The Clorox Company (CLX) Earnings Call Transcript & Summary

Hello, everyone. I'm Linda Rendle, CEO of the Clorox Company, and I'm joined today by Kevin Jacobsen, our CFO. It's great to be here today to talk about our progress on our IGNITE Strategy and how we plan to accelerate long-term profitable growth. While we certainly acknowledge there's a lot of short-term noise out there, today, Kevin and I are going to focus on our long-term investment case. We really appreciate your interest in Clorox and for joining us today. Before we get started, a good reminder that this presentation contains forward-looking statements, and we know you take that as seriously as we do. With that in mind, let's get to key messages. First, 18 months ago, we started our IGNITE Strategy implementation with the goals of strengthening our competitive moat and accelerating profitable growth. Despite a very dynamic environment, we have made strong progress on our choices and IGNITE continues to position us well for the future. Second, the last 10 months has further demonstrated the important role our brands play in consumers' lives around the world, and we have plans to further accelerate profitable growth. And finally, Clorox has a strong track record of delivering for our shareholders and our long-term investment case remains attractive. Let's begin with a quick overview of who we are and our view of our competitive moat. We have a diverse portfolio in the health and wellness and household essential spaces. Although we compete in over 100 markets around the world, 85% of our sales are in the U.S. Our North Star is maximizing economic profit. And we do that with a choiceful and disciplined playbook with 4 main components. The first is leading brands consumers love. Second, we are purposeful and targeted in our participation strategy. Third, we have discipline in the DNA, and we strive for operational excellence. And finally, we believe in the strategic link between our impact in the world and long-term value creation for our shareholders. And that's why we lead with purpose and embed ESG into our business. Let's talk briefly about each of these in turn. First, leading brands are important because we believe they capture a disproportionate share of category profits. That's why 80% of our portfolio is made up of #1 and #2 share brands. And we focus on superior value as a way to keep them loved by consumers. And because we know purpose-driven brands grow 3x faster, we have activated all of our major brands with purpose. We love to have those big share brands in economically attractive midsize categories that are generally less competitive, so that we can drive profitable growth for Clorox and our customers. And as I said earlier, discipline is in our DNA and shows up in how we grow through innovation, how we consistently deliver margin growth from cost savings, our top-tier return on invested capital and strong cash flows, all delivered with low selling and admin relative to our peers. And finally, and very importantly, we are clear on why we do what we do, and we never take for granted the role our brands play in consumers' lives around the world. We champion people to be well and thrive every single day. And that's why our strategy formalizes is by embedding leading ESG goals and accountability into the business. Now let's move to a review of our IGNITE Strategy. This strategy was built to further strengthen our moat and competitive advantage. We chose the name IGNITE because we wanted to convey how we would lead through a period of disruption with energy and excitement and movement. None of us could have predicted how disruptive this environment actually would be. But we're pleased to say that our IGNITE Strategy has served us well. We're making strong progress against our choices and the strength of our core has never been better. Let's take a look at a brief overview of our IGNITE Strategy, the 4 key choices that make it up and our progress against each. Innovation is the central theme of IGNITE as we believe it's the way we'll deepen our competitive advantage and keep our brands healthy. We apply innovation to our 4 core choices. Fuel growth is about raising our cost savings target to 175 basis points of EBIT margin expansion. That helps us generate fuel and offset inflation. Innovate experiences is about expanding the way we deliver consumer -- superior consumer value through personalized and purpose-driven brands through frictionless shopping with retailers and through bigger, stickier innovation. In reimagine work, we are striving to build on our strong team and culture to be more inclusive, digital and fast, so that we can move as fast as the world does around us. And finally, on evolve portfolio. It's about having a strong, more resilient portfolio with the #1 job always being the core. IGNITE also leverages relevant consumer megatrends to accelerate growth, and these trends are even more relevant today. Most prominently, we see the incredible importance of health and wellness across all areas of consumers' lives. There have been so many broad impacts of COVID-19, and it's changing people's routines and habits. Our progress has been strong across the board, and we are playing 100% offense. In fiscal year '20, we generated cost savings above the targeted EBIT margin impact, and we're on track to deliver against our commitments in fiscal year '21. Not only did this help us offset cost inflation, but it also allowed us to invest back into our brands through advertising and innovation, leading to household penetration growth with over 2/3 of our sales coming from brands with growing household penetration. Nearly 60% of our portfolio is deemed superior by consumers. This is the highest we've ever measured. We've also been able to strengthen our loyalty with these households and improve retention rate, repeat rate and spend per buyer sequentially quarter after quarter. We're growing market share over the last 52 weeks despite significant supply challenges. And with all of this, it's safe to say our portfolio is significantly stronger than it was 18 months ago, and we're going to continue to invest to build on this strength and accelerate growth. Moving on to our second choice. One of the most important areas around innovative experiences was bigger, stickier innovation platforms. We wanted to create more value in the portfolio from innovation. We were going to do that by having bigger ideas, casting a wider net and employing a longer-term investment focus. And