Clorox Q3 2024 Earnings Call Transcript

Peter, why don't I get us started, and I'll just talk about some of the dynamics that we expect in the fourth quarter, and then I'll hand it to Kevin and he can talk about the outlook. And of course, you'll appreciate we're not setting guidance for fiscal year '25 at this point. But Kevin can certainly give you how we're thinking about the exit. So as it comes to Q4, there are a number of dynamics and things that are important that we plan to do and have the right plans to address. And the first is what you mentioned. We intend to fully restore the temporary distribution we lost as a result of the. Cyber attack, and we are well on track to do that.

At this point we know the decisions on the shelf resets from all of our major retailers. We've built the inventory in order to supply those distribution losses and are on track to restore that distribution. So certainly that will help both reported and organic sales as we head into the fourth quarter. The second dynamic is now that we have fully restored our ability to supply and are back to normalized service levels. We are going to return to our merchandising plans, which, if you recall from our earlier conversations, we expect to be higher than they were during the pandemic, basically returning to pre pandemic levels and that is on track as well for the fourth quarter, and both of those will support growth.

The thing I would mention and as you can see, the implied range is rather large, and that's because it's still quite variable and volatile what we're dealing with. We're dealing with a complex recovery. Resets are all at different times for our retailers, how fast those resets happen, and then of course, where we are on the purchase cycle with consumers will matter, and that's informing the depth and breadth of that range. But I'll hand that over to Kevin, and he can help you think about just how that plays out in the outlook.

Hey, Peter, as it relates to the outlook, and I think specifically your question, organic sales growth in Q4. What I expect to see occurring this quarter is improving volume trends. If you look at our volume performance we're down about 7% in the front half of the year, down 4% in Q3. I expect that to continue to improve as we move forward. I also expect we'll see some increased trade spending. We continue to work back towards a more normalized promotional environment. Q3 was still below sort of that normal level. So I think you would expect to see some increase trade spending and then as a result of the divestiture of Argentina business it's gotten a lot simpler. I don't expect any FX headwinds. I don't expect any meaningful pricing. Now, most of our pricing was in international. That would all go away, so you should see improving volume trends, a little bit of uptick in trade spending, and that gets you down to probably flat to down a little bit in terms of organic sales growth in Q4 and that would keep us on track to be up about 1% for the year.

Yeah, I think there's a few things. You saw where we landed, Peter in Q3, a little over 42%. We think will be closer to 43% when we exit. As Linda said, we're not prepared to provide our outlook for next year, but I would tell you we fully expect to continue to expand margins in fiscal year 25, so we'll exit this year. Over the full year, we're probably up around 42%. And then I expect to build in that next year.

Thanks, Peter.

Sure. All right, I'll get started with that first question. And I think the question was twofold. So I'll start first, maybe addressing the areas on supply. That we called out that impacted sales for the quarter, and then I'll talk a bit more about the consumer and the confidence that we have about where we are and that we have the right plans in place as we roll into Q4 to continue to accomplish what we intend to do around the consumer and restore our business fundamentals, so on supply recovery. We talked about the last call and actually the call before that. We had a couple of businesses that were more challenged, given the depth of the portfolio, and that was glad and we called out later as well. And those continue to be a challenge a bit longer in the quarter than we had originally anticipated at the time of forecast. The good news is that with a few other minor things in businesses, we were able to fully fix all of those by the end of the quarter and we exited Q3 getting back to normalized service levels to our customers and so feel good that as we head into Q4, we have the right inventory and we have the right production plans and plans with our retailers to be able to get back all of those distribution points that we lost temporarily and, again, restore merchandising. So again, that was a temporary thing in nature impacted Q3, but we don't anticipate that we'll impact Q4.

If you look at the consumer. A few things going on first. Our distribution points are still down versus pre cyber, which we had anticipated and we knew that the majority of shelf resets would happen in Q4. That is still going as planned, and we expect to fully regain that distribution that we anticipated having at the beginning of the year when we set our original outlook. So on track there and then, I would say we're starting to see the share turnaround, so we've recovered nearly 90% of our share loss. And actually, if you even look at the last few weeks, you've continued to see that trend improve. And in addition, we're rebuilding households. So our households in Q3 are still down versus pre cyber, which we expected, but improving and moving in the right direction.

