The Clorox Company (NYSE:CLX) Q2 2023 Earnings Call Transcript

The Clorox Company (NYSE:CLX) Q2 2023 Earnings Call Transcript February 2, 2023

Operator: Good day, ladies and gentlemen, and welcome to The Clorox Company Second Quarter Fiscal Year 2023 Earnings Release Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference call, Ms. Lisah Burhan, Vice President of Investor Relations for The Clorox Company. Ms. Burhan, you may begin your conference.

Lisah Burhan: Thank you, Jen. Good afternoon, and thank you for joining us. On the call with me today are Linda Rendle, our CEO; and Kevin Jacobsen, our CFO. I hope everyone has had a chance to review our earnings release and prepared remarks, both of which are available on our website. In just a moment, Linda will share a few opening comments, and then we’ll take your questions. During this call, we may make forward-looking statements, including about our fiscal 2023 outlook. These statements are based on management’s current expectations, but may differ from actual results or outcomes. In addition, we may refer to certain non-GAAP financial measures. Please refer to the Forward-Looking Statements section, which identifies various factors that could affect such forward-looking statements which has been filed with the SEC.

In addition, please refer to the Non-GAAP Financial Information section of our earnings release and the supplemental financial schedules in the Investor Relations section of our website for a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures. Now, I’ll turn it over to Linda.

Photo by Clay Banks on Unsplash

Linda Rendle: Hello, everyone, and thank you for joining us. As I mentioned in our prepared remarks, despite persistent macroeconomic headwinds, we delivered better-than-expected Q2 results, with organic sales growth in three of four segments: gross margin expansion, and double-digit earnings growth. Our performance reflects the strength and superior value of our brands, strong execution across a broad set of actions and the benefit of some timing shifts. As a result, we’ve updated our full year outlook. During the quarter, we made good progress through building margin, driving top line momentum and executing against our Ignite strategy to strengthen our advantages and accelerate profitable growth for the long term. This includes advancing our innovation pipeline delivering cost savings and taking additional cost-justified pricing actions while maintaining record high consumer value superiority.

Overall, we feel good about our progress, but we’re relentlessly driving additional improvements as we continue to invest in our brands, categories and capabilities. Looking ahead, we expect the operating environment to remain volatile and challenging, and we’ll continue using all the levers under our control while protecting the value proposition of our products to recover margin and drive long-term growth for our brands and categories. We are confident that our leading product portfolio in essential categories, coupled with our proactive actions, will enable us to navigate this environment and return to more consistent profitable growth over time. With that, Kevin and I will take your questions.

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Q&A Session

Operator: Our first question today will come from Peter Grom with UBS.

Peter Grom : Thanks, operator, and good afternoon, everyone. So maybe just to start, when we think about the 2Q performance, and I know you outlined a few things on the script, but just from our perspective, plus 4% organic versus the original guidance of down low single digits and kind of gross margin coming in at 200 basis points or so above the midpoint of your outlook. It’s a decent amount of upside versus what you were expecting? So can you maybe just help us understand where were the biggest surprises versus your forecast for those two items?

Linda Rendle : Sure. Thanks, Peter. The first thing that I would just start with, and I’ll hand it over to Kevin to walk through the quarter in a bit more detail. We’re doing exactly what we said we were going to do. We are maintaining top line momentum, which came in better than we expected, and Kevin will walk you through those factors while also doing the hard work to improve margins. And so from that perspective, we’re feeling good about that balance. We’re going to continue to be focused on it for the year. And Kevin, why don’t you take him through the details of how the quarter should go.

Kevin Jacobsen : Sure. Hey, Peter, I would say in terms of the strength of the quarter, if I think about the top line, as Linda said, really good strong fundamentals on the business. We saw consumption up 6%. We held share in track channels in the U.S. We continue to grow shares internationally. We delivered a record cost savings for the quarter. In fact, we had to go back and look, this is the strongest quarter we’ve had in the last 10 years. So really great execution by our team. Another area I’d highlight is we hit a record case fill rate since the pandemic has begun. And so our team continues to make very good progress, improving our supply chain operations in spite of the ongoing disruptions we’re dealing with. And so I’d say from a business fundamentals perspective, the team has done really good work this quarter.

And then I’d also say, and you saw in our prepared remarks, we’ve had some benefit from some timing shifts. One we call out is cold and flu season. We saw the season start earlier than we anticipated, and we think it’s peaked in our Q2. Typically, you see cold and flu season peak or in the January, February timeframe, which is our Q3, so we think that’s pulled forward into Q2, some of our shipments for cleaning and disinfecting products. We also had a little bit of merchant timing shifts, and that’s pretty typical moving between quarters that it won’t have any impact on the year, but provided some benefit to the quarter. And then lastly, as I said, cost savings, while it was certainly a record quarter, and we’re on track for the full year to have a very strong year.

The team was able to pull forward some of that benefit. And so collectively, the good strong fundamentals of the business plus a little bit of timing benefit were the primary drivers of the really strong performance in the quarter.

Peter Grom : Got it. That’s helpful. And then maybe just a bigger picture question on the gross margin front. And you’ve obviously have made some great strides here past this quarter specifically. Kevin, I would just be curious if you could comment on how we should be really thinking about gross margin progression for the next 18 months or so in the context of what we are seeing today, given the 40% exit rate, just assume that you could have substantial margin expansion on top of the 37% that you are guiding to for this, if we should expect sequential improvement from the 40% into the first half of next year. So just any thoughts on kind of the margin recovery, how we should be kind of thinking about gross margin expansion over the next 18 months or so?