The Clorox Company (CLX) Earnings Call Transcript & Summary

Hello, and welcome to the Annual Meeting of Shareholders of The Clorox Company. Please note that today's meeting is being recorded. [Operator Instructions]. It is now my pleasure to turn today's meeting over to the Independent Chair of the Board, Matthew Shattock. Mr. Shattock, the floor is yours.

Thank you. Good morning. I'm Matthew Shattock, Independent Chair of the Board of The Clorox Company. On behalf of the Board of Directors, I'd like to welcome everyone, and thank you for joining us for our Virtual Annual Meeting of Shareholders. Before I get started, I'd like to ask that you please read the forward-looking statement that's currently displayed on the screen. A copy of the agenda and a list of the rules of conduct for the annual meeting are available online on the meeting website. We ask that you cooperate in following these guidelines. As you heard from the operator, you will have an opportunity to ask questions during this meeting. Shareholders of record and proxy holders who provide their valid control number will be able to ask questions during the meeting by typing and submitting the question using the Q&A icon at the top of your screen. If we're unable to respond to all properly submitted questions due to time constraints, we will be posting responses to submitted questions on our Investor Relations website after the meeting. Before getting into the formal business portion of the meeting, I'd like to introduce our independent directors who are on the line today. I'll introduce them individually. Amy Banse was elected to the Board in September 2016. She is a Venture Partner with Mastry Inc. Julia Denman was elected to the Board in May 2022. She is Corporate Vice President and Head of Internal Audit Enterprise Risk and Compliance of Microsoft Corporation. Spencer Fleischer was elected to the Board in July 2015. He is Chairman of FFL Partners LP. Esther Lee was elected to the Board in August 2013. She is the Former Executive Vice President, Global Chief Marketing Officer of MetLife Inc. David MacKay was elected to the Board in August 2016. He is the Former President and Chief Executive Officer of Kellogg Company. Paul Parker was elected to the Board in November 2020. He is the Senior Vice President of Strategy and Corporate Development for Thermo Fisher Scientific Inc. Stephanie Plaines was elected to the Board in May 2022. She is the Chief Financial Officer of JCPenney. Kathy Tesija was elected to the Board in May 2020. She is the former Executive Vice President and Chief Merchandising and Supply Chain Officer of Target Corporation. Russell Weiner was elected to the Board in February 2017. He is Chief Executive Officer of Domino's Pizza Inc. Chris Williams was elected to the Board in July 2015. He is Chairman of Siebert, Williams, Shank & Co, LLC. I, Matthew Shattock was elected to the Board in August 2018 and I'm the Former Non-Executive Chairman of Bean Suntory Inc. Also joining us today is Linda Rendle, who was elected to the Board in September 2020. Linda recently completed her second year as CEO of Clorox and has continued to share outstanding leadership in a dynamic year. I'm also joined by Kevin Jacobsen, our Chief Financial Officer, who along with Linda will be representing today. We also have Molly Steinkrauss, our Director of Corporate Communications. Molly will assist us with the Q&A portion of our meeting. Additionally, I'd like to mention that Javier Garcia and Meredith Friga of Ernst & Young LLP, the company's independent registered accounting firm are on the line today. And before I get started, I'd like to remind you that the Board of Directors fixed the close of business on September 23, 2022, as the record date for the determination of shareholders entitled to vote at this meeting. Notice of the meeting was sent to each shareholder of record, and a quorum is present online or by proxy. Maria Para, on behalf of Computershare, the company's transfer agent, has been appointed inspector of election for this meeting. She is on the line today and will supervise the voting. I now declare the polls are open. The polls will close after all proposals have been presented. Direct the flow of the business, we intend to adhere to the following format. Each of the items of business to be acted upon by shareholders will be proposed in the order set forth in the proxy statement, but the vote on each item will be deferred until all of the items of business have been presented. The first matter of business to be considered at this meeting is the election of directors. The following individuals have been nominated to the Board of Directors upon the recommendation of the Nominating Governance and Corporate Responsibility Committee to serve as directors until the next Annual General Meeting of Shareholders or until their earlier resignation or removal: Amy Banse, Julia Denman, Spencer Fleischer, Esther Lee, David MacKay, Paul Parker, Stephanie Plaines, Linda Rendle, Matthew Shattock; Kathy Tesija, Russell Weiner and Christopher Williams. The Board of Directors recommends that shareholders vote for the election of each of the director nominees. Second item of business is approval on an advisory basis of the compensation of the company's named executive officers as set forth in our proxy statement. The Board of Directors recommends that shareholders vote for the advisory vote on executive compensation. The third item of business is ratification of the selection of Ernst & Young LLP as the company's independent auditors for the fiscal year ending June 30, 2023. The Board of Directors recommends that shareholders vote for the ratification of the selection of Ernst & Young as the company's independent auditors. Molly, are there any questions of the proposals?