we are doing just that. It's early, but we're excited about the progress we're making. Not only have we been able to grow year 1 sales and innovation launches, but with more focus on sticky innovation, we're increasing the contribution in the second and third year, leading to a 2 to 3x increase in the net impact from innovation. We've also materially dialed up a number of large platforms we're launching across the portfolio while reducing smaller, less strategic launches. And our businesses are accountable for building platforms into their 3-year innovation plans. Moving on to our third choice. Today, due to our focus on reimagine work, we are already a much more agile organization than we were 18 months ago. We challenged ourselves to accelerate our progress versus our original plan when the pandemic hit. We had 2 very big jobs to do. First, we needed to increase supply to help meet the demand, the unprecedented demand we are experiencing across our portfolio. And two, we had to make progress against our strategic ambitions, and we're proud to say that we've been able to do both. A couple of highlights of progress that I would include, exceeding our IGNITE goals on key targets like cost savings, which I discussed earlier, but also another good example of this is in personalization. In IGNITE, we set out to know 100 million consumers by the year 2025. We've been able to incrementally invest in fiscal year '21 and accelerate our progress on that personalization goal. Second, we are increasing our speed to market and decision-making. On several major innovation projects, we were able to condense the speed to market from 12 to 18 months down to 6 months. That's charter to the time we start shipping. And we're looking to embed these learnings across our processes where speed to market matters most. And finally, for evolve portfolio. We have strengthened our core with a focus on superior consumer value that is leading to growing market share, high household penetration and increased loyalty from consumers. We have also identified new growth runways with the potential to even further strengthen our portfolio and accelerate growth. We're going to talk about those in a minute. But before we do, let's look at an example of how this work is strengthening our core. At the end of 2019, we shared we weren't happy with where we were on our Kingsford business, and we outlined how IGNITE would address and improve performance. It started with a category vision and building plans with retailers to grow the category and restore profitability. As a result of these changes, we're seeing a more rational category with less deep price promotion, and that's incenting retailer commitment to growing the overall grilling category. We also wanted to build on the strength of the Clorox brand through purpose and personalization and ensure that we were bringing new consumers into the category. Through target-specific insights and marketing activation, we were able to increase household penetration with multicultural millennials, creating a strong foundation to grow from in the future. We also spoke about the need for meaningful innovation in the broadly defined category, not just charcoal briquettes been broader fuel experiences. And with that, we created a new innovation platform. And out of that was born Kingsford pellets. That was one of the innovations that we were able to launch in only 6 months, and we were able to capture a 15% share of the category in our first year. All of this leads to a fundamental shift in the health of the Grilling category as well as the health of our Kingsford business. Over the last 52 weeks, household penetration is up. We have stronger repeat rates, and that's leading to growing market share. This strong performance has allowed us to reinvest in brand building and innovation, and that's setting us up for a great season year 2021 and well beyond. Kingsford is a great example of why we have strong conviction in our IGNITE Strategy and our ability to accelerate growth through executing it with excellence. With a portfolio as diverse as ours and an incredibly dynamic external environment, we will always face challenges, but we will play 100% offense as we did with Kingsford, and we'll get back in the driver seat and win in the marketplace. As we began to do with Kingsford, IGNITE creates a virtuous cycle that strengthens our advantage. We're building off a strong cost savings DNA to generate more fuel, which allows us to consistently reinvest in the business and deliver strong innovation. By doing this, we're creating stronger brands, a stronger portfolio and a stronger moat. Ultimately, our goal is to serve more people around the world with our brands and grow market share, and you'll see more of a focus from us on that in the future. Our progress on IGNITE is also enabling us to pursue new opportunities with the goal to further accelerate growth and evolve our portfolio. We believe COVID-19 has fundamentally changed the world and people's behaviors and habits across so many areas of their lives, and this is creating new opportunities to serve them. As I mentioned earlier, the pandemic has further strengthened the megatrends we've been leveraging, and we're seeing lasting shifts in consumer behaviors that are creating new growth opportunities. First, the role of home has changed. People are investing significantly in their in-home experiences, and they expect to spend more time at home. It's also unlikely that people will fully return to their pre-COVID work routines. We're seeing the emergence of flexible work, meaning more time at home. That means more meals, more water, more trash and more products being consumed at home. Second, we are seeing a significantly higher focus on health and hygiene, with cleaning being reframed from a chore to a cornerstone of health. We expect increased usage of cleaning and disinfecting products to remain high with less than 10% of people saying they'll return to their pre-COVID routines. This heightened sensitivity to cleanliness of spaces extends to outside of the home as well. Nearly 3/4 of people are paying attention to how public spaces are cleaned and disinfected. Given the enormous impact of this pandemic, we also expect disease to be on the mind of people in the future, whether that be in a normal cold and flu season or in the event of a future pandemic. Finally, brand trust has always been incredibly important, but we're seeing a greater preference for trusted brands across our categories emerge. Given