that we will be taking a broader price increase across 70% of our portfolio. We are working that now, so we won't be sharing the nitty-gritty details, but we're taking pricing in additional businesses. We are also evaluating given what we're seeing, would there be an additional increase, for example, we've taken high single digits on Glad, would that be a business that we look at to take additional pricing given what we're seeing. And we have that analysis ready to go, and we're going to continue to watch what's going on with resin in the category to determine if that's the right next move. But we'll see pricing flow through in Q2 and see additional pricing from that 70% in the back half.

Okay. I think that's clear. Shifting gears a little bit. We started to see the investments behind your sort of $5 million -- $500 million sort of digital capabilities flowing through in the quarter. I wonder if you can talk a little bit about, as those businesses have started to take place, when do you expect to start seeing the benefits? What are the first things that we should be sort of looking to see, to see that the long-term payoffs here are really sort of in line with what you've kind of set out?

Yes. So we have begun the project, as we said, and it is on track. But recall, we talked about this being a larger project that really is about the future of the company. It's really not about the IGNITE Strategy period. It's about continuing the momentum coming out of our IGNITE Strategy period by replacing, one, an aged ERP that has to be replaced but two, building additional digital capabilities. And the reason we need to do this right now is we've seen a massive increase in digital during this period. So if you even just look at our e-commerce business over the last few years, we've nearly doubled it to 14% of sales, which was significantly ahead of what we thought we would be at, at this period. And we believe we'll continue to see that accelerate. In addition, you know we spend about 2/3 of our dollars, media dollars on digital. So we thought it was really important now given the ERP and what we're seeing from a consumer standpoint to do this. It also gives us many benefits on the efficiency side. It allows us to supply chain plan better. It allows us visibility through our entire supply network in addition to building those more commercial capabilities. And I think really importantly, we are an ROI-based company, we make investments that give a strong return, and there is no exception on this one. So we're going to start to see those benefits flow through in 2025 and in the next strategy period, both from an effectiveness standpoint but also from an efficiency, and the ROI is very strong.

One of the things that we've seen, of course, a lot of the CPG landscape, but also I think the tech landscape in calendar third quarter is because of some of the changes in the sort of Apple ecosystem. There was a marked decrease in ROI on online marketing in the quarter for a lot of businesses. Is that something that you guys see too? And is that flowing through into your sort of perspective on how much you want to allocate to online marketing going forward? Or will you expect this to be a transitive gain over the long term?

We've been prepared for this for a while. And actually so our ROIs and advertising went up even though we spent more money. So this has been something that our team has been hard at work at building a digital ecosystem that we're able to talk to consumers in the digital space. We've known about these privacy guideline changes for a long time, and we're working across our ecosystem to do that. So it will be something we watch closely to see how this evolves, but we believe we have a good handle on it and continue to see very strong ROIs in advertising in general and digital specifically.

Okay. Makes sense. Look, one of the things that when -- I think it was back in CAGNY, where you sort of originally lifted the long-term sales guidance back in February, sort of driven by this opportunity in international and professional. I wonder if you can walk us through a little bit of -- especially as a lot has changed in the world since February and a lot has changed in your business, in particular, since February. Has anything changed with that sort of increased enthusiasm you have for those opportunities in professional and international? And in particular, I wonder if you can sort of highlight for us where you see the most opportunity from an international perspective.

Sure. I think what's important to do is just remind everybody what that increase from 2% to 4% to 3% to 5% was comprised of. It was comprised of: one, our strong belief that our core was healthier than ever. We spoke about some of the businesses that haven't been doing as well in the prior period that we feel like we have on the right foot now. Kingsford is a great example of that. We talked about the fact that innovation was working stronger across the portfolio as we had intended in IGNITE. So we felt really good about the core business. But then we also saw this global disinfecting, cleaning disinfecting opportunity given the strength that we have in the #1 cleaning disaffecting brand in the U.S. and in many markets around the world. So that was comprised of 3 parts. One, our retail business and ramping up innovation and spending there, and we've seen that play out as we continue to grow again this quarter off of a very strong quarter last year on cleaning and disinfecting, and then additional opportunities we saw in our professional business and international. So that was the landscape of what we thought that extra point could come from. We continue to feel very good about that extra point given what we're seeing. Our core continues to look great. Our brands are incredibly healthy, and we have very strong innovation plans. What we see in professional international, it's bumpy given, and we expected this from a volatility perspective and just what we're lapping. So if you look at professional, we've had a long history of bringing that business mid- to high single digits. We think that will continue into the future, and we'll be able to get more out of it. But we're lapping 70% growth in our front half of last year. And so the business is down double digits right now. It's also in flux because businesses aren't fully open, consumer -- people haven't fully returned to their hybrid work environments. And so there's going to be lots of volatility. There's inventory in the system there, but we think that's one that, again, we can return to that strong growth that we had and get additional value out of Professional. In international, we had another strong quarter. If you look at the 2-year stack in Q1, it was 19% growth. We saw double-digit growth in wipes, and we've been able to double the amount of countries that Clorox disinfecting wipes are in, given the dedicated supply chain we built. And we feel really good about the continued opportunities to grow in international. We've talked about the fact that we want to move away from LatAm over time into other markets, and that has also gone well. We continue to expand our Middle East business behind the majority acquisition from an ownership perspective of our joint venture, and our businesses in Asia continue to do really well. So I would say largely on track. It is going to be bumpy as we go through these periods. But the combination of all those things we talked about against that extra point Kevin and I continue to feel confident in.

Okay. Perfect. I think we have time for one last question. I have one from a client, which is about your vitamin mineral business, where obviously, you took an impairment, say, in the second half of last year. And it's a pretty small part of your business now today. I think 4% of sales is the last; number that you gave us and in the space that otherwise actually been doing quite well through the pandemic. So the question from the client is, do you still consider this to be a sort of core category for the Clorox business? Would you consider supplementing it with further acquisitions to strengthen your position in the space? Is that a problem that you're just sort of not big enough from a competitive standpoint? And if not, what you can say going the other way and getting rid of it, divesting it, it's sort of structurally challenged.

Yes, this is -- as you said, it's a small portion of our business, but one, we're hoping to build into a more meaningful portion of our portfolio over time. And we spoke about some of the dynamics from when we purchased it to now, we got a lot of small brands, and we bought brands that were heavily exposed to the natural channel, which has declined significantly over this period. But we went back and redid our strategy. We feel good about the business right now. We relaunched Renew Life, and that's done very well and has been growing share. Natural Calm Vitality, which is a strong brand, it's a magnesium supplement, and it really helps with stress, which I think people have been abnormally stressed over this last period. That's done very well, we continue to grow share in that business. And so we see a path through innovation through brand building to build a core set of these brands over time. We think we're off to a good start in our Strategy Refresh. We'll fully hit market in fiscal year '23, but elements of that are hitting now in fiscal year '22. It's one we're going to -- where we continue to be committed to. And you're going to hear more news from us in that moving forward in terms of the elements of the strategy that we put in place. But I would say right now, it's early, it's small, but we continue to think this is a business that we can have that can be margin accretive and additive from a growth perspective to our portfolio.

Okay. Very clear, but we are out of time. So I want to thank everybody for joining us, and thank you, in particular, to Linda and Kevin for the sort of very clear and I think generous answers in terms of sharing incremental information. So thank you very much.

Thanks so much, Callum. It's great to be here.

Thanks, everyone.