The Clorox Company ($CLX)

All right. Thank you for joining us at the Global Consumer and Retail Conference. We are here with the Clorox Company. Filippo, you can take it over. Great.

Good morning, everyone. I'm Filippo Falorni, Citi's Beverages, Household Products and Personal Care analyst, and we're very happy to welcome the Clorox Company here. We have Luc Bellet, Clorox Executive Vice President and CFO. Luc, thanks so much for coming.

Yes. Thank you, Filippo, and good morning, everyone. Maybe let's just start by taking a few moments to maybe frame where we're at in our transformations and how we've been navigating the current environment. I would say probably 3 key messages for you. First, we started the fiscal year knowing that the front half was going to be challenging. And this was driven by the environment, but also driven by the fact that we were implementing our ERP and expected some temporary negative impact. Now the second quarter came generally in line with expectations. And the good news is now the ERP implementation is behind us with cost complexity ramping down and then the benefit ramping up. Second message is we have strong plans for the back half of the year, and we expect to sequentially improve organic sales growth, and we're really focused on execution right now. Now this is really supported by a more stable supply now that we passed the ERP implementation, but also supported by the strong slate of innovation and demand creation plan. And then third, looking ahead, we feel like we now have a stronger foundation that positions us well for the future. If we look at our innovation pipeline, our margin management pipeline for the upcoming years, they're quite strong. We also now have put in place a solid digital foundation that's going to enable us to modernize capabilities, strengthen our brand and reinforce our competitive advantage for years to come. And then finally, with the GOJO acquisitions, we are expanding our leadership in health and hygiene and adding a business that should structurally improve our growth and financial performance. So net, still more work to do, but we're relatively optimistic about the future.

Great. That's a good intro. So maybe starting with your first point, right, of improving top line growth in the second half of the year and starting with the categories. Obviously, you said your category is approximately flat in the first half of the year. but you saw a little bit of an improvement in January. Can you help us give an update on like what you see at the consumer level, category growth expectation for the back half within your expectation of improving top line?

Sure. So for context, we -- our outlook for the full year assumed that categories will be about on U.S. retail category on average, flat to 1%. That is below our historical average of 2% to 2.5%. Now we also assume that there will be some volatility in any given month and any given week. In the front half, we -- like you said, our category average about on the low end of that range, about -- we're flat. And for the back half, we assume that they would continue to be flat to 1% in the current quarter, we certainly saw volatility week by week. I think we were referring to earnings call where at the end of January, we saw double-digit increase as people were loading their pantry ahead of the storm. And that was followed by double-digit decline in early February and bounced it back after that. Now if I look at quarter-to-date, categories probably averaged about 1% on the higher end of that range. So we expect that for the remaining of the fiscal year, we would continue to ocillate between flat and 1%.

Great. And then to your point, like that's below historical growth rates for your categories. So as you look a little bit ahead like in the next couple of years, what do you think you would need to see categories normalize more towards like 2%, 2.5%? And especially given the promotional environment has been a little bit more elevated in the U.S. Do you need that to kind of return to more lower levels to see the categories get back to like more the historical kind of like 2%, 2.5%.

Yes. I guess the short answer is we're confident that the categories will normalize back to 2%, 2.5%. But given the current environment, it's hard to predict when that might happen. And again, what we're currently seeing is essentially category being compressed mainly due to value-seeking behavior, right? So consumers stretch their usage. They adjust the pack sizing as well as shift in channels. And that's putting a little pressure on the categories. That's actually fairly consistent with what we've seen in the past when consumer was under stressed. And then we saw that bounce back. What gives us confidence is we're not seeing any structural changes. Those are everyday essential categories. And if you look at the share of wallet spent on those categories, it's been remarkably consistent over a long period of time and in recent years. We're not seeing any structural change in at-home behavior, and we're also not seeing any significant trade down to private label. So hard to predict when it will normalize. In the meantime, we're focusing on what we can control. And as market leaders, we have -- it is our responsibility also to drive that recovery. And this is what we're doing in the back half with a strong slate of innovation as well as RGM activities. And then the last thing I would say, the GOJO acquisitions will add a business that have categories that are growing probably closer to mid-single digits ahead of that average, and that should also help enhance our ability to increase growth.