these trends, we are doubling down on our strengths. The global cleaning and disinfecting market is big, and we currently play in a relatively small part of it. We believe the Clorox brand can go further and where it plays today, and we can build a truly global brand, and we're starting from a position of strength with a strong foundation of internal capabilities. Of course, that starts with the brand we've built for over 100 years, but it also includes our technology, our supply chain and our go-to-market organizations for both retail and professional. We'll leverage these capabilities to grow both in-home, out-of-home and around the world. We are investing aggressively to build capabilities to support this expansion in the areas of supply, dedicated growth teams, external partnerships and new technologies. In home, we're focused on innovation to support people as they clean more frequently to reduce the time it takes to get the job done and fatigue. As people are more aware of the cleanliness of public spaces they enter and mobility around the world increases, we're focused on out-of-home cleaning. This is both from the perspective of the person who wants to arm themselves with products as they leave their homes and businesses who want to reinsure their guests that their spaces are safe. And finally, global. Cleaning and disinfecting has long been the core of our international business, and we are expanding our product portfolio in the markets we compete and exploring opportunities to go beyond the markets we compete in today. All of these opportunities are large, multiyear growth opportunities that we expect to meaningfully contribute to accelerating growth for the company and building contribution as we go through the strategy period. Let's look a little bit deeper at out-of-home and global. Starting with out-of-home, we see continued strength in our core professional business, especially in health care and janitorial services, but there is big white space for Clorox. First is ensuring people have the right products to take with them as they leave their homes, so they can better control their safety level on their terms. Second, we build on the strong foundation we have in our professional business to offer a suite of products and services. And this includes education and communication expertise to help businesses welcome people back to spaces that are cleaner and disinfected. This includes significant expansion in new channels, including transportation, hospitality, retail, with the opportunity to go even further as we expand supply. The value proposition is threefold for businesses. We improved the cleaning outcomes versus what they have today through protocol development and better technologies. Second, we give them the opportunity to reassure their guests by talking about the use of Clorox in their properties. And three, we're working to reduce their labor costs given the need to clean more thoroughly and more often through both new forms and technologies. In order to deliver leading innovation in this space, we will expand on our dedicated professional innovation team by leveraging new strategic partners like we've done with our partnership with the Cleveland Clinic. This allows us to collaborate on the latest science and support of public health. The demand in this space is high, and our early pilots have gone very well. We've expanded each one of those pilots as we've had additional supply. What's really important to understand is we expect this to be a multiyear journey that builds over time. And success here will strengthen our brand and strengthen our moat and further establish ourselves as an authority in public health. We expect this to be a meaningful contributor of growth in the next few years, especially as we gain more scale. As part of our IGNITE Strategy, we increased the contribution from international with sales going from down 2% to up 1% to 4%. At the same time, we wanted to have a more stable and profitable international business through our country and category participation choices. We are making good progress in both areas, but we see an additional opportunity to accelerate the performance of international. As I said earlier, the core of our international business is cleaning and disinfecting. And we have been hard at work at building the supply necessary to deal with the increased demand we're seeing across the world. What has become clear during this time is that people are looking for new solutions to keep them safe, and there's been very high interest in our Clorox brand and in new forms like wipes. Based on early testing and localized insights, we're expanding our product lineup in the markets we compete. Of particular focus is wipes given the convenience they offer to people, and they have relatively low penetration outside of the U.S. In just a matter of months, we built a dedicated supply chain to support this wipes expansion and are making progress in expanding into these new markets. This began in our second quarter and is another area we expect to be a multiyear growth platform as we build innovation based on local market insights and evaluate expansion into new markets. As I said earlier, the global cleaning and disinfecting market is big, and we play in a relatively small area. Every new market we can penetrate is 100% incremental to Clorox. We fully believe we can grow to be a strong global brand, and we see this as another meaningful contributor to growth over the coming years. To summarize, building a global cleaning and disinfecting brand is a big opportunity for Clorox. We not only have the right to play, but we have the right to win, and we are investing aggressively. There will be challenges along the way, and we do expect strong competition, but every new consumer end market is incremental to us. And finally, I'd leave with the thought that this will be a meaningful multiyear journey, and this will support our portfolio evolution and turning us into a faster-growing company. Before I turn it over to Kevin for how these growth opportunities translate into our financial aspirations, let me say how grateful we are to be able to make a difference to so many people around the world with our brands. I know I speak for every member of the Clorox team when I say how energized we are by the opportunities we have in front of us on our core and in these new growth runways. We're going to make the most of it by being fast, playing offense and executing with excellence. Thanks, everyone. Kevin?

