The Clorox Company (CLX) Earnings Call Transcript & Summary

Good morning, everyone. Thank you all for joining us today. I'm Bonnie Herzog, Senior Consumer Staples Analyst at Goldman Sachs and I'm thrilled to welcome you all to our Annual Goldman Sachs Global Staples Forum. So we have a great lineup of companies for you today, which should make for robust conversations especially as we emerge from the hyperinflationary environment in '22 and '23 and see the consumer continuing to grapple with high prices and interest rates against what is still a pretty tough macro backdrop. That said, companies really have not been asleep at the wheel, and many have been sharpening their commercial strategies to provide better value propositions for the stretched consumer. So with that, we're excited to kick off this year's conference with Clorox, and it's my pleasure to welcome Clorox's CEO, Linda Rendle, join us on stage. Now Linda is the CPG veteran with over 20 years of experience at Clorox, where she held several leadership roles and as a key architect behind the company's IGNITE strategy. Linda was appointed CEO in 2020 at a time when the industry at large was dealing with COVID-led disruptions, which was followed by decade high inflationary pressure and then certainly rising rates and since then, the team has been working hard to recover from supply disruptions caused by a cyberattack in August last year. Now overall, Clorox has made meaningful progress with restoring distribution and service levels and is aiming to put these challenges in the rearview mirror by next quarter. So there's really a lot to unpack and -- you sure have been busy. So Linda, thank you so much for joining us.

[indiscernible] Bonnie. I believe you wanted us.

Kickoff with some opening comments.

Thanks for having me. Thank you for joining us today. I'll just start with some brief comments to set the stage for Bonnie and I to have a conversation. Maybe beginning with Q3 and just a recap of our results. Our quarter mostly came in line with our expectation with some puts and takes. Sales came in lower than our expectations, driven by a few businesses that took us longer to restore supply. The good news is at the end of Q3, we were able to fully restore supply on those businesses, so not an issue moving forward. Gross margin came in ahead of expectations behind our strong margin transformation program as well as a moderating cost environment. And as a result, earnings came in above expectations, and we feel good about that progress in Q3 based on that. Maybe just some context, Bonnie, for those results because I think that's really important. And to your point, there's a lot going on. So maybe just taking a step back, we experienced a significant cyberattack in August that really impacted our operations. At the height of our reduced shipping and manual processes, we were down on distribution by 1/3. We had lost 1/3, and that was in the fall time period. And so we knew it was going to be a long road to recover this year and that we were laser-focused on all of the steps required to do that. In Q2, we made progress well above our expectations, and I credit that to the work that we've done to build a more resilient supply chain as we dealt with COVID as well as the better customer relationships that we developed during that time as well. And then we knew for the back half, we had much more work to do. So we had bluntly restored inventories in Q2, but we had to do the SKU by SKU, location by location, retailer by retailer, supplier by supplier work. We finished that at the end of Q3, and inventories are largely restored. We resourced all of the supply constraints we had on our businesses. And for the first time, return service levels back to our goal since 2019, pre-COVID, and we did that at the end of Q3 as well as restoring much of our distribution, and that resulted in recovering about 90% of our share at the end of Q3. We have more work to do in Q4. We intend to fully restore the distribution that we lost in Q4, and we're still on track to do that. And then really what it comes down to is the consumer. And we lost consumers during that time. We have full confidence we'll get them back. It's the time line on how long it will take. Purchase cycle is every quarter basically. So when we catch them in that time, we believe we have the right plans, we have increased spending, but that's what we're looking towards. And then just finally, before we get into Bonnie, I want to reiterate, not only operationally have we made progress, but we set out to transform, I think, this wonderful 111-year-old company into a modern version of itself. We want to be more consumer obsessed, faster and leaner, a faster-growing company that delivers back with the consistency we did pre-pandemic but with a faster and profitable growth rate. And we made continued progress this year despite all the disruption. We are well on our way to return our gross margins back to pre-pandemic levels behind a set of capabilities we've built over the last 2 years to do that, that are in addition to the cost savings program we had. On innovation, we've continued to build stronger brand portfolios, invest more deeply in all of our brands. And then I think the big thing that we're doing is really reimagining the way Clorox operates. We are implementing a digital transformation, a new operating model so that we can move as fast as we need to. And we're already starting to see that work pay off in our speed to market on innovation, et cetera. And then, of course, the work that we need to do to evolve our portfolio, and we made progress this quarter with the sale of our Argentina business, which was a big FX headwind for us for a number of years. And although that team performed really well, we determined it was best to be out of that business. So with that, Bonnie, I will let you get into your questions, but hopefully, that's good context for our conversation.