No, there are no questions on the proposal.

There are no additional questions relating to the proposal. To all of our shareholders, if you have returned your proxy card, voted by telephone or voted via the Internet, it is not necessary for you to vote here today, unless you wish to change your vote. If you'd like to vote your shares now, please navigate to the vote icon on the meeting center section of the screen and follow the prompts. [Voting]

I now declare the polls closed. Now I will announce the results of the voting. I'm advised by the inspector of the election that on the election of directors, each of the 12 people nominated has received at least 97% votes cast in favor of their election and has been elected to a 1-year term expiring at the annual meeting in 2023 and until their successors are elected. The approval on an advisory basis of the compensation of the company's named executive officers has been approved with at least 93% votes cast in favor. The ratification of the selection of Ernst & Young has been adopted with at least 98% votes cast in favor. That concludes the full business of our meeting, so the meeting is now adjourned. Now that the annual meeting is adjourned, we will share a presentation on progressing our Ignite strategy from our CEO, Linda Rendle; and a financial update from our CFO, Kevin Jacobsen.

Thank you, Matt, and hello, everyone. Thanks for being with us today. I hope you are all well. I continue to have great pride in the fortitude of my teammates and the strength of our iconic brands as we navigate these challenging and volatile times. Today, I'd like to share our purpose and how we're investing in our company's future. The actions we're taking to address near-term challenges and how our Ignite strategy continues to drive our strategic priorities and ESG agenda. Starting with our purpose. Even as we face challenges, we remain focused on our commitment to serve our consumers and communities to be well and thrive every day. We do this through our diverse portfolio of consumer-loved brands, which continues to show strength and resiliency. In fact, 75% of our portfolio is deemed superior by consumers as measured by our consumer value metric. We're leveraging this competitive brand strength and are taking advantage of demand-driven tailwinds to drive our business forward. We're a bigger business today than prior to the pandemic, and we'll continue investing to maintain this advantage and ensure the long-term health of our business. Now we'd like to discuss the broad set of actions we're taking to address near-term challenges, drive growth and rebuild margin. Amidst inflation and supply chain disruptions, we've executed well on the factors under our control. We've done this by taking a holistic approach to mitigate headwinds and rebuild margins even as we continue to face higher costs. This includes pricing, optimizing our supply chain, removing COVID-related expenses and continuing our Hallmark cost savings program. We're also continuing to invest long term in our global portfolio to maintain top line momentum. We do this by innovating where we have strategic product advantages, including how our brands engage with consumers and how we partner with our retailers to ensure healthy and profitable categories. We continue to invest in product innovation through a multiyear pipeline that drives category and market share growth. This past year, we introduced innovations across 28 categories, including new products in our Clorox, Burt's Bees, Fresh Step and Glad brands. We also continue to invest behind our brands to engender consumer loyalty and maintain brand strength and relevancy. As part of this work, we made progress against personalization efforts, and we're 3/4 of the way to reaching our goal to now 100 million consumers. This work is paying off with more efficiency and engagement across our marketing. Finally, we're advancing our Ignite strategy alongside driving our ESG priorities. We're building on our momentum by continuing to invest in our people and digital capabilities. This includes our $500 million investment in our digital transformation to drive productivity improvements and enhance our digital capabilities. We're reimagining how we work to be a simpler, faster company that is closer to our consumers and customers. As we do this, we continue to enhance the benefits for our people to ensure Clorox remains a great place to build a career. ESG remains a core component of how we drive long-term value creation and invest in our future. Over the past year, we continued to make progress against our long-term environmental sustainability goals. We introduced product innovations that minimize our environmental impact while maintaining efficacy. These include Glad bags with less plastic that don't compromise strength and the Clorox refillable cleaning system that uses 80% less plastic than the typical spray bottle. We drove up packaging and other waste, including reaching 84% of our goal to have 100% recyclable, reusable or compostable packaging by 2025. We built on our climate actions by again reaching 100% renewable electricity in the U.S. and Canada. We collaborated with stakeholders across our value chain to accelerate our emissions reduction. And at the start of fiscal year '23, we welcomed our first Chief Diversity and Social Impact Officer, Shanique Bonelli-Moore, who is making a meaningful difference in our work to become a more inclusive and diverse company. Before I pass it to Kevin, I'd like to touch again on my key points. We're living our purpose and investing to build a stronger, more resilient company. We're taking decisive actions to address near-term challenges. We're advancing our Ignite strategy against our strategic priorities while driving our ESG agenda. The actions we're taking today, the Ignite strategy and my teammates around the world give me conviction that we can deliver consistent profitable growth and create enduring value for all of Clorox' shareholders. And now Kevin will provide a financial update.