And if you think about it we really only had from when we fully restored inventories and again, haven't fully restored distribution at basically one purchase cycle for the consumer in our categories. Purchase cycle is about 90 days. So we've had one chance to influence as that consumer comes back to the shelf. And we are not fully restored yet. What we're laser focused on in Q4 and this is why we have the investment levels that we do, where we've increased our spending on advertising and sales promotion as well as reduced revenue, ensuring that we have the right spending, that in this next purchase cycle that we can recapture that consumer.

We intend to do as much of that as we can in Q4 and we're hoping to get the majority of it done. We're very confident on distribution, very confident in merchandising. And now we're just watching as the consumer comes back to a fully stock shelf. What is their behavior and do we need to make any tweaks as we head into the beginning of fiscal year '25, but feel very good about where we are and restoring the fundamentals and very good that we're beginning to see the consumer come back that we lost during that time.

Andrea, on your question on '25 gross margin, as I'm sure you can appreciate we're still in the process of building our plans right now for '25 but where we're sitting at today, I fully expect we're going to be growing top line, expanding margins, growing earnings. And so as you think about how we grow margin, I think to your specific question. Certainly top line growth helps build margin. Additionally divestiture of our Argentina business that was margin diluted to the company. So divesting that business certainly helps our margin and then our margin transformation efforts. We think collectively that more than offsets what we believe will be a level of cost inflation but continue to moderate. So we do not believe right now we're going to be in an inflationary environment next year.

There will be some cost inflation, but it continues to moderate, and the actions I just mentioned, we think are more than enough to offset that and allow us to continue to build margin next year. But the exact amount we're still working through.

Yes. We don't break that out, Andrea specifically, but I can tell you it was significantly below the company average in terms of gross margins. You can probably do some math. It was 2% of sales and well below the company average in terms of gross margin.

Yes, thank you.

Hi, Chris.

Yeah, Chris. From all the data that we see, the progress we've made with the consumer and what we anticipate will happen here in Q4. We do not feel like we have a dynamic that the sales miss was due to a consumer issue that we have or not bouncing back to that degree with household penetration, we lost. This was simply, we had two very complex businesses. We thought we would make more progress on supply than we did. It went longer. It went through the remainder of the quarter when we thought we would get it done mid quarter. That impacted our ability really, to supply for merchandising, mostly distribution we always knew would come back in the fourth quarter because that's when retailers reset their shelves.

So the good news is because we were able to fully restore supply by the end of the quarter, we're still on track to recover that distribution, but this really was heightened competition as we weren't able to supply merchandising events and still not in a place where we were fully able to supply on those couple of businesses. But we're through that. We got through that at the end of Q3. We have the ability now to fully supply in Q4 that investment level we feel is the right investment level, and I'll just be clear we have not constrained our businesses. We have said they should spend what they need to to get these households back that is contemplated in the outlook that we provided, and we believe we have the right spending on both advertising and sales promotion and merchandising.

And if we have to make adjustments as we go through the quarter, we will. But right now, we feel like we have the right plans. We're seeing those households come back again. We went through one purchase cycle. We're going through another one here in Q4 but all indicators are that we will restore our business. And we feel like the fundamentals will be fully recovered by the end of Q4 and set us up well, as we head into fiscal year 25.

Sure. Chris. The increase you referred to, that is primary, driven by inflation in Argentina. You might recall, before we divested that business, we were projecting about 300% inflation, and they had a significant devaluation in December, so that was playing through. And it's the biggest driver. To your question as you go forward. Now that we divested the business, I would not expect to see logistics, manufacturing be that level of a drag. Logistics is turning on us. It's fairly benign in terms of year over year cost once you strip out Argentina. So this was one of the additional benefits of not having that business in our portfolio any longer given that the disruptions it had broadly across the P&L.

Hey, Dara, you know what I'd say is a little too early for us? To talk too specifically about 25. As I said, we're still developing our plans. Maybe the one item I would just make sure we remind folks is with the divestiture of Argentina business, that's about two points of sales. We'll see a portion of that in Q4, but you'll probably still have about a 0.5 headwind next year as a result of that sale. But for the other items, we're going to wait till August to have that conversation because we're still working through our plans. It'd just be too early to talk any detail.

