The Clorox Company (CLX) Earnings Call Transcript & Summary

All right. We're going to get started. So next up this morning. I am pleased to welcome the Clorox Company. We're joined by Linda Rendle, the company's Chair and CEO; and Luc Bellet, CFO. Linda, in May, you announced your decision to step down from your role. So before we get started, I just wanted to thank you for the thoughtfulness that you've consistently brought to your conversations with the investment community. You've led the company through a time of extraordinary change, and we've always really valued the opportunity here directly from you, so thank you. And Luc, we're happy to have you here Tim. Before we get started with questions, I think, Linda, you had a few things you wanted to open up with, and then we'll get into the questions that prepared.

Sounds good, and thank you for your opening. And in line with that, perhaps I'll give an update on the CEO succession process -- the Board is well their way in identifying my successor. They laid out a process where they're doing a comprehensive search and they are well into that at this point. Until then, the team and I continue to be focused on our strategy and priorities, and we'll keep you updated as we have more information, but nothing new to share today. With that, I thought I would just provide some brief opening comments on the business and then get into Lauren's questions. First, I wanted to talk a little bit about last year, our fiscal year that ended in June. It certainly was a year of volatility for the industry, given what was going on from a consumer perspective, and then for our company, it was a year of transition. We implemented the final version of our digital transformation with our ERP in the U.S. which was a significant undertaking. We did a greenfield implementation, but that is now behind us, and we are moving into optimization mode. And in addition, we made a significant move on our portfolio with the acquisition of GOJO Industries, which you know better as PURELL, which is a key player in B2B and retail in the hand sanitization space and expands our presence in health and hygiene, and we're excited about that acquisition. I know we'll talk more about it today. So we feel we enter fiscal year '27 in a much stronger place than we did in '26, and that was a result of making sequential improvement in '26 quarter after quarter after quarter. But we still see the environment as being tough. Consumers are under stress. Our categories remain muted, but we have a strong slate of innovation. We're investing in superiority in our brands. We can talk more about that. And certainly, as we face inflationary headwinds, we're taking all the necessary actions to ensure that we recover margins over time and importantly, have the fuel to invest in our brands, and we're making strong investments this year. With that, maybe we just get right into questions.

Yes, sounds great. let's start with category growth. As you mentioned, it's been challenging. So category growth has been trending below historical levels. We're seeing that broadly across our space. But I was curious if there were differences worth calling out on a more granular level and specifically where Clorox competes. Like are there areas where you see consumers more willing to pay up for premium innovation or areas where consumers have pulled back more or less than in others?

Yes, we don't see a really distinct difference in our categories. They all follow a very similar pattern, but they certainly have different things impacting them. So let me walk you through a few of them. First, in aggregate, all of our categories are being impacted by value-conscious consumer. Consumers are trading up to larger sizes and smaller sizes, and they're shopping in different outlets at an enhanced pace to do that. So you're seeing more in club and mass. And certainly, they're going to continue to do that. We see as gas prices are elevated, and they're dealing with the impacts of inflation. So that's across all of our categories. And then even categories that have stronger growth rates, cat litter, for example, is a mid-single-digit grower, we've seen a little bit more muted, but that's still growing faster than our average. Our Pro categories continue to grow faster than average. International continues to grow faster than average, even though they're under inflationary pressures in those markets as well. I would call out every one of our categories is positively impacted by innovation and consumers are willing to pay for a better experience. So whether that be in a trash bag where we've launched trash bag that has an absorbent layer on the bottom, that is a premium, that's doing well at launch. To a Burt's Bees new lip squeeze bomb that is a premium, and that is doing well. In our cleaning businesses, we continue to see trade-up to our Sentiva platform. Consumers are entering into the new allergy space we launched with Clorox PURELL, which is a premium. So we're seeing generally consumers very willing to accept continued innovation and premiumization in the category as long as that delivers a superior value. And that's what we're laser-focused on, is making sure that we have the right size, price-back architecture in our base business that we're doing the right claims work, that we're investing strongly in advertising sales promotion. But then really to get these categories growing again, we need to continue to lean into innovation, and we have strong innovation plans this year.

