The Clorox Company (CLX) Earnings Call Transcript & Summary

Okay. We're going to get started. I think -- yes. Okay. So starting the morning today, we're happy to have Clorox. We're joined by Linda Rendle, Chair and CEO; and Luc Bellet, CFO. Linda, welcome back. And Luc, I hope this is the first of many visits to our conference. So thank you for being here. Linda, I think you had a few comments that you wanted to start with before we get into Q&A.

Perfect. Thanks for having us here again, Lauren. Great to be here, back-to-school for everybody. I hope that's going well for those of you that have kids. And if not, it's great to talk about the business at this time. We continue to be very optimistic about our business despite what we all can acknowledge is a pretty difficult environment. We've made significant investments over many years to strengthen our company. And we're starting to see those investments bear fruit, although we certainly have more work to do to ensure that we deliver the growth that we expect of ourselves as a company. If we look at last fiscal year, our fiscal year '25, which ended in June, that year was mixed for us. We delivered less than we had expected to from a top line perspective, but we over delivered on both margin and earnings behind our strong margin transformation program. Q4 looked much the same where we delivered strong margin and earnings performance, but under-delivered on top line. And if you look at the shape of the year, really the first half of the year, our consumer assumptions were about what we expected them to be, category assumptions were what they expected to be, and our share assumptions were the same. In the back half of the year, though, around February, when we saw the consumer take a turn, given all the uncertainty that's out there, we definitely had an impact in our business. And we can talk more about what we expect for fiscal year '26 and all the things that we're doing to invest to ensure that we have strong categories and we can continue to win with the consumer. Also importantly, in Q4, we began the implementation of our U.S. version of our ERP, which is not just an upgrade, but we did a greenfield implementation of a new ERP. And of course, our U.S. business is big. So it's 85% of our company's business. And that generally went very well. The prebuild in Q4 went well. And then we had a number of modules that happened in Q1, beginning in July. We had some bumpiness in August, which we can talk about. So as we were on the order fulfillment part, as you're bringing retailers up, we saw bumpiness in getting inventories where they needed to be. So you're actually seeing that in scanner data in August. The good news is we're past that. So we are now shipping well above consumption, we're rebuilding inventories. And what that means, Lauren, and for everybody is that we expect to be at the low end of our range for Q1. And that's based on what we know right now, but expecting to see, as we have for the last couple of weeks, those shipments rebound, and we'll see consumption rebound here in September, and we've already seen that in the last weeks of data. With that, maybe I'll hand it over to you for kicking off some questions.

Okay. Perfect. Just to follow up on that in particular because I know it's only Q1, and you said you're through it. So low end for Q1, but you expect to catch up. I mean the range is still the range for the year, but you expect to catch up, and we should think...

We have lots of room left in the year. So at this point, we're just letting you know we think it's the low end of the range for Q1. Obviously, that's well within what we contemplated. And we'll see how the rest of the year plays out. But at this point, we're just in the low end of the range for Q1, and we'll continue to keep people updated if there are changes to the full year.

Okay. Perfect. So let's go back to a high level then. Okay, great. So there's been lots of volatility since COVID, obviously. But first, I'd love to talk about what you see as long-term category growth, where Clorox competes, what more recent trends have been at a category level and what you think causes that sort of below long-range performance dynamic?

Yes. So typically, our categories on average, grow about 2% to 2.5% in the U.S. And I'm excluding our professional business, and obviously excluding our international business where we have markets that grow at different rates of that. But in the U.S., excluding professional, about 2% to 2.5%. And we have seen around that average high ups and downs. Certainly, during COVID, we saw significantly higher category growth. And in times where the consumer is stressed, we've seen lower, but it does tend to have a floor. We tend to see flattish as about the floor in our categories. And they typically are pretty steady. What we've seen over the last 6 months is not wildly out of line with that, Lauren, but definitely more volatile. And we're seeing in categories we typically don't see volatility in. For example, food is a good example for us, which has been very steady. We're just in the salad dressing and condiments and dips part of the business. And that's typically fairly steady, and that's been more bumpy. But we're still expecting our categories to be flattish to slightly growing this year. That's about what we see. So it's not out of line with what we've seen in past times with the consumer. I think the volatility is what's different and difficult to predict right now. When we look at maybe starting in February, I mean, we saw some category numbers that we hadn't seen before, down low to mid-single digits for short periods of time and then bouncing back. The good news is we've seen it stabilize in Q4, and that's continued in Q1, but albeit at those lower growth rates of about flattish. And again, it depends on the week. Certainly, our inventory position in those few weeks in August impacted the categories. So we're starting to see them bounce back a little bit as our inventories come back. As we look ahead, though, I think it's safe to say the consumer is definitely under stress, although they continue to have decently healthy incomes, et cetera. They're starting to see some -- they're afraid of inflation, they're starting to see a bit. And I think the thing that's most difficult is there's just so much uncertainty for them and a myriad of facets in their life. And so we think they're going to continue to be cautious. In our categories, what cautious looks like is they tend to trade within our own portfolio to larger sizes. They look for more value SKUs. That can compress category growth, right? So instead of buying, let's say, you're buying normally 90 ounces of something, you're buying 60 ounces and you're trying to make it stretch that inherently slows category growth down while you're in that mode. So what we're focused on is strong category investments and then also winning share at the same time, but really focused primarily job #1 is getting those categories back to that 2% to 2.5%, which we don't have any reason to believe that won't happen in the future once we get through this rough time from a consumer perspective.

