The Clorox Company

Good day, ladies and gentlemen, and welcome to the Clorox Company fourth quarter and fiscal year 2020 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. If you'd like to ask a question, you may press star 1 on your touchtone pad at any time. If anyone should require assistance during the conference, please press the star 0 on your touchtone pad at any time. As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Ms. Lisa Burin, Vice President of Investor Relations for the Clorox Company. Ms. Burin, you may begin your conference.

Thanks, Hillary. Welcome, everyone, and thank you for joining us today. We hope you and your family are safe and well. On the call with me today are Ben Odor, our Chair and CEO, Kevin Jacobson, our CFO, and Linda Rendell, our President and CEO-elect. Before we go through our Q4 and full-year results, I'd like to turn it over to Benno to say a few words about the leadership changes announced today. Benno?

Thank you, Lisa, and hello, everyone. You've likely seen this morning's announcement about my decision to step down from my role as CEO, with our current president, Linda Rendell, being named my successor effective September 14. I will continue to serve as executive chair of the board. It has been my great privilege to carry forward the legacy of generations of strong Clorox leaders in my pursuit of good growth. growth that is profitable, sustainable, and responsible. The idea of good growth was created based on the very strong belief that companies can deliver great results the right way, and that serving employees, communities, and the planet as a whole is as important as serving shareholders, and that how we generate profit matters. I am proud that, as a company, we have always been strategy-led and committed to our values. both of which have guided us successfully in making the right choices on behalf of our shareholders and all of our stakeholders. After 15 terrific years at the company, I am particularly grateful for my teams of 8,800 strong and especially for the current executive team. I have great confidence in them. I also want to thank the board of directors for their support of a guy who ventured out of a small town in the German Black Forest 35 years ago to pursue a dream that led me to places and allowed me to do things I could not have possibly imagined. My thanks also go out to everyone in the investment community around the world for your support, helpful perspective, and of course, your candor, which I look forward to momentarily. I appreciate all of you, and I particularly appreciate the wonderful friendships that I've been able to make along the way. On September 14, I could not be more pleased to hand over the reins to Linda, and I look forward to supporting her and her team. I've worked with Linda for 13 of her 17 years with the company. She's an exceptional leader with an outstanding track record, the right leader for this great company, and I cannot wait for all of you to be able to see what she can do. Linda is joining us today and will participate in Q&A and also say a few words toward the end of the call. Thank you. It's been an honor and a privilege. And with that, I'll turn it back over to Lisa.

Thanks, Benno. I've really enjoyed working with you since I started at Clorox on the GLAAD business more than 15 years ago, and I look forward to working closely with Linda as well. A few reminders before we go into results. We're broadcasting this call over the Internet, and a replay of the call will be available for seven days at our website, thecloroxcompany.com. Today's discussion contains forward-looking statements including statements related to the expected or potential impact of COVID-19. These statements are based on management's current expectation 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 in the non-GAAP financial information section including the table that reconciled non-GAAP financial measures to the most directly comparable GAAP measures, both of which are located at the end of today's earnings release, which has also been posted on our website and filed with the SEC. Turning to today's discussion of our results, I'll start by covering our top-line commentary as usual, with highlights in each of our segments. Kevin will then address our financial results as well as outlook for the fiscal year 2021. Finally, Benno will offer his perspective and will close with Q&A. For the total company, Q4 sales increased 22%, reflecting double-digit growth in all four reportable segments. Full year sales were up 8%. I'll now go through our results by segment. As you may have seen in our press release, we've made some changes to our reportable segments, with a newly formed health and wellness segment replacing our cleaning segment, and the realignment of several business units. In our health and wellness segment, Q4 sales were up 33% for the quarter, and full-year sales grew 14%. Cleaning, which merges home care and laundry, is our largest business unit in the company, representing about 30% of total company sales in FY20. The business had another quarter of double-digit sales growth behind continued elevated demand across the portfolio. While we've been able to add significant capacity, demand still far exceeds supply, leading to continued out-of-stocks for many products. This, coupled with our focus on assortment simplification to increase output and our prioritization of healthcare facilities, is impacting our market share and distribution points, especially in tract channels. We expect to improve our share of assortment over time as we expand production. On a full year basis, cleaning sales also grew by double digits behind a very strong back half performance. Our data continues to show that the majority of sales increase we've seen since March has been from new users, leading to an unprecedented growth in household penetration for the Clorox brand. We're excited to continue to drive our categories and maintain momentum by increasing our investments in brand building and innovation. However, our most