Great. Zooming in maybe in some of the categories and your actions to your point, to improve market share. Maybe starting with litter. You mentioned some of the changes in price pack architecture that you're implementing. How do you expect that to impact both volume and price mix? And like do you think you can get back to better market share performance in litter?

Yes. Well, on litter, maybe let me first acknowledge that this is a place where we've not been happy with our performance. In litter, we've been plagued by a series of supply issues over the past few years, and we've been able to recover on each one of those issues, but we fell behind our value proposition and from a market share standpoint. And the other thing about litter, this is a category that has strong tailwinds driven by cat adoptions and also the fact that people are spending more and more money on their pets. So we haven't been able to fully take advantage of those tailwinds, and this is something that we are addressing. And the way we're addressing it is through a full relaunch of our litter -- sorry, a full relaunch of our litter businesses. And so that includes change in formulations with better order control and dusting that includes new packaging and new claims that also include, we design a new and improved e-com and mobile experience, and that also includes some price pack architectures where we're getting sharper on a 2-tier approach to the lineup. The one thing I would mention is this relaunch is really just the first step in regaining competitive positioning, and we have a strong innovation pipeline in the upcoming years. Now from a price pack architecture in the long term, we really want to drive sustained volume-driven growth. In the near term, some of the activities we've taken will either be positive or negative from a price mix. If I look at the net, most likely volume might grow slightly ahead of organic sales growth for the time being.

And then another category that you're trying to improve performance as well is trash bags. Obviously, there's been a lot of promotional environment, an increased promotional environment in the category. Like what are the main plans there in terms of improving both category growth and market share performance in trash bags?

Yes. So in trash bags, I would say competitive activity and promotional level have been elevated, but as expected. And we've been very disciplined and mainly leveraging RGM as well as innovation to address the heightened competitive activity. RGM has been allowing us to be very granular and much more real time in addressing price gap, and we've been able to adjust make surgical adjustments to specific SKUs and specific retailers, and that's been actually really improving market share. And then, of course, innovation is the only way to drive profitable category growth. And so we have a new line extension on our ForceFlex platform that's called LeakGuard that use -- that basically leverage a super absorbent polymer at the bottom of the bag to absorb any liquid and prevent leaks, which has been a major dissatisfier in the categories. And so looking at some of those actions, we're seeing good momentum in trash. We've been improving share and consumption consistently over the past couple of quarters. Private label was about flat in share last quarter. And while we have a little bit more work to do, we feel good about the momentum and the plans going forward.

On the cleaning business, that's been like probably the best area of strength from your portfolio. And you talked about, obviously, the new Clorox Pure innovation. Like how significant do you see this innovation? And just in general, like about expanding categories into adjacencies, right? That's something that you both you and Linda mentioned recently. Is this the first step? Should we see more after the Clorox Pure? Like what are the opportunities there?

Yes. I would say we're really excited by the Clorox Pure launch, and it really represents a meaningful platform opportunity for years to come. For perspective, this is a really large category that's growing really rapidly. There is about 100 million of people in the U.S. that suffer from allergies, and there's a significant unmet need. Most people report still allergies returning despite cleaning, despite medication. And right now, the current allergies remedy category is about $4 billion and again, growing rapidly. And so we feel like we have a right to play and a right to win in these categories. We have a breakthrough patent-pending technology that enables us to destroy the protein -- the allergen protein before it can impact people and also is safe around kids and pets. We actually have significant retailer support. They see the same unmet need, and they've been engaging with us very early. And we also have a very strong marketing and influencing campaigns, generally spending about twice as much as we would do normally on this type of launch. And then what's important, it's really just a multiyear innovations. We have already a strong pipeline, and we already start selling the next round of innovations to retailers. So net, we are excited, and we think this is a great opportunity for years to come.

Great. I guess on the innovation point that you just mentioned, like how impactful is the innovation in the back half of the year? Like are you seeing shelf space gains at retail? Can you help us understand like how much visibility do you have in that improvement as we think about your back half of the year?

Yes. So what we saw to date is of the distribution gain associated with it, and they're generally in line with our expectations. And we'll see most of the benefits probably towards the fourth quarter because, as you know, most of the resets tend to happen in the spring. And then we need a few months to just really see how the innovation is tracking in terms of both trial but also repeat.