Sure, Dara, without obviously, again, providing any guidance for '25 or beyond on specifics, I think I can say with really strong confidence, one, based on the track records, if you looked, we delivered our sixth consecutive quarter of gross margin expansion behind this toolkit that we have. And what we talked about at CAGNY is important. Pricing and cost savings have been the majority of the tools that we've had and we put them to good use over the last couple of years as we've dealt with inflation. But we knew that we wanted to take a broader look. And the fact that we're implementing a digital transformation and we have more visibility end to end gave us a great opportunity to look and see where else can we go beyond traditional cost savings.

Revenue growth management is certainly one of those tools, price-pack architecture within that, and the teams all have plans in place to use those tools to continue to make progress against our commitment, that we stand behind to return gross margins to pre-pandemic levels and then grow from there. And we feel very confident in our ability to do that. And Kevin and I have talked before, it's really dependent on two things. One, how fast we implement this toolbox and feel good about that. But second will be what the cost environment looks like.

And as we continue to look forward, we continue to see inflation in people's reporting. Again, we're not providing any specifics around our business at this point, but the pace of recovery and when we return to pre-pandemic levels will be those two factors. But we feel very good about what's in our control and that we have the right toolbox to be able to accomplish what we set out to do.

Thanks, Dara.

Sure. We're seeing pressure across all consumer groups, and we're seeing behaviors broadly outside of our categories changing for nearly everyone as they evaluate what's going on and as they think about what's happening in the future, whether that come down to the interest rate environment, etc., cost of housing, a cost of a basket of groceries when they go to the store. So we're seeing that behavior quite broadly, and we've called it value seeking. People are buying larger sizes, they're buying smaller sizes, and they're thinking about the trips they take, etc.

I would say, in particular, we always have our eyes focused on the lower income consumer as they are more pressured. And to date, we've stood very well with them. And we tend to do it during times, tough economic times for low income consumers because we deliver products at a great value that work really well and they can't afford to make a mistake in our categories. And so we've typically fared well. And we continue to see that we are doing well with low income consumers and we haven't seen a material trade to private label that isn't due to the cyber attack. And of course, we're watching that closely, as we get our distribution and our merchandising back. But we largely believe private labels growth is due to the fact that we weren't on the shelf.

And, we're seeing Q3, their share was lower than it was in Q2, we're seeing all the right indicators, our households were coming back that might have tried private label during that time when we were off the shelf. So we're watching all income tiers, always focused on low income. But that was a very general comment to say that all consumers are under more pressure and are certainly evaluating their behaviors and how they're spending their wallet.

And then when it comes to our spending plans, we had always anticipated that we would return to pre-pandemic merchandising levels before we even saw a more stressed consumer, because we just thought that was the right level of spending to ensure we were introducing people to new innovation, making sure that we're capturing new behaviors in times where consumers are open to that, for example, when they send their kids back to school or when they send the kid to college. And so we'd always anticipated that.

And this promo, though, does also support our return to share growth and our return from a distribution perspective. So we like that it works doubly hard for us. But I wouldn't say we're doing this because of our recovery from cyber. We just always anticipated that this merchandising level would return. And then from an advertising and sales promotion level, we did increase that this year because we saw a pressured consumer and wanted to make sure that we were communicating our superior value, etc. But these are all within the range of normal spending for us in a given year.

We typically spend around 10% in advertising and sales promotion. It'll be closer to 11% this year and we're returning to a level of reduced revenue spending that we've had in the past. So we don't see any need to go further or deeper than that. We feel like we have the right level, but this really is about more normal course of business than it is, that we're seeing consumer behaviors that we need to react to.

Sure, Javier. I mean, it has certainly been a complex last few years and lots of puts and takes. And so what I would comment on is, we intend to grow market share. That is our mid-to-long term goal, and that is the bar we hold for ourselves to say if we're winning with the consumer or not. Clearly, given the cyber attack, we have not grown market share this year, but we're seeing the trend move in the right place. So for perspective, we lost about 5 points of share, nearly a third of our market share during the low point, from a cyber perspective and we're back down. We ended the quarter down about three quarters of a point, and we've made progress since there, if you look at the weekly data.

But what we first need to do is restore market share and then grow from there. And we believe we have the right plans to do that. If you look at many of our businesses, they're variable versus the market share they had in the past. But in aggregate, we mostly returned and some businesses were higher. For example, in our cleaning business, we made significant progress on market share, even though we had COVID blip. And then, of course, multiple rounds of pricing. And our brands have held up really well. So my evaluation would be, heading into the cyber event, we were in the right place from a market share. We had plans to grow market share. Cyber has unfortunately caused another place where we took a step back and we have to rebuild. But I'm confident in our ability to return. And then we're working on plans in fiscal year '25 and beyond to deliver that market share growth we aspire to.