urgent priority remains to continue aggressively expanding our production capacity to meet consumer demand, which we anticipate will remain elevated for some time. These investments support our Ignite strategy to strengthen our core and continue to leverage the health and wellness megatrend at a time when our brands are more relevant than ever. Our professional products business, making up about 7% of total company sales in FY20, also has double-digit sales growth for NQ4, supported by strong shipments across all of our disinfecting platforms. Full-year sales also grew by double digits, fueled by an exceptional performance in the back half. As a reminder, the main source of revenue for our professional products comes from providing commercial cleaning and disinfecting solutions to both the healthcare and janitorial channels. Our broad range of solutions include platforms such as the Clorox Total 360 system, which uses an electrostatic technology to deliver disinfectants to large, hard-to-reach areas, as well as Clorox germicidal bleach, Clorox hydrogen peroxide disinfecting cleaners, and Clorox disinfecting wipes. We believe our brand has broader reach beyond the channels we're in today. and that this business will continue to have significant growth opportunities. We're proud that our products can help support public health, and we're excited about the recent strategic partnerships we've established with Uber Technologies, United Airlines, AMC Theaters, and Cleveland Clinic. Lastly, within the health and wellness segment, our vitamins, minerals, and supplements business combines Renew Life and Neutronex, representing about 4% of the total company sales in FY20. Sales in our VMS business decreased by double digits this quarter. There were two main drivers for the decline. First, our Neutronex brands continued to experience a supply disruption related to COVID-19 in a third-party fulfillment center that prevented us from meeting what has been a healthy demand. We're currently transitioning to a new provider and expect the situation to be fully resolved in the fall. Second, renew life-based ongoing category and competitive challenges. Looking forward, our full brand relaunch remains on track for FY21, and we're continuing to work on partnering with retailers to reinvigorate the category. Full year sales for the VMS business also declined double digits due to similar drivers as in Q4. Turning to the household segment, Q4 sales were up 17%, reflecting growth across all three businesses, and full-year sales grew 1%. GLAAD sales were up by double digits in Q4, behind strong demands for our products as consumers continue to stay at home. We're also pleased to see share growth in our GLAAD trash bag segment, driven mainly by strong innovation. We launched a new experiential GLAAD 4 Flex Trash Bags, featuring unique fragrances and colors in Q3, and early reception has been positive. For the full year, GLAAD sales grew slightly, reflecting sequential improvement throughout the year, ending with a very strong Q4. We're focused on building on this momentum and investing further behind our differentiated platform with more innovation plans for FY21. Grilling sales grew by double digits in Q4, fueled by strong consumption, both due to increased grilling occasion among existing users, as well as new users entering the category. We're also pleased to see share and household penetration growth this quarter, supported by our new Kingsford strategy. Collaboration with our retail partners has been strong, and growth this quarter was broad-based. Our Q4 performance was especially notable because it was delivered without aggressive holiday price discounting during the peak grilling season. The Kingsford Pellet innovation continues to build distribution and share, and we're excited to lean in further to invest in long-term, profitable category growth. For the full year, we saw solid sales growth as our efforts to turn around the business started to bear fruit and consumption increased strongly in the back half. Cat litter sales grew in Q4, driven by innovation and strong online shipments, partially offset by lower consumption in traditional channels, following consumer pantry loading that we saw last quarter. For the full year, litter sales grew behind strong back half performance, partially offset by a more challenging front half performance, as we lapped the initial pipeline shipments of fresh step clean paws. Clean paws continue to perform very well, with strong growth in its third year after launch, and we'll keep investing in this innovation platform in FY21. We're also encouraged by the strong start of Fresh Step Gain Original Scented Litter with Aparo Febreze, which just launched in June. In our lifestyle segment, sales grew 16%, and full-year sales grew 10%. Rooted sales were up by double digits in Q4, behind continued elevated consumption of our water filtration systems and filters. This unprecedented level of demand started in Q3 and continued in Q4, resulting in out of stocks that impacted our share this quarter. Full-year sales also grew by double digits, reflecting healthy momentum in the first half and heightened consumption in the back half. We're encouraged by the fact that the majority of recent sales have come from new households, just like what we've been seeing in many of our other categories. Our priorities going forward will be to increase supply, convert these new users to loyal consumers, and continue to support our brand with a focused message around Brita's value proposition during this recession. The food business saw double-digit sales growth in Q4, mainly behind very strong consumption of Hidden Valley Ranch bottled dressings. benefiting from more at-home eating occasions. The brand grew share for the 22nd consecutive quarter and increased household penetration. Full-year sales increased behind solid growth in the first half and elevated consumption in the back half. We'll continue to invest to drive brand awareness and trial behind our innovation and capitalize on this