Okay. Great. You've guided to organic ex-ERP comps. It's organic flat to up slightly for fiscal '27. But underlying organic will still be down in the first quarter. So -- and I think a big driver of that is Kingsford and some dynamics of Charcoal specifically. But I think investors get nervous may see a second half weighted year. So what gives you confidence that organic performance will accelerate as we move beyond Q1?

Sure, I can take that Well, maybe let me get us reconnected to our outlook for the full year. So organic sales growth is expected to grow 3.5% to 4.5%. But as you mentioned, that includes a little over 3.5 points of benefit from lapping the ARP transition last year. So excluding this, organic would be flat to up slightly for the full year. Now Q1 is a bit of a unique situation. And you mentioned part of it is we -- excluding the impact of the ERP we expect organic sales growth to be down in Q1. And that's mainly driven by the timing impact of some merchandising as well as the expected softness in our drilling business following what has been a weak start of the season in the fourth quarter and resulted in higher level of inventory, both at retailers and consumer homes are going into the first quarter. But if I leave that on the side, if we really look at the phasing through the year, category growth is essentially expected to be fairly consistent throughout the year, in line with what we saw last year. And then looking at market share, we exited last fiscal year with improved trends and the outlook is essentially expecting us to continue building on that momentum through the benefit of the focus and investment we're making on innovation and commercial execution.

Okay. It's been interesting to see the cleaning business is where Clorox has been having the most success. I guess and that's judging both reported results and also looking at Nielsen. So do you agree that that's a fair characterization? And if so, what do you credit it to? Like what do you take as learnings from cleaning that you can apply to other areas of the portfolio?

That's the right assessment. Our cleaning business has been a very strong driver for the company, pretty consistent over a number of years. And there's a few things that I would highlight that make it so, and it was actually learnings into how we built our strategy that outlined for this period. The first would be the importance of brands. Clorox is an incredibly strong brand that stands for something very powerful with the consumer stands for trust. It stands for superior cleaning and consumers with that, whether that be in the home space or in the B2B space. So continuing to invest strongly in our brands is something that the cleaning team has done for a number of years, and they've built that Forex brand over years to being something different to the consumer. We used to just stand for bleach. And now it stands for a lot more for the consumer. And in fact, there are many products don't have bleaching today. and some products that don't even disinfect, but they stand for powerful cleaning. The second thing would be is innovation. Cleaning has consistently launched innovation year-after-year going after new jobs that, that brand can take the consumer to. So if you looked at our portfolio 30 or 40 years ago, we were pretty much a dilutable business. And then we moved into more convenient forms of sprays, we launched the Wipes category 20 years ago, and we continue to launch into adjacencies that allow that brand to go into new spaces, but with that primary benefit that we keep at the forefront. And many of those innovation platforms we've built to invest in for years and years and years. Scentiva is a great example. We launched that in 2018. It's been a growth driver for us for almost a decade now. And so those are the learnings we applied in our Ignite strategy to get those other businesses moving, and that has been working in a number of categories. We have more work to do, and I know we'll talk about litter later. That's a good example where we have to reapply that formula to get back to consistent growth. But that is why we have invested in health and hygiene. That is consistent with the acquisition we just made with GOJO. We see a real differentiator in our capabilities and our understanding of these categories and our ability to create value over time.

Okay. Another positive story, but so completely different. It's Hidden Valley, which historically hasn't gotten much airtime despite being a big business. But recently, you've been highlighting the share gains for the brand. Super fun, Taste of America dynamic during the World Cup. But I think there's still an ongoing challenge from GLP-1s and maybe the cyclospor outbreak. How should we think about the trajectory for Hidden Valley going forward?