Yes, I would say, first of all, there's a price mix and a trade component of Q3 and certainly Kevin can walk through that in more detail. But if I just take a step back and say, what were the dynamics in Q3 that give us confidence, and what were the dynamics that negatively impacted us, it's pretty clear. We weren't able to fully supply on a couple of those businesses that you mentioned, Glad and Litter in particular. And that means we weren't fully available for the consumer, which we don't like. But the good news is, as I've said, we recovered that ability to supply by the end of Q3 and we feel good heading into Q4. And also, there were more competitive dynamics, given that fact that we couldn't fully supply. We saw more merchandising from competitors, etc.

As it specifically relates to private label, if you look, there was a stressed consumer prior to the cyber event and we didn't have any material loss to private label and share during that time. Nor have we, in any recessionary time lost any material share to private label. We offer brands with great value. We offer innovation. The consumer trusts us. They love our products, they love our brands. And we spend behind those brands to ensure that they understand the superior value we deliver. And we see that beginning to take hold and work in Q3 as we restore distribution and inventories.

We saw private label share come down versus Q2 and heading in the right direction back to what we would expect it to be in a more normalized environment. We expect to continue to make progress as we restore distribution in Q4. So I think it would be pretty understandable to say when you're not fully on the shelf and you don't have all your distribution, a consumer is going to choose what's on the shelf and they did. But we felt confident in our brands, confident in our spending plans that we'll restore that back. And history would tell us when we were out of stock in COVID, that happened. When we've had product issues where we're out of shelf on Pine-Sol, we came back, we restored our share in distribution. We have a long history of doing this and I remain confident in our ability to do it in Q4 and beyond.

Thanks, Javier.

Thanks, Filippo. We fully expect to recover in Q4 the distribution against our plan that we had fiscal year '24 that we lost. We view that as temporary. And we have seen the shelf decisions from retailers. They are now in the process of converting their sets as we speak, in some of our categories, and some will happen throughout the quarter. So we have strong confidence that we will restore that distribution. And that really was not the Q3 story because we always knew most of that distribution would come back in Q4. It's really more of a supply and service level issue story in Q3. And again, we have fully recovered from that and we're heading into Q4 in a great place. We're able to fully supply that distribution that we -- that we will recover.

I'd also just note, I did a recent roadshow with all of our top retailers and they want our business back on shelf too. We are the brand that leads their categories. They're very invested in growing with us. Our conversations were focused on growing, moving forward, our innovation plans. What we want to do to unlock our joint digital plans. Now that we've well underway on our digital transformation, now that we know 100 million consumers, how can we personalize better to them. The conversations were very growth oriented, future focused and they're looking forward to having our full distribution back as well so that we can grow their categories.

Sure. You are absolutely right that we talked about international being a portion of that growth. And if you look at the performance over international over the last couple of years, it certainly has played a role where it's grown faster. But we also talked about having a more consistent -- consistent, less volatile business. And Argentina was a high source of volatility and variability. And certainly you saw the FX impact play out and you heard Kevin talk about what we expect moving forward. So that was definitely on our minds to reduce the volatility and variability that we had and then be able to grow from a very solid base.

And you might recall from a few years ago, we had purchased the majority ownership of a JV partnership we have in the Middle East. It was a good example of looking at markets that we could grow faster in that were more stable and predictable and that has played out very well. We continue to have a really healthy consumer there. Innovation is working well in that marketplace. And so what I would say is, it's very consistent with what we've said before. We have continued business in Latin America that we feel good about and we'll continue to grow business in Asia, Europe, the Middle East. And we continue to have growth pockets on businesses like Litter, etc.

Our cleaning business, which is the majority of our business, is international. And we continue to expect international be a strong contributor, but it will be much more profitable and stable versus what it was before.

Thank you.

Yeah, Lauren, happy to take those. As it relates to gross margin, I can start there. And kind of what we're seeing from a cost perspective, we are seeing costs continue to moderate. I think, as you saw in Q3, is a fairly small impact, particularly if you look at commodities. We are seeing some commodities become deflationary. You see that a bit in soybean oil, which is something we use in our food business. You're seeing it in other categories, substrate, some chemicals. We are seeing still some cost increases, particularly on petroleum-based products, solvents, diesel, resins up just a little bit. That's more supply/demand driven, more than input costs.