momentum as consumers are eating at home over an extended period of time, especially during the recession. Burt's Bees sales were down by double digits this quarter, as overall category consumption was negatively impacted by ongoing store closures and stay-at-home measures. Regardless of the decline in Q4, this business had solid sales growth for the full year, reflecting strong growth behind innovation and enhanced leadership in lip balm. In lip care, Burt's Bees grew share for the 22nd consecutive quarter, and widen its market leadership status as the number one overall lip balm in the U.S. While we expect the category-wide challenges to persist in the short term, consumer preferences for natural products, and more specifically Burt's Bees, remain unchanged, and we're confident in the brand's long-term growth trajectory. Our FY21 plan includes a robust innovation lineup, including a new squeezy lip color line that launched in July, and CBD personal care products launching in the fall. Lastly, turning to international. Due for sales grew 12%, mainly driven by continued elevated demand for our cleaning and disinfecting products, as well as essential household products. Sales were also impacted by unfavorable foreign currency headwinds of about 12%, partially offset by the benefits of pricing that was implemented before the onset of the pandemic. for the full year, sales were up 5%, reflecting about 10 points of unfavorable foreign currency exchange rates. Additionally, it's worth noting that profit for international was down this quarter due to costs associated with the product recall improve. Like other businesses where there have been increases in household penetration during this period, we'll be focused on converting those new households into loyal consumers. We're also continuing to explore international opportunities, and today announced the acquisition of a majority stake in our long-standing joint venture in the Kingdom of Saudi Arabia. In its long 50-year history, this business has offered consumers in the Gulf region a range of cleaning and disinfecting products. During that time, it has shown not only steady growth, but also strong profitability. Consistent with our Ignite strategy goal, This acquisition will help drive long-term profitable growth in our international segment. Now, I'll turn it over to Kevin, who will discuss our Q4 and full-year financial performance for FY20, as well as our outlook for FY21.

Thank you, Lisa, and thank you, everyone, for joining us today. We hope you and your families are well. I'm proud of our very strong performance in Q4 and our overall results for Fiscal Year 2020. As we continue to navigate the global pandemic, our team has been unwavering in our efforts to maximize supply of disinfectants and other essential products needed by healthcare workers, consumers, and our communities. In the fourth quarter, COVID-19 continued to have a significant impact on our results. In addition to double-digit sales growth in all four of our reportable segments, we delivered our seventh consecutive quarter of gross margin expansion and another quarter of strong cash flow. all of which contributed to strong fiscal year 20 performance. As you saw in our press release, we're providing a financial outlook today because despite the increased challenge of anticipating how the full year will play out, we believe that in this period of heightened uncertainty, it's important to provide investors with as much transparency and perspective as possible. That said, we anticipate a higher level of variability than what you might normally expect as the results will be heavily influenced by the depth and the duration of the ongoing health crisis. I'll comment more on our outlook shortly. Turning to our fourth quarter results, fourth quarter sales were up 22%, driven by 21 points of volume growth and three points of favorable price mix, partially offset by two points of FX headwinds. Gross margin for the quarter increased 170 basis points to 46.8%, compared to 45.1% for the year-ago quarter. Fourth quarter gross margin included the benefits of higher volume, as well as 170 basis points from cost savings and 120 basis points from favorable mix. These factors were partially offset by higher manufacturing and logistics costs, which included temporary spending related to increasing our production capacity and expediting transportation of our products. Fourth quarter gross margin also reflected ongoing cost favorability in commodities, more than offset by the impact from foreign currency headwinds. Selling and administrative expenses as a percentage of sales came in at 14.1%, compared to 13.3% in the year-ago quarter. This higher rate primarily reflects increased year-over-year incentive compensation consistent with our pay-for-performance philosophy. Advertising and sales promotion investment levels as a percentage of sales came in at about 11%, about half a point higher than the year-ago quarter. We're spending for our U.S. retail business, coming in at about 12% of sales for the second consecutive quarter. For additional perspective, we invested $70 million more in the back half of fiscal year 20 compared to the same period in fiscal year 19, reflecting aggressive investments consistent with our ambition to accelerate long-term profitable growth. Our fourth quarter effective tax rate was about 22%, compared to about 17% in the year-ago quarter due to lapping tax benefits in the year-ago period. And out of all these factors, we delivered diluted net earnings per share of $2.41 versus $1.88 in the year-ago quarter, an increase of 28%. Commenting briefly on our fiscal year results, I'm pleased with the progress we made in our core business prior to the impact of COVID-19, plus our team's dedication to responding to unprecedented demand, resulting in very strong results for fiscal year 20. We delivered sales growth of 8%, and on an organic basis, grew sales 10%. Gross margin expansion of 170 basis points versus fiscal year 19, supported by strong volume growth and another year