That was really good -- super good overview. And you just touched on something, you mentioned all the progress you've made, you still mentioned you have some more work to do in Q4. So maybe give us a little bit more detail on what exactly needs to be done in the next, I don't know, a couple of months or maybe already has started to take place.

Yes. So I think the most important thing is restoring the remainder of the distribution that we temporarily lost during the cyberattack. So in Q2, we were able to catch up with [indiscernible] inventories. Q3, we're able to restore the nitty gritties of inventory across the network and restore supply, and that sets us up for the retailer resets that happened in Q4 and we believe based off of what we know on those results that we will fully restore the distribution that we lost as a result. That also needs to be paired with merchandising and getting back to the merchandising plans that we had intended to do this year, and we are in a position to do that. We have the right plans so it's really fully restoring those fundamentals of the business. And then I mentioned in my opening comments and most importantly, that sets the conditions to get all of our consumers back. We recovered 90% of that share, but we still have more to go. And as we've talked about over the mid- to long term, we intend to grow share. But that's what we're watching really closely. Each consumer, why did they trade out when we were out of distribution, how do we get them back? How do we make sure we have the right pack at the right deal, et cetera.

And on that point, have you already seen that happen where you have restored distribution, you're gaining those consumers back into some of those categories or like...

So as we're -- yes, restoring is happening now, retailer resets are happening as we speak. So some happened in April. It takes a while for that to turn over, depending on the retailers. So that will happen throughout the quarter, but we continue to have strong confidence. It's not fully done yet. But we still see the plans in place to do that. On the consumer side, we're watching our share tick up. We still have some work to go in the remainder of the quarter. And again, because you have one purchase cycle, if you miss a consumer during that purchase cycle, and we won't know that until we get to the end of the quarter, and we see how that all shakes out. But we have very strong confidence in the plan. I think I would maybe just reiterate, our portfolio has higher percentage that consumers deem superior value than we did pre-COVID. We've retained that. So again, if we don't get a mispurchase cycle, we'll get them the next one. We have -- we're very confident in the plans we have and the increased investments to support it.

And drilling down a little bit further into some of the categories? Are there some categories where maybe you've gained more distribution versus previously and then some where you're still hoping to catch up, can I ask you to highlight a few of them.

I won't get into the details of what will happen this quarter just because it hasn't set yet. But you could guess that that's always depending on the innovation plans you have, maybe 2 categories I'd call out that took us longer to restore supply that's glad in our Litter business. So those were 2 of the big impacts that we had in Q3. And although we're fully restored now, we definitely saw more competitive activity. I would not say that the categories have in any way, become more competitive. It's that when you're out of stock, retailers award competitors with merchandising. And so we've seen more competitive activity in those 2 categories. So those were laser-focused on them, getting that distribution back, restoring merchandising, that's the place that we are just hyper aware of right now, given how much longer it took. Those are complex supply chains. We had already had issues in Litter, well before the cyberattack and the cyberattack exacerbated those. So those are 2, we're watching really closely. Some businesses were resorted much faster, and we began merchandising in Q3. But we'll talk a bit as we end Q4 on exactly where that landed. But in aggregate, we believe we'll restore distribution.