And so I'd say, it is definitely going in the right direction. It's a fairly modest hit for us in Q3 and that's certainly been an ongoing improvement. I'd say on the other piece of inflation, which is more wage driven, is generally playing out as we expected. That tends to show up in manufacturing and warehousing. We're still seeing ongoing inflation there. But on the commodity front, it is certainly easing. And as we step out of Argentina, which is a source of inflation, I expect it'll be fairly benign by the time I get to Q4 on the commodity side and then we'll continue to deal with the wage inflation.

And then how to think about Argentina next year, I think you said exactly right is, as we move forward a number of years you talked about, we will not have that impact going forward. So let me give you an example. You highlighted FX this quarter, to your point was about 180 basis point hit to margin. That was almost entirely Argentina. As I look forward, even starting in Q4, we should have almost no FX hit to gross margin. So you get that benefit. But keep in mind, that will be offset by other areas, things like pricing. The pricing you see in Q3 was primary Argentina, that will also go away.

So you'll strip all that out. Ultimately, the net impact of all that is Argentina was a margin dilutive business for us. So by stepping out of that, all the different lines, when you look at in totality, our margins will go up as a result of exiting Argentina, but you'll strip out each one of those elements that Argentina drove.

Yes, that's right. I mean, you look at the businesses, 2% of sales, and you can probably do the math pretty quickly. It's a very dilutive business to us when we owned it and it represents 2% of our sales. So you probably do the math. You can see there's some modest benefit to our gross margin going forward now it's out of the portfolio.

That's right, Lauren. So we were not able to fully service our retailers throughout Q3 until the end. So at the end of Q3, we restored normal service levels and we entered Q4 with MBAF [Phonetic] to being normalized. And that marries with the supply chain comment that we had some constraints which impacted those service levels throughout the quarter.

Thanks, Lauren.

Sure Olivia happy to take that one. As you think about gross margin and you almost have to separate what we've been doing for the last several years in terms of where I think this is going longer term. We're still working to recover from the record level of inflation that we've had to absorb and as I think you know quite well, Olivia, we lost about 800 basis points in gross margin through this inflationary cycle. And as [Indecipherable] and I both talk quite a bit, we remain committed to fully recovering that, to your point, with the work we did last year, the work we're doing this year, we'll get about. 650 basis points. We'll recover. We've got more work to do and feel quite confident we'll get there.

The process to get there. We were leaning into pricing. We took four rounds of pricing, which is very consistent, what you saw broadly in our industry to recover from this inflation. As we move forward now and get back into what I described as we believe, a more normalized cost environment typically, our cost savings efforts is more than enough to cover normal levels of Inflation and allows a little bit extra that we can either invest back in the business, pay to the bottom line to further expand EBIT margins. And that's where that long term goal of 25 to 50 basis points was generated, which is normal level of cost inflation, which for us tends to be about $75 million a year.

Our cost savings more than covers that and use the extra debt to modestly improve margins each year. That's where we're going. We're not there yet. We're still working on recovering from the inflationary cycle and that was through pricing, but it's certainly moving in the right direction, so we'll get back to fully recovering these gross margins over time, and then I expect, assuming that the commodity environment is at more normalized level. That's how you should expect to see us continue to grow margins over the long term as our margin transformation efforts more than offsetting regular levels of inflation.

Sure, Olivia. If we wind the clock back to the beginning of the fiscal year, we actually had intended to spend more money in advertising and sales promotion. In our original guidance, we said about 11%. We still intend to do that but you're absolutely right that given the cyber attack, the shape of that over this course of the year has changed. So we spent less in the front half of the year. We're spending more in the back half still with the intention of spending what we're saying now is over 11% of sales. I want to be clear on the dynamics there, though. We're spending about the same money we had intended. But given what we've talked about from a sales outlook perspective and Argentina, it would put us above 11%, but we're. Still spending about the same amount of money as we intended to when we first gave that guidance. But again, this was more about supporting our brands as consumers are more challenged. We felt good about our innovation plans and we wanted to spend behind them and again, just the shape of the year has changed, given the cyber event.

Great. Thank you.

Thanks so much, everyone. We look forward to updating you on our continued progress on our next call. Until then, stay well.