Got it. And then on just your point earlier on price mix and volume for litter. Can you help us understand at the total company level, how you see also the back half shaping up in terms of composition of volume and price mix?

Yes. So from a price mix standpoint, first thing to mention is there's still a lot of noise as you look at reported financials driven by the ERP transition. But if I exclude this, generally, we would expect organic volume to grow roughly in line with organic sales for the full year. Probably net maybe 1 point of negative mix for the full year. Now that will -- that might vary from quarters to quarters driven by the seasonality of some merch events as well as innovations. But for perspective, the second quarter was about flat. And so we'll probably see some -- a little bit of movement around that. But for the year, expect about 1 point of headwind from a price mix. Mostly -- the way to think about it, this is mostly driven by value-seeking behaviors, right, people shifting size, channels and offset by RGM activities and the benefit of innovation.

And then on the ERP front, obviously, was a big undertaking from your part. You're largely behind it now. Obviously, you have to cycle in Q4 the shipments from last year. But as we think ahead of fiscal '27, can you help us understand the pieces that you will be cycling from both top line and EPS? Obviously, you had $0.90 of negative impact to the EPS line. So how should we think about like the base of which to grow into '27, both on top line and EPS?

Yes. So the ERP, as I mentioned, the ERP created some noise as -- for context, we launched a new ERP in the U.S. at the beginning of the fiscal year. And as we went with the implementations, we basically had to turn off the old system and waited a week to transfer all the data and then turn on the new system. And when you're turning it on, it takes a little bit of time to ramp up shipments. So what we did is essentially ship 2 weeks of inventory ahead of that implementation and shifted 2 weeks from fiscal year '26 into fiscal year '25. And those 2 weeks represent about 3.5% of sales. And so on a year-over-year basis, since I have overstated fiscal year '25 and understated '26, I have about 7% of headwind. Now it's only temporary noise, and that will actually reverse next year. And so what that means from an EPS standpoint is next year, we will step up the fiscal year '26 basis to get to fiscal year '27 by $0.90. And then we will also see about 3.5% of sales.

Great. Maybe shifting to margins. Obviously, there's a lot of question more recently with the spike in oil prices post the conflict in the Middle East. Can you give us any perspective of the potential implications on the resin side, which usually takes -- there's a little bit of a gap? And then on the transportation and freight side, as you think about it, I know it's very recent, but like any thoughts there?

Yes. As you mentioned, very recent and still very much developing. So -- and very dynamic. So we're working on many different scenarios right now. It's a little early to tell what might be the impact, but we certainly will have better perspective at the end of the quarter when we release results. A few things to think about. For sure, the duration of the conflict is definitely a main driver here. We would expect headwinds from a cost standpoint, mainly energy driven, energy communities driven. As you mentioned, it takes a little bit of time to show up just because we transfer price may have a month or 2 lag and then we also have some inventory. So we don't expect that it will impact our third quarter, but it could impact our fourth quarter and beyond depending on what's happening. We'll have to see in logistics. Generally, in the past, what we've seen is that when you have disruptions globally, it tends to impact your logistic network, and there's a lot of externalities. So we're looking into this. Beyond the cost, we're also staying close to what might be the impact on demand. And again, too early to tell. And then the last thing I would say is we do have operations in the Middle East. About 2% of our sales are in the areas. So far, we haven't seen major disruptions, but that's another area that we are monitoring closely. So again, developing and dynamic, and we'll stay close to it. And -- but right now, it's too early to tell what might be the impact. Right.

And then thinking about the other drivers of potential margin and offsets to these pressures. Obviously, you have the Glad JV benefit starting to flow through in the second half of the year. Any other big like levers that you can pull in terms of like trying to offset any cost pressure that might materialize, especially at the gross margin level?