Thank you, Linda, and thank you, everyone, for joining us today. At Clorox, we have a long history of creating value for our shareholders. Today, I'll share a brief summary of our fiscal year '22 performance and where we stand on delivering against our fiscal year '23 outlook as well as our confidence and our ability to continue to drive long-term shareholder value. For fiscal year '22, our 3-year average growth rate for net sales was 5%. That said, it was a year of rising cost pressures, particularly in manufacturing, logistics and commodities, which impacted our margins and resulted in a 43% decline in adjusted earnings per share. Our adjusted earnings per share results also reflect increased advertising investment at about 11% of net sales to engage new consumers to build lifetime loyalty. Now on to fiscal year '23. We delivered better-than-expected results in the first quarter amidst the challenging operating environment, which reflects the strength of our brands and strong execution that Linda spoke about earlier. In the quarter, sales decreased 4% compared to a 6% net sales decrease in the year ago time period. With the continuation of elevated cost pressures, particularly in commodities, manufacturing and logistics, first quarter adjusted EPS decreased 23% to $0.93 from $1.21 in the year ago quarter. Based on our first quarter performance, coupled with the actions we're taking to address today's cost environment, we remain on track to meet our fiscal year '23 outlook. Now let me share with you why we remain confident in our ability to drive long-term shareholder value. I'll start by reviewing our annual long-term financial targets of our Ignite strategy. First, our annual sales goal continues to be to grow net sales 3% to 5% per year. We continue to target 25 to 50 bps of EBIT margin improvement, and we continue to target 11% to 13% free cash flow as a percent of net sales. We're proud that Clorox is a long history of strong cash generation, which gives us financial flexibility to invest in growth for our long-term health. We do this by focusing on continued investments to maintain the health of our core portfolio and being disciplined in our approach to how we deploy cash in the best interest of our shareholders. First, we prioritize reinvesting in our base business through innovation and how our brands engage with consumers to build household penetration and further widen our competitive moat. We're also making near and longer-term investments to increase and optimize production capacity, including our new Cat Litter facility in Martinsburg, West Virginia. As Linda said, we're also making the necessary investments to strengthen our growth initiatives to deliver profitable growth in the long term, such as a $500 million investment to drive productivity improvements and enhance our digital capabilities, ensuring our ability to compete well into the future. Our ability to make these investments is fueled by our strong cost savings program and operational excellence, along with pricing and a new streamlined operating model. We're proud of our long track record of delivering more than $100 million in cost savings on an annual basis, including $119 million in fiscal year '22. Importantly, Cars is still a strong generator of cash. Throughout the Ignite strategy period, Cars has delivered 13% average free cash flow. For more than 20 years, we've increased our dividend annually, including our most recent increase of 2%. Over the past 5 years, we've returned almost $5 billion to our shareholders through our dividend and share buyback programs. We remain focused on the things we can control. Despite short-term challenges, we're investing for the future and the long-term investment case for Clorox remains strong. Of course has a strong foundation and the right plans in place to address the immediate challenges while accelerating our Ignite strategy in support of creating long-term shareholder value. Thank you, everyone, for participating, and we would now welcome any questions.

Thank you, Kevin. We will be answering questions that were submitted prior to the meeting and also during the meeting. If you have a question or comment, you may submit it by clicking on the Q&A icon at the top of your screen. If you have submitted a question prior to the meeting, it is not necessary for you to resubmit here today unless you have an additional question. We will be addressing questions that are consistent with the rules of conduct of this meeting. A copy of the rules can be found in the meeting center section of your screen on the meeting website. We will be reading questions and we will regroup any questions that are substantially similar and answer them together to avoid repetition. We will also be posting the Q&A on our Investor Relations website after the meeting. Molly, do we have any questions?

Yes, we have one question. Kevin, is Clorox still seeing the cost of raw materials going up?

Yes. Thank you, Molly, for the question. As it relates to raw materials, and I'll broaden this a little bit, as we think about cost inflation impacting our supply chain, last year was a record year for us. We experienced over $800 million of cost inflation. This year, we're projecting another $400 million of cost inflation. Now I would say in spite of that level of cost inflation, we remain on track to expand gross margins this year. The team continues to focus on the things we can control, including taking several rounds of cost justified pricing. We continue to drive our very well-established cost savings program, and we continue to optimize our supply chain. And as a result of these actions, we were able to offset the $400 million of inflation and project to grow gross margins this year.

Thank you, Kevin. Molly, are there any further questions?

No, there are no additional questions.

Thank you. That concludes the 2022 Clorox Annual Meeting of Shareholders. On behalf of everyone at Clorox, thank you for participating in today's meeting and for continuing to put your trust in our company.

This concludes the meeting. You may now disconnect.