So the intensity of the competition, it's still pretty fierce in those categories, but it's moderating at all? Or is it still pretty strong?

What I would say is, again, it's not a different -- it's not a different level of competition. It's more competitive activity as just that switch back and forth between suppliers. But it's not like pricing is holding et cetera. So we believe as we've restored supply, we'll have our merchandising events and it will be kind of normalized in Q4. But we'll be watching that really closely because as I think you said in your opening comments, the consumer is pressured, and we're watching that closely as are all of our competitors.

We definitely want to talk about that in a second, but before I switch to that. As you think about everything that happened, and I feel like you've touched on this at other events, what are you putting into place to prevent some of these incidents from happening again in the future? Lessons learned, given the cyberattack.

First and foremost, like any company, as you would expect, we had been making cybersecurity improvement for years. And in fact, in this last period, of our strategy period, we spent 2x the amount on cybersecurity improvements than we had in the previous period. But this is a great opportunity to learn and we've learned a lot during this. And we have an amazing set of partners who've helped us, so we have a continued road map. And we've made a lot of improvements this year. We'll continue to do that. I think that's what every company is going to need to do because these criminals are getting more sophisticated, and their methods are different. But that's something we've long been dedicated to, but the job is never done in cybersecurity. That's, I think, the key thing we're always paranoid now, but I feel great about the improvements we've made on process and people and tools coming out of this. So ultimately, it's going to make you a stronger company if you think about it in the next...

So the consumer, top of mind in the context of sort of what you just mentioned, it would be helpful to hear your perspective on consumer, especially in the low-income consumer and kind of what you're seeing as we are seeing, as I mentioned, some softening in the macro data. And then certainly in the context of that, your view on either if it's consumption or any kind of changed consumer behavior. It would be helpful.

I would say the consumer continues to be remarkably resilient given what they're going through. And I think that is an important thing to keep in mind and the comments we'll have. We've been saying for a while, we believe though the consumer is under a lot of pressure and coming under more pressure, and we are beginning to see those impacts in a couple of new ways. First, I would say -- the very first thing we see is value-seeking behaviors and that continues. They're buying larger sizes, they're buying smaller sizes, they're trading in and out of different retail outlets. And that's across all income groups, Bonnie. We are certainly laser focused on low-income consumers. But I would tell you, they are the savviest consumers we have in consumer packaged goods. And so they tend to know value in a different way. And they are not usually the first ones to trade to private label because they can't afford for products to fail and we continue to see that. So watching them very, very closely. What we did expect is coming off of the multiple rounds of pricing in our categories that categories would soften a bit, they have, but they're generally in line with what we expected. And we're starting to see volumes come back commensurate with that. So what we're looking for moving forward is given all of -- what you talked about from a macroeconomic perspective, if inflation is persistent, et cetera, how does the consumer hold up? What choices will they make? They are behaving differently. And I wouldn't say necessarily in our categories, but they're behaving differently in their lives, which is putting pressure on their wallet. They're still valuing experiences and travel, et cetera. So that's what we're watching really closely is does that begin to impact our categories more but again, they've been fairly resilient. We're doing all of the things needed to ensure that we give them the best value and that's taking into account the brand, the product, the price and they've been holding up pretty well, and we'll make adjustments to our plan if we need to as they evolve.

Okay. And then in the context of that, and you're probably seeing more pressure from private label competition and thinking about your different price tiers. Do you feel like you have the right price tiers, are you making adjustments? And then I believe in your last quarterly call, you mentioned that promo levels may be returning to more normalized levels. So touch on that and kind of where you're at in that cycle.