Thank you, Linda, and thank you, everyone, for joining us today. What I'd like to do now is spend a few minutes and provide a financial update. And as I begin, I want to start with 3 key messages. The first, Clorox has a very strong track record of delivering value for its shareholders. Additionally, we rolled out our IGNITE Strategy 18 months ago with the intent to accelerate the financial performance of the company in service of our broader ambition to deliver total shareholder return in the top 1/3 of our peer group. And finally, as a result of the early success of IGNITE plus the new growth opportunities Linda just spoke about, we're raising our financial goals today. And I'll talk more about those in a moment. But let me start with our track record. If you look at our performance over any period of time, Clorox has consistently delivered total shareholder return in the top of our industry. Importantly, not just within our peer set, but against a broader market, Clorox has consistently delivered strong returns. Had you invested in Clorox 20 years ago, you would have generated a return 3x that of the S&P 500. And we've been able to generate those very strong returns by focus on delivering profitable growth, and we've consistently been able to increase operating cash flows as we focus on our core portfolio. And with that cash, we've been very disciplined in how we deploy our capital. At Clorox, what we understand very clearly is how we generate the best returns for our investors is to focus on investing in our base business, maintaining a healthy, profitable core portfolio. And this year has been no exception. As a result of the very strong start of our IGNITE Strategy, plus the additional growth opportunities, we are leaning in even further. We're leaning in, in advertising. We're going to spend close to $150 million more this year, engaging consumers, working to build lifetime loyalty. We're increasing our production capacity, working to keep up with the elevated demand we're seeing for our products. And we're investing in people and technology, all in service of accelerating our performance. While we continue to invest in our base business, we also continue to actively support our dividend, and we have a long track record of increasing our dividend on an annual basis. Additionally, as we generate excess cash, we will continue to look for ways to return that to our shareholders. Over the last 5 years, we've returned almost $4 billion to investors through both our dividend and our share buyback program. And this year is no exception. This year, we're on track to return almost $1 billion to shareholders. And we've been able to do all this while maintaining a very low level of leverage. And what that means for us is we have plenty of financial capacity to invest in additional growth opportunities as they present themselves. And folks, if you focus on generating cash and your discipline in how you deploy that cash, you can generate very nice returns on invested capital. Clorox has a very long track record of operating at the highest level of our peer group on the returns we generate on our investments. When we communicate our IGNITE Strategy about 18 months ago, we set financial goals that we thought would position us to deliver returns at the top of our industry, 2% to 4% sales growth while expanding margins and delivering strong cash flow. As a result of the early success of our IGNITE Strategy, plus the additional growth opportunities we see, primarily in our cleaning and disinfecting portfolio, we're going further. We're raising our sales target of 3% to 5%. While we're doing that, we'll continue to focus on expanding margins and generating strong cash flow. And importantly, while we're raising our goals to 3% to 5%, our belief is, over time, we can move to the higher end of this range as we fully build out these new growth runways. And so if you look at our progression on our sales goals, over the last 5 years, we averaged about 2% growth. As part of our IGNITE Strategy, we took that up 2% to 4%, primarily focused on our international division. We felt we could create a more profitable, consistent international portfolio that allowed us to take up our top line sales growth target. Today, we're going further. International is working. We have additional growth opportunities in our cleaning and disinfecting portfolio, and we're raising our goal of 3% to 5%. And so folks, I'll end our presentation where Linda started. We believe the long-term investment gauge for Clorox remains very attractive. We're investing to strengthen our competitive advantage, further building out our defensible moat around our portfolio. We've got an attractive business model that consistently drives strong cash flow. And you can rest assured, we'll continue to be disciplined in how we deploy that capital in the best interest of our shareholders. Folks, I'd like to thank you all for joining us today. And hopefully, you can join us for our Q&A session to follow. Thanks, everyone.