Yes. I think a few things. First, if we step back, in general, we feel really good about our ability to expand margin over time. I think, as you know, in fiscal year '22, we lost about 8 points of gross margin at the height of the inflationary cycle, and we've been able to fully rebuild gross margin to pre-pandemic level. And that's really a testament to kind of our new approach on margin management, which has been the evolution of an old cost savings program that were in place for decades and we're now adding new capabilities like design to value, RGMs. We brought a lot of new experts and talent teams as well as now leveraging our digital foundation that we put in place. So that's the good news. We've been delivering record level of cost savings, and we feel really good about the pipeline going forward. Now specifically to this fiscal year, if I exclude noise of the ERP, we're essentially looking at gross margin to be declining in the front half and then expanding in the back half. And when you compare the front half and the back half, there's a few things to consider. First, in the front half, I had to incur additional expenses more than expected to deal with the stabilization of the ERP and optimizing services. Those costs will start coming down in the back half. And then we also had a less cost savings in the front half than the back half. Some of it is just regular timing of projects, but the other is the fact that I had to use more resources on the stabilization of ERP and delay some of the cost savings. So that's between the back half -- the front half and the back half. And then in the back half, I have a little bit of phasing between the third quarter and the fourth quarter. First, some of those additional expenses associated with the ERP will still continue in Q3, but then probably go away in Q4. And then I have like a little bit of timing between onetime and manufacturing expenses that bring Q3 down and bring Q4 up. But so net, right now, we feel confident in our ability to expand gross margin in the back half, but we'll probably see most of that in the fourth quarter.

And on that point on the fourth quarter, you obviously also have like the reversal of the cycling of last year ERP shipments. So like how should we think about that impact on your gross margin bridge because obviously, it was a benefit in the fourth quarter of last year.

That's right. I think the easiest way to think about it is when you look at an absolute gross margin standpoint, there's no implication. The only implication is that last year was slightly overstated. So it will have an impact of over 100 basis points when you look at a year-over-year comparison.

Makes sense. And then I guess, thinking about below the gross margin line, there's still an opportunity on SG&A given your medium-term target there. Can you help us understand what are the drivers there? Like obviously, you made a big investment in digital transformation, and this is like the last big year of spending. So should we start seeing some ROI into fiscal '27? What are the areas where you're expecting to see some benefit?

Yes. We feel good about our ability to drive productivity in SG&A over the next few years, probably starting '27 and then '28. There's a few things. First, with the investment we made in ERP and digital transformation, we expect to see a lot of automation, which will drive productivity. And in addition, we're going to be able to expand our global business services capability. In the past, it was hard to do so with really outdated infrastructure, but now that we have a modern standard global data infrastructure, we can do more of that. And just there, we see millions of productivities over the next few years. So those are the main drivers.

Great. And I guess on that point, like on the long-term outlook, we get a lot of questions, obviously, like the return, right, to like organic sales, 3% to 5%, operating margin 25 to 50 basis points. I guess what are the key points that you need to get more consistently there on a sustainable basis from a category standpoint, from a market share and in terms of like some of the drivers that we discussed on the margin front?

Yes. I would say on the growth side, our algorithm just assume that category normalize -- our U.S. retail category normalized to 2% to 2.5% per year. And we just talked about it. It's -- we feel confident that they will do so. It's hard to predict when. So right now, we're really focusing on what we can control. And that's -- I think the back half is a good example of that, where the strong slate of innovations, strong demand creation plan and also RGM initiatives. And so we're seeing sequential improvement in the back half, and that means that we're going to exit with stronger fundamental and better momentum than where we started. And then we actually feel that we're well positioned to continue to accelerate growth beyond the back half. I mentioned earlier, we feel really good about our innovation pipeline for the years to come. And we're just starting now to scale new capabilities like RGMs. Beyond that, we continue to see international and professional businesses being outsized growth contributors. And then over time, as I mentioned, the acquisition of GOJO is also going to structurally accelerate the growth of the company. So that's on the growth side. So I think, again, relatively optimistic in improving and accelerating growth going forward. Margin, I just mentioned it, it will depend -- some of it will depend on the cost environment, of course. But on what we can control, we feel like we have a very strong pipeline of margin improvements. Some of it is driven by our current efforts, and that includes a lot of potential savings in procurement, logistics and supply chain. But of course, now that we're past the ERP implementations, we also see a new source of productivity coming from the ERP, and that impacts supply chain and manufacturing logistics, but also impacts our working capital and inventory. And so that really strengthen the pipelines for years to come.