Yes, it was really fun to be part of the World Cup fever unless you're a TSA agent and people are taking bottles of Hidden Valley in their carry-ons. People really fell in love with ranch, which is great and gives us opportunities. But you're exactly right. We've been growing share in Hidden Valley. We had a period starting at about 1.5 years ago as the food category softened. I mean we had made some decisions on price pack architecture that didn't go as well as we had intended -- so we went back to our playbook, refreshed our innovation plans, did some additional price pack architecture work, got that business going again and that led to share growth in Q4. Right now, we're dealing with the temporary impacts of Cyclospora. So if you look at the category, it's been down double digits. We fared much stronger than that. So we've grown 2 to 3 share points depending on the time period over this time, but that -- it certainly is impacting us too, but to a lesser degree than the category. We see that starting to lessen in the data. So I think we might be through the worst of it. We're going to watch it closely. But I really view that as temporary and people will get back to those eating occasions. I'm happy to be eating salads again. So we'll be watching that. But I think fundamentally, to your point, the category is under pressure from things like GLP-1s, et cetera. What we're trying to do with Hidden Valley is it's a brand that makes everything taste better, whether that be what you're doing on your GLP-1 journey or you want to enjoy it on something a little more indulgent like pizza, and that's working pretty well. We're going to continue to do that. So we're excited about the share growth, but we're really focused on getting the category going again.

Okay. Great. And then let's spend a moment on areas of portfolio that have struggled more. So let's talk a bit about Litter given its size, top of mind. So I guess for those who are here who don't really know aren't as close to the story, maybe you can an overview of fresh set struggles, the restage and why it's kind of taking longer to get back to growth than anticipated?

Yes, Litter is a good example. I spoke about that playbook in cleaning. The work that we do on our brands in equity, ensuring we have innovation and superior value where we had a lot of operational disruption in Litter that was disproportionate to the rest of the portfolio. We built a manufacturing site in COVID, not a fun time to make a greenfield plant implementation, and so that took longer than we expected. And then when we had the cyber attack back in 2023, that was one of the categories most impacted because as you can imagine, and if you have a cat, you know this, to change out your trash bag for a period of time and then get back to your Glad bag is not that hard. You run out of the old bag, you purchase glad. But when you've trained your cat to use a particular litter, that transition back takes a bit longer. So it took us longer to get back with consumers, and we were focused operationally on doing that in e-commerce, et cetera. And where we fell behind, frankly, was in innovation and ensuring that we had superiority and our competitors kept moving. So the team took a very hard look at our plan knowing that, and we said we needed to do a complete restage of the business, starting with price pack architecture, getting our claims right and our packaging right, improving our formulation to remove more dust -- and we did that as the first part of the restage in Q4. That was a lot of change for the consumer. And some of our retailers made decisions on shelf placement that weren't consistent with what we thought was going to happen. We got the distribution, but the shelf placement, it wasn't exactly right. And so they didn't go as exactly as we expected. But we do feel that restage was really important to get us going again. Now what we're focused on is driving our brand equity, being really clear what Freshed up stands for, which is freshness. And oderemoval, we're going to get back to that, a strong innovation pipeline, and we have a good 1 this year that we'll talk more about in the back half. and then ensuring we have superiority over time. And the team is laser-focused on that playbook. The first part of that implementation is in, and we're starting to see some green shoots for lack of a better word with some of the price pack architecture work we've done. But this is going to be -- we view this as a rebuild for Fresh Step, and we have full confidence we'll get there. We've done this in other businesses over time, but that's really what happened. We were really operationally focused, and we need to get back to that playbook for our brand.

Okay. And so you just mentioned that there are some green shoots. So this isn't about reconsidering the plan. It's been refined. The plan is in place, and now it's time.

It is. The 1 thing I'd call out, and we've said this over and over again to our team we want to see a multiyear innovation playbook, and we feel good about that, but we want more. This is a category that is innovation driven even more so than others. And so we are pushing really hard to say, what does our innovation plan look like multiple years out and how do we back into that and ensure that we have the right value. So that's the place that our team is very focused on is innovation.

