The Clorox Company (NYSE:CLX) Q3 2024 Earnings Call Transcript

The Clorox Company (NYSE:CLX) Q3 2024 Earnings Call Transcript April 30, 2024

The Clorox Company misses on earnings expectations. Reported EPS is $-0.00041 EPS, expectations were $1.33. The Clorox Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, ladies and gentlemen, and welcome to the Clorox Company Third Quarter Fiscal Year 2024 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] 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: Thanks Paul. Good afternoon and thank you for joining us. On the call today with me are Linda Rendle, our Chair CEO, and Kevin Jacobsen, our CFO. I hope everyone has had a chance to review our earnings release and prepared remarks, both of these 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 2024 outlook. These statements are based on management’s current expectations, but may differ from actual results or outcomes. In addition, we may refer to 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 reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures. Now I’ll turn it over to Linda.

Linda Rendle : Thank you for joining us today. During the third quarter, we continued to progress our recovery from the August cyber-attack while advancing our Ignite strategy to build a stronger, more resilient company. For the most part, our progress in the third quarter was in-line with our expectations. Sales came in lower, as a few businesses experienced slower supply recovery than we planned. Gross margin came in higher, benefiting from our margin transformation program and a [modernized environment] (ph). Despite lower sales and strong investments in our brands, we finished the quarter ahead of our expectations on adjusted earnings per share. Before we turn to questions, I think stepping back and putting these results in context is important.

Given the magnitude of disruption from the cyber-attack, we knew our plans to restore the fundamentals of our business would be complex, and a recovery path would not be linear. We have made tremendous progress and are laser-focused on finishing the job. We tracked well ahead of our expectations in the second quarter and knew we had more work to do as we entered the back half of the year to return our business to the strong trajectory it was on at the start of fiscal year 2024. This included fully rebuilding inventories, restoring normalized service levels, and rebuilding commercial plans for each of our businesses, which we accomplished by the end of the third quarter. These actions unlock our ability to fully restore lost distribution due to the cyber-attack and return to normalized merchandising levels as planned in the fourth quarter.

Through Q3, we have regained nearly 90% of the market share we lost and expect to make further progress in Q4. With service levels now normalized and strong investment levels behind our brands, we’re confident we can rebuild household penetration and return to volume growth over time. Despite the significant disruption and lost sales we’ve experienced and based on our team’s strong work, we are now positioned to exceed our original gross margin target and meet or exceed our adjusted EPS guidance we provided at the beginning of the year before the cyber-attack. Importantly, our recovery progress to date puts us in a good position to exit fiscal 2024 with strong fundamentals. In addition, we continue to execute well against our IGNITE strategic priorities throughout our recovery.

We made substantial progress rebuilding gross margins, continuing to target returning to pre-pandemic levels over time. We launched innovation invested in our brands and capabilities, progressed our streamlined operating model and digital transformation, and completed the divestiture of our Argentina business, which supports our goal of evolving our portfolio to deliver more consistent and profitable growth. In closing, we’re taking the right steps to navigate the near-term and continuing to advance our IGNITE strategy. I’m confident we have the right investments and plans to deliver against our strategic and financial objectives and enhance long-term shareholder value. With that, Kevin and I will take your questions.

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Q&A Session

Operator: Thank you, Ms. Linda. [Operator Instructions] And our first question comes from Peter Grom of UBS. Your line is open.

Peter Grom: Thank you, operator, and good afternoon, everyone. Hope you’re doing well. I was hoping to get some more color on kind of the implied 4Q organic sales growth and how this informs you on kind of the path forward here. I know this was always the case, but it seems like you’re expecting to kind of close some of these distribution gaps of 4Q, more or less implying that you’re going to overship versus consumption. But when you kind of look at the implied 4Q guide and to kind of where you need to be to land at the low end — of low single digits for the year, doesn’t really imply a ton of growth considering this dynamic. So maybe first, am I thinking about that right? And if so, how does this exit rate inform your view on the growth looking out to next year just in the context of the long-term algorithm of 3% to 5%? Thanks.

Linda Rendle: Thanks, 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 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. shelf 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.

Kevin Jacobsen: Hey, Peter. You know, 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% 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 increased 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.

Peter Grom: Awesome. Thanks so much for that. And Kevin, maybe just one follow-up or more of a piece of clarification. In the prepared remarks, you mentioned kind of building on the 43% gross margin exiting the year. Is that a broad-based comment, or are you talking specifically on building relative to the 4Q exit rate?

Kevin Jacobsen: Yeah, I think there’s a few things. You saw where we landed, Peter, in Q3, a little over 42%. We think we’ll be closer to 43% when we exit. You know, 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. You know, over the full year, we’re probably up around 42%. And I expect a bill on that next year.

Peter Grom: Thanks so much. I’ll pass it on.

Kevin Jacobsen: Thanks, Peter.

Operator: Our next question comes from Andrea Teixeira of JP Morgan. Your line is open.

Andrea Teixeira: Thank you, everyone, and good afternoon there. Linda, you mentioned in the prepared remarks few areas of the portfolio that experienced slower supply recovered than planned, that impacted the third quarter. And I understand the 10% that you mentioned that still is below the service levels. But relative to your 2% organic growth, how much was out-channel consumption given also comments in that same report that you experienced consumption losses? So can you elaborate more on which areas you were still below in share and what gives you confidence that the consumers you lost during that period within your consumption patterns would come back. And then Kevin, a clarification on what you just said about building margins into 2025 — the fiscal 2025.

How do you see rising prices in other commodities? Are you embedding these two inflationary commodities and how would you expect to offset that? Is that mostly on the savings? They IGNITE, how we should be thinking as we move forward.

Linda Rendle: 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 in 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 their portfolio. And that was Glad, and we called out Litter as well. And those continued 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 it will 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 turnarounds. 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, that’s 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’re 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 in distribution, very confident in the merchandising, and now we’re just watching as the consumer comes back to a fully-stocked 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 in restoring the fundamentals and very good that we’re beginning to see the consumer come back that we lost during that time.

Kevin Jacobsen: Andrea, your question on ‘25 and gross margin, you know, 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] (ph) 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 a deflationary 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.

Andrea Teixeira: Yeah, thank you. That’s super helpful. In Argentina, what is the impact of removing Argentina as a tailwind?

Kevin Jacobsen: Yeah, 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.

Andrea Teixeira: Okay, very good. Thank you very much, I will pass it on.

Kevin Jacobsen: Yeah, thank you.

Operator: Our next question comes from Chris Carey of Wells Fargo. Your line is open.

Christopher Carey: Hi, everyone.

Linda Rendle: Hi, Chris.

Christopher Carey: I wanted to ask about sales delivery in the quarter excluding international. So in the prepared remarks, you spoke about increased competitive activity as you were trying to get back on shelf. Price mix was negative in your key division in the quarter. And I’m trying to marry that with, I think you had sounded quite good recently on the logistical dynamic of getting back on shelf in the quarter. And so I guess I’m trying to put maybe altogether the why behind sales coming in a bit below your expectations and whether competitors are perhaps a bit firmer on shelf and share gains than you had expected, and you need to increase competitive spending, whether that’s in price mix? And obviously, you called out some trade promo in your gross margins this quarter, to get back on shelf and whether you think to your comment to the prior question, you may need to actually accelerate that spending over the next several quarters if this shelf-uplift is not exactly how you expect.

So you can tell, I’m trying to wrestle between not just that sales came in below the expectation, but the why and some of the actions that you seem to be taking to try and rectify the situation.