Okay. Let's talk also though about Clorox versus the categories a bit. So outside of the August dynamic, because consumption in 4Q was down around 3% in Nielsen, it's been that way. And you just shared why August, but we saw it in July as well. So -- and the underperformance is kind of broad-based. So why is it do you think that Clorox is currently losing share in so many spots, and it's pretty broad-based.

We are in a few categories. There are some categories that are doing really, really well right now. And maybe I'll start with where we're doing well, but I do want to get to your point, which is an important one. Certainly, our business in international and professional, which I know people have less visibility to, continues to do well, and we continue to grow share in both of those segments. In addition, our cleaning business continues to perform very well, and we continue to grow share. That's a highly competitive category for us. Innovation is working really well. Our brand investments are working really well. So there are a number of places in the company where it's going very well and share is not a concern for us. And we'll see the normal ups and downs as we see competitive activity, but we feel great about our plans. Particularly in Q4, there were a couple of places we just didn't execute well. Kingsford is one we spoke about on the call. And what does that really mean? What is not executing well, not well mean? It means in an environment where the consumer is changing rapidly, we must change as rapidly our plans to adjust, and that's where we just fell a little short in Kingsford. For example, we saw a lot of consumers who couldn't afford to buy larger sizes, which is typically what we merchandise in a time of when they're grilling for Memorial Day or for the 4th of July. What we adjusted our plan for later in the year was to account for that. So we had smaller sized merchandising, making sure that we had that right level. And also our merchandising levels were just down a little bit based off of what retailers were doing. That's what we mean by execution, and that's what sharpened in July 4. So if you looked at the category and we bounced back, the category bounced back, we bounced back in July 4. We're hoping the same for Labor Day, which just happened, and that data will come out in a couple of weeks. But those are the kind of examples of as the consumer is moving, we need to move a bit faster. That accounts for most of what we saw from an execution perspective. In addition, there were just some of our categories that had shifts that we didn't anticipate. Food is a good example where we've grown share consistently for years. And that's a place where it's been pretty heavily impacted by consumers. Again, in the long run, we don't see any change materially in what we think their behaviors are going to be. But in the short term, they're making trade-offs, and we just didn't move as quickly as we needed to, to adjust. Again, we feel good about our plans, innovation and spending. But I would say Q4 was a few categories where we didn't execute well. We know why. And it really is about speed and making sure we adjust our plans as we see the consumer move really fast.

Okay. You've had so many -- both the volatility, so operational challenges that come with that volatility, the work that you've been doing on greenfield on SAP, the reorg type work. Do you think the organization is distracted?