Okay. Great. Let's talk a little bit about pricing. So -- given the inflation that we've seen this calendar year, where the key topic has been for across Staples has been how companies are going to be offsetting these cost increases -- you guided to cost inflation above $200 million in fiscal '27 and have also discussed some plans to raise prices on Glad given the exposure there, which makes a ton of sense. So that's sort of the backdrop, and I had a few questions on this. So Luc, maybe you could give some color on the components of the $200 million. I think there's some questions out there as to how this ties directly to direct oil, how much is logistics in diesel versus downstream. Yes, so let's start there. And...

Sure. Well, as you mentioned, we expect input cost inflation of slightly over $200 million for the year. And for perspective, that compares to a historical average of $75 million to $100 million. So well above that. Now oil is an important variable, but it's important to recognize that the inflation, we expect this year is broader than just energy alone. And if I look at the components, certainly, a big part of it is input cost and commodities. And the largest driver would be raising based or commodities, but we're also seeing meaningful inflation across a broad range of other communities that are not energy-based. And beyond commodities, we're also seeing inflation across a broader area of the supply chain from supply chain from supplier cost increase, all the way to transportation. The market has been pretty tight, especially in the U.S. and other related logistic costs. So I would say the inflation this year is proving out to be much more persistent and extending beyond what just the headline from oil. The last thing I mentioned is from a phasing standpoint. We expect inflation to be more pronounced in the front half. And that goes along with the fact that it generally takes a little bit of time for cost mitigation actions to take place. So that's where this year, the gross margin will be pressure, but it's more of the timing than the structural issues, and we expect sequential improvement throughout the year.

Okay. And then there's now been this more recent spike in logistics costs. So any changes to the outlook or impact?

No, no change right now. I mean, our outlook contemplated a pretty tight transportation market in the U.S. That was -- that's one of the drivers of the inflation that we assumed.

Okay. Great, so in addition to pricing on Glad on the conference call, you'd mentioned targeted pricing elsewhere and then also value investments to improve competitiveness in other spots. So -- is there anything you're able to call out now key categories in both sides of this equation to get more specific?

Yes. So we called out targeted pricing for a reason. We feel right now the consumer is stretched, and we have a very broad range of tools to recover margins over time. So we will use targeted pricing. You mentioned glad earlier. Glad is one where we're taking truckload pricing in a more normalized level. across our food business in some areas of cleaning. We're taking pricing, but again being very targeted in how we're doing that, not taking broad price increases in any of those businesses. And then at the same time, we are making investments on the other side. So we talked about Glad being 1 that we did last year, where we invested in our 80 count to ensure that we had the right price point. We're also doing that in areas like Litter. On price pack architecture. So we are balancing where we're taking pricing up and also making them some investments. We're also investing in product in some cases. So you're not seeing that in the pricing line, but that actually plays out in TDC instead, but we're investing in superiority and a few of our things. And so that contributes to ensuring that we have the right balance between where we're taking pricing and of course, using cost savings, RGM, price pack architecture and other places, but also ensuring that we're making investments where we feel we need to at the same time and we'll continue to talk more about pricing as we put it in the market. But we're being, as we said, very surgical, where we think we have the right ability to take pricing and where the right value is.

Okay. And then just how should we think about net price mix for the year in the context of everything we just said and then the sales guidance. Is it a full one point benefit, like I was trying to do some math on Glad, if it's mid- to high teens, anyway, so it is around one point?

Yes, price mix would be net -- slightly up. right? And this is mainly driven by some of the targeted price increase that we're taking in Glad or as Linda mentioned, in some part of cleaning. And that's tempered by, of course, continued headwinds on from consumer value setting behavior and channel shifting as well as some targeted investments we're making to improve value equation in some more challenged businesses like Litter.