Great. Maybe talking about the GOJO acquisition that you mentioned a few times. So obviously, the Purell brand, great brand, very well established. Solid growth, right, mid-single-digit growth you mentioned. Maybe first, what got you excited about this brand? Where do you see the biggest opportunity? And I think on the call, the last call, you mentioned the opportunity to accelerate growth, maybe to more mid- to high single digits. So where are those opportunities to get the brand to further accelerate?

Good. Yes. Very excited about the GOJO acquisitions. Again, it really allows us to expand our leadership in health and hygiene, and I think will help accelerate both the growth and financial performance of the company. Maybe I'll mention 2 things. First is the GOJO acquisitions represent an investment in leaning into a place of strength. Our Health and Wellness segment is our largest segment. It's been the fastest growing and growing about 4% CAGR past 10 years. And it's also the most profitable. And then if you really look at the Purell brand, it really mimic a lot of what we're seeing in the Clorox brand in many different ways. It's ubiquitous. It's highly trusted and science and innovation driven. And then the other thing is we see this acquisition as a strong strategic and cultural fit, whether you look purpose, values, the companies are very well aligned. And then the business are complementary. The Clorox business is mostly focused on surface cleaning and 80% in retail, 20% professional. The Purell business is mostly focused on skin hygiene, and it's 80% B2B and 20% retail. And so when you look at the combined business, we think that we have a lot of scale and ability to activate growth. So that's the first thing. Now the GOJO business you mentioned itself represent a strong growth opportunity for us. First, it's actually participating in categories with strong tailwinds, both in B2B and in retail. And we see opportunities to further accelerate this. So it represents about $800 million business has been growing mid-single digit, as you mentioned, and really driven by category tailwinds. And on B2B, we see opportunity to accelerate this through cross-sellings. Both businesses have strong presence and positions in the professional business, but in different verticals. one business might be stronger in health care and other business might be stronger in schools and offices verticals. And so that's very complementary. And so when you actually combine the businesses, you're able to bundle a larger offering and then cross-sell to those different verticals, reducing complexity for the end users and the distributors. And just since the announcement, we actually had a lot of excitement and interest from our partners, which kind of validates that. Now we still need to close before we act on this. And then on the retail side, we also see opportunities to accelerate growth. The Purell brand is in extraordinary brands with tremendous amount of awareness and trust. But the reality is there hasn't been a lot of investment in retail activations, in brand buildings and innovation on the retail side. And so we feel like leveraging Clorox consumer insights, brand building, innovation engine and commercialization capabilities should enable us to accelerate the business. So net, we feel good about the growth prospect of the business.

Great. Yes, maybe on that point on the retail opportunity. Brand has been around for a while, like distribution is already pretty elevated. But to your point, there is an opportunity to innovate the brand, and we've seen premiumization, especially in the hand sanitizer with a lot of different other brands that have innovated more at the premium point. So how do you see the strategy there? Like do you see an opportunity to elevate the price point or to have different price proposition within Purell? Like help us understand like the retail opportunity.

Yes. I mean I think there's a few -- first, pretty basic things. There's very little merchandising happening on this brand just because they don't have the scale. And so if you think about the integrated and pretty large effort we have around cold and flu merchandising, as an example, we can just take advantage of that by joining Purell with Clorox. So those are pretty basic things, but they're significant. And then, of course, you just mentioned it, there's an element of brand building and there's an element of innovation. Innovation is really about increasing form, increasing usage. As you mentioned, there's a lot of new consumers with new needs coming in these segments as well as potential expansion into adjacencies. So too early to go into details, but we do see a lot of upside there.

Great. And then on the cost synergy front, you mentioned $50 million in cost synergies, which is probably pretty conservative given the complementarity of the business. You mentioned there could be upside there. Can you walk us through like the key buckets of cost synergies and where there where you could see upside?

Yes. As you mentioned, the acquisition case included about $50 million. We think it is conservative, and we have a high degree of confidence that we will achieve those. And there could be some upside, especially when we start to leverage our holistic margin management bots. Now yes, there is a lot of overlap between the business. And so we see cost synergies across the cost structures. And if I look at the $50 million, they probably be split evenly between supply chains as well as operating expenses. Now the one thing I've mentioned on the synergies is from a timing standpoint, we expect most of them to come by year 2 or 3s but we're being very thoughtful, as you can imagine, on how we integrate. We have strong governance in place that's clearly sequence and resources, and we will balance going after synergies while ensuring that we derisk and manage the integration well.