I wouldn't say distracted, but I think this is a really important point, and maybe we can spend a bit of time on it. Just our transformation, what we're trying to accomplish. And then, yes, what the organization is trying to take on and their trade-offs we're making. So making zero excuses because I don't believe in excuses, but I certainly think the context is important. We had COVID, which we were disproportionately impacted by, our categories were significantly impacted, and it took quite a bit of time to catch up, and we lost share during that period as all these little brands came in and just filled the holes when there weren't enough disinfecting products to go around. Once we recovered from COVID and we really said we needed to wholeheartedly transform the company because we needed modern capabilities. We needed a modern digital foundation and all of the tools and capabilities you would expect from a company of our size, we announced our investment in our transformation. Then we had a period of incredible inflation where, again, we were disproportionately impacted given our portfolio and U.S. footprint. We were able to recover all of that margin over the last 3 years through the capabilities we built. And of course, unfortunately, we were hit by a fairly substantial cyberattack in 2023. So again, not making any excuses. But we're trying to deal with all of those shocks as well as what's going on with the consumer, and we're trying to transform so that we can better deal with those shocks. So our transformation is about investing hundreds of millions of dollars, well over $550 million in rebuilding the digital foundation of the company. So we did all the things that you would want us to do. We rebuilt our data lake and foundation so that all of the data that we have, we can actually use in the way that we want to do that, and we can get the insight so that we can move as fast as the consumer is moving so that we can remove costs like we have been known for, for many, many years that we can invest back in our business or return to shareholders. So we began that journey about 3 or 4 years ago. So we're doing all those things in tandem with that transformation. In addition, we intend to accelerate growth. And we had periods over that time where we did. If you look at '23 right before the cyberattack, we had rebuilt our share positions in many cases, and we had started to see that translate into growth. And then, of course, we had to recover from the cyberattack. What I would say is all of those instances show the strength of our brands that we were able to get through that. I think certainly, the cyberattack showed how incredibly strong our brands are. We were able to get all of our distribution back and, in fact, grew distribution after that. Regained the vast majority of our share. We still have work to do, particularly with a few categories we've spoken about and that we're making the right investments to ensure the company is stronger. So all sites continue to be focused on in that transformation, finishing the job on digital. It's not done yet. We are in the stabilization phase right now. We feel good about where we are. We have additional modules that will come from a manufacturing site in the next couple of quarters. But those went very well in Q1. We would anticipate them to go very well for the remainder of the year. And then we have to extract the value out of all of those investments we made in the transformation, and that will continue to fuel us. So I wouldn't say the organization has been distracted because this is the most important work that we do is building strong capabilities for the company, but we've had a lot going on. That being said, though, in a time where the consumer is stressed, in a time where we need to ensure the categories are healthy and, of course, we intend, you've heard us talk much more about share in the last 18 to 24 months than we have in many years past. We are absolutely laser-focused on getting our categories growing again and then, of course, winning in those categories. And I feel confident in the innovation plan we have this year, particularly in the back half, very strong. We'll be launching some new platforms; and obviously, continuing in fiscal year '27, we have a very strong pipeline in getting that growth renewed. Our brands are stronger than they've ever been. Arguably, we have a consumer value metric that says we continue to have stronger brands than we did pre-COVID. But now we need to do all of that work to ensure that we're extracting the value from those brands. And I'm sure we can talk more about superior value and all those things that, that means. But I want to just pause again, I don't think this is a distraction. It's the most important work we do. There's been a lot going on. And we intend, just like we did on margin for those growth plans to begin to take hold, and particularly, we'll begin to see that in the back half of this year.

Okay. I do want to talk about innovation. But first, one more question on the transformation, which was around reimagine work. So I think that work started like 6 years ago now-ish with the IGNITE strategy. And I know it takes time for people to adapt to new ways of working. But I was wondering if you could help just briefly describe kind of how things function now versus then, right? And is reimagine work kind of fully actioned so that you've got the org structure the way you want it versus what the vision was 6 years ago.

Six years ago was a lifetime ago. And what was contemplated by that team at the time, which I was part of, was not what we are doing right now. So reimagine work back then. We wanted to be digitally enabled. We wanted to move at the speed of the consumer. But really, when COVID hit, I took over as CEO and our management team looked at each other and said, reimagine work means a very different thing. There's not one person in The Clorox company that can work like they are today in the future. We won't be fast enough. We won't respond quick enough to customer and consumer requirements. We do not have the digital foundation to be able to do that. And then frankly, as we started to see technologies emerge around AI, we wouldn't be ready for those things. And so reimagine work went from we need to move as fast as the consumer and over time, we'll do this to, we fundamentally need to reinvent the capabilities of the company. And we have gone systematically to do that with a digital foundation at the core because that's what gives you all of the insight to be able to do it. What you started to see is that come to life, and I would give you the margin work that we've done. So we lost about 900 basis points of gross margin from the effects of inflation, and we were able to get that all back in a shorter period of time than we thought because we had begun to put those digital pieces in place and we rebuilt capabilities. We didn't have a holistic net revenue management program, et cetera. We're starting to get the fruit of those labors really this year as we began to build it. So we have been going capability by capability to reimagine work. We're building the next level of capabilities in marketing. So we talked about personalization was our big journey. We met our goal last year. And now we're looking at 1:1 as our next goal. How are we going to continue to drive the type of ROI that we've experienced. We're in the top quintile of ROI from an industry perspective on marketing, and we want to continue that investment. And then in places where Lauren, frankly, we were just really behind, we needed to rebuild those capabilities to ensure they could deliver the value. So it follows really the path of what we announced back 4 years ago than it does when we were in 2019. And so I'll give you an example. I think this is really tangible. In June, thousands of people in the company worked one way, how they took orders, process them, how they worked in a manufacturing plant, how the business units planned, how they decided how much volume they had, what merchandising was. And we flipped the switch. And in July, everybody works differently now, completely differently. And that's bumpy, right? You have a person who's used to doing something manually in systems and now they have to let it happen in a system that's guided, et cetera. So that's what reimagined work means right now is making sure everyone has those tools that they're working as fast as the consumer is, and I would say we've made great progress, more to do, but this is really now when we get to the value creation part of the space. We made the investment phase and the execution phase and now we're in the -- let's extract the value from these investments.

Okay. Great. Let's switch to innovation. So embedded in the guidance is second half step-up, where you just mentioned the stronger pipeline. I guess to the degree you can talk about it because I know it's early from that standpoint, but kind of what differentiates the upcoming launches versus what you've had from the innovation slate in the past?