From a pricing perspective and our lineup of products, we feel very good about what we have. We have items in the largest sizes that offer consumers who want the best price per use or ounce, we have those, and then we have very good opening price points for consumers as I only have a few out of pocket, but I want the brand. And of course, we compete in all retail channels and have very strong presence across pure-play, e-com to dollar stores, you name them. From a private label perspective, we have not been largely impacted by private label over time during times like this. And I would say for this period, if you normalize for cyber, that continues to hold true. We did see consumers trade into other brands and private label when we were out of distribution, but we're beginning to see that come back. And if you look quarter-over-quarter, our share is up and private label share is down. And so we'll see what happens in Q4. But we would expect as we restore that distribution, we get back to kind of more of a normalized state, but we're always watching that. We're watching it in just a few categories where private label is a bit more developed. But for now, we feel good and that the consumer continues to choose brands. What we're seeing is the middle get squeezed. So consumers tend to move towards the premium brand and then private label. And that's exactly what we're seeing right now. A lot of second and third-tier brands are losing share, very consistent with what we've seen in the past. And then from a promotion perspective, we absolutely expected it to return to what we said were normalized levels, pre-COVID levels. And that is what we're seeing and what we continue to expect for Q4 and for our categories, the majority of our business is done off shelf. We continue to expect that, but consumers who are looking for that deal or that value, particularly during times where they're sending their kid back-to-school or they're worried about getting a new pet and do they have the right Litter, we tend to be -- we're able to influence them and capture them as a new consumer or returning consumer during those pulse periods. So we use it pretty strategically but definitely seeing promotions come back up as we expected. So far, we don't see anything that would indicate they're going above the levels that we expected. But again, it's something we're watching really close.

And it's something that you're obviously then also doing to make sure to bring that consumer back to your brands. Are there any categories that are more pronounced where you seeing promotional levels versus others that you call out?

Glad and Litter are the 2 that -- we would expect those 2 to be a bit higher, and they're playing out that way, but nothing higher than we had expected.

Okay. All right. So switching to gross margins. You mentioned you made some good progress on recovering your gross margins. Your full year guidance does suggest at Q4 levels back to around 43%. So as we look at next year and beyond, can you maybe talk about further opportunities for gross margin expansion?

Obviously, and I know you know this, but just to set it straight, we're not setting a guidance or any type of forecast for next year. But what I'd say is we have very strong confidence in our ability to restore gross margins to what they were pre-COVID. And as you indicated, Bonnie, we'll make substantial progress this year, like we made substantial progress last year. And what we've really built is an enhanced set of capabilities to do this. We call it our margin transformation program. We've always done very well on the cost savings portion of that, and that will continue. But we've developed new capabilities in net revenue management, which include price pack architecture and all those tools, which will begin to really take hold starting next year. We have some plans in place this year, and we've made some progress, but it really takes off in fiscal year '25 and '26. Pricing has played such a large role. We'll continue to take targeted pricing where it makes sense, international, for example, is a place we continue to do that. But we really feel like we've built a suite of tools that give us very strong confidence that we'll be able to return those gross margins to pre-pandemic levels. We continue to be committed to that.

As you mentioned the price pack architecture, where are you at in that evolution? Are you still in the beginning phases. So you see great runway of growth? And then just wanted to make sure as you think about different pack sizes, and packaging, you have the capabilities, the infrastructure in place to kind of execute on that as you evolve.

We're in early stages -- early. So being really [ blunt ], we're behind other people. But that's a lot of runway for us, which is terrific and a new set of capabilities and tools that allow us to be able to do the work we want. And this is not just on gross margin. This is revenue growing as well if we do it the right way, and that's exactly what we intend to do. And so I would say early in the journey, so very confident we've built centers of expertise that we have assisting the business units to develop their plans. I think maybe, Bonnie, remember from when you covered us earlier, we always had a cost savings plan, and we now have a plan on net revenue management and price pack architecture that the teams have for 3 years. That's part of that. And we feel very, very good about the plans and capabilities we built. So lots more to come. So lots more to come.

And then in the context of a -- even with maybe except promo levels, everything you just mentioned, you still feel good about potential for margin expansion moving forward?

Yes.