And then on the revenue synergy side, you mentioned the cross-selling opportunity. That's not part of your official part of the model. But how do you see the opportunity both on the B2B side and the retail side in terms of cross-selling?

Yes. Cross-selling, I just mentioned it to you, like a lot of it has to do on the B2B side and the fact that we have different -- our relative presence in different vertical is complementary. And so I think essentially by offering a broader end-to-end hygiene solutions, we are able to unlock sales with some end users and distributors that we couldn't before. That's the main one. I would say on the retail side, the example I just gave you around just using merchandising together across brands is another opportunity in the short term. And as you mentioned, some of those -- a lot of those opportunities tend to be upside to our business case, which again give us comfort in the fact that this acquisition should deliver strong returns for the company.

Great. Maybe shifting to capital allocation. Obviously, that leverage post acquisition is going to increase to about over -- a bit over 3.5x. But just can you give us a sense of like your return to like your 2.5x goal and like the ability to delever potentially even quicker? And how does that change your medium-term capital allocation?

Sure. I would say right now, balance sheet discipline and delevering is the top priority from a capital allocation standpoint. As I mentioned it, the -- we expect our debt leverage to temporarily increase to about 3.6x by the end of the fiscal year, driven by the acquisitions. And we think we can bring it down to about 2.5x, which is the high end of our targeted range by the end of calendar year '27. Part of it is the fact that we're delivering strong free cash flow as a company. But the other part is so is GOJO. And so we're able to actually leverage those cash flows to delever. And we also anticipate to have some tax benefit as transactions will help us to get there. Now as we're focusing on delevering, we'll continue to support our dividends. Our commitment there hasn't changed. We have a long track record of increasing dividends for decades, and you could expect this to continue. But while we delever, we will suspend share repurchase until we meet our target leverage.

And then thinking a bit more medium to longer term on capital allocation, how important is M&A post after you get back to your target leverage ratio like going forward in terms of seeing potential deals similar to GOJO going forward?

Yes. I mean we have actually been -- while we haven't transacted in a little while, we have been very active. And we've just been very disciplined in trying to find the right assets that's a strategic fit at the right price and generating the right returns. So we'll continue to be active in evaluating opportunities. Until we delever, it's likely that M&A will take a little bit of back seat. But once we meet our leverage targets, we'll definitely intend to be active again.

Great. And then on the divestiture side, you exited the VMS business in 2024. Are there any other parts of the portfolio that you're reviewing for potential rationalization of portfolio or potential exits? Or do you think the portfolio in the current shape is in the right place?

Yes. I would say, as of now, we like our portfolio as it is, and this is really nothing to share. Having said that, we have been active in doing regular portfolio reviews with our Board to ensure that long-term value is aligned with shareholder returns. And this is what really drove the divestiture of Argentina and VMS, as you just mentioned. And we're quite pleased with both of those divestitures. We think it really strengthened our portfolio, helped reduce the volatility and increase both our growth rates as well as our margin. And more importantly, or as importantly, I should say, it enabled us to shift time and resource to businesses that had better growth opportunities. So again, as of now, we like our portfolio as it is, but we will continue to evaluate and see if there's any additional opportunity for divestitures.

Great. And maybe just a last question. Just taking a step back, you've obviously had a like a big implementation of all these strategic changes with Linda, the digital investment, like a lot of the heavy lifting is behind you at this point. So as you look ahead over the next couple of years, like what are you most excited about as you think about like starting to see some of the ROIs from all these initiatives and potentially getting also the top line to accelerate in market share?

Yes. Our focus in the short, medium and long term is really about accelerating growth, and we talked a lot about it today. I think the sequential improvement in the back half is a start. And I think we're -- as you mentioned, with the investment that we made, we're well positioned for the future. I think the digital information that we have is really going to start modernizing a lot of the capabilities we have and with that, strengthen our brand and accelerate growth. And from a margin standpoint, as I said, we feel like we have a strong in-house pipeline going forward. And if anything, the implementation of the ERP is actually giving us extra fuel for productivities for years to come. So hopefully, enable us to expand margin and reinvest in profitable growth.

Great. That's a good place to end. Okay. Thank you so much, Luc.

Thank you. Thank you.