of robust cost savings. These factors enabled us to close out the overall fiscal year, delivering diluted EPS of $7.36. an increase of 16%. As you saw in our press release, fiscal year 20 net cash provided by operations was $1.5 billion versus $992 million in fiscal year 19, an increase of 56%. Our accelerating cash flow and strong balance sheet give us the flexibility to continue investing behind long-term growth opportunities. Now I'll provide more perspective on our outlook. starting with our key assumptions for fiscal year 21. First, we expect the impact of COVID-19 to be with us for the bulk of fiscal year 21, resulting in our expectation for ongoing elevated global demand for our cleaning and disinfecting products, particularly through the first half of our fiscal year. Next, we expect the U.S., in many parts of the world, to face an ongoing recession that will reduce consumers' disposable spending and increase the importance of providing superior consumer value. And we plan to aggressively invest behind the momentum we're seeing in our global portfolio, including increasing production capacity to address ongoing elevated demand for our products. Our outlook also assumes minimal disruption through our extended supply chain over the course of the fiscal year. And finally, we are assuming about a 40% devaluation of the Argentine peso, which is materially less than the potential devaluation if the currency moves to the country's parallel rate. For our fiscal year sales outlook, we expect fiscal year sales to be flat to up low single digits, reflecting our expectation for continued elevated demand through the first half of the fiscal year and a deceleration in the back half as we lap the initial spike in demand from COVID-19. As you saw in our press release, we have acquired a majority stake in our Saudi Arabia joint venture, which we anticipate will contribute about one point of growth to our fiscal year 21 sales. We expect this to be offset by about one point of foreign exchange headwinds, primarily in Argentina. On an organic sales basis, our outlook assumes flat to low single-digit growth. For additional perspective on our fiscal year sales expectations, we anticipate strong growth in the front half of the fiscal year, including double-digit increases in Q1. although decelerating from the 19% sales growth we delivered in the back half of fiscal year 20. In the back half of fiscal year 21, while we expect strong performance relative to our pre-pandemic sales levels, we expect sales to decline as we left the initial impact from COVID-19 in the year-ago period. We expect fiscal year selling administrative expenses to come in at about 14% of sales as we continue to invest aggressively in long-term growth initiatives. Additionally, we are increasing investments in our brands to address this unprecedented demand for our products from existing and new consumers, with plans to increase advertising spending to about 11% of sales, to build loyalty with the many new consumers entering our categories for the first time, in addition to continuing to deliver superior consumer value, which is more critical than ever as we navigate the global recession. As I mentioned, we will continue to invest in expanding our production capacities. to address our expectation for ongoing elevated demand for our products and support new longer-term growth opportunities. In the near term, we will continue to expand our use of third-party manufacturers to increase our production capacity. While this comes at a higher cost, we believe it's an important action to take while our internal expansion efforts come online. We expect our fiscal year tax rate to be in the range of 22% to 23%, closer to our long-term tax rate assumption. None of these factors respect fiscal year 21 diluted EPS to be down mid-single digits to up mid-single digits. Our fiscal year diluted EPS outlook includes an estimated contribution of 45 to 53 cents from our increased stake in our Saudi Arabia joint venture, primarily driven by a one-time non-cash gain associated with a fair market value adjustment to our previously held stake in the joint venture. This one-time gain is projected to be recognized in Q1, and on a full-year basis, offset by our expectations for a high tax rate and foreign currency headwinds for the company. Before I turn it over to Benno, I'd like to reiterate how proud I am of the Clorox team for delivering strong performance in fiscal year 20 and the role we are playing to help fight this global pandemic. Our disinfecting products continue to support public health, and other essential products continue to make a difference in the day-to-day lives of people as they spend more time at home. Consumer interest in our categories has never been higher, and our robust fiscal year sales results provide a strong foundation for ongoing momentum. We certainly plan to build on that by aggressively investing in our Ignite strategy to drive long-term shareholder value. And finally, I also want to say how much I've enjoyed working with Benno over the years, and I'm also looking forward to Clorox's next chapter with Linda, who will be a strong CEO for the company. And with that, I'll turn it over to Benno. Thanks, Kevin.

Here are my three key messages for our Q4 and fiscal year 20 results. First, I continue to be proud of our people's leadership and commitment to serving public health and supporting our consumers and communities during this global health crisis. The dedication has led to outstanding Q4 results, contributing to very strong performance in fiscal year 20. I'm pleased we delivered fiscal year 2020 sales growth of 8%, reflecting growth in all reportable segments. organic sales were up 2%, our highest organic sales growth on record. We also delivered totally company gross margin expansion, reflecting gross margin increases in all four segments for the fiscal year, supported by the strength of our volume results and robust cost savings. And even with significant advertising investments, we were able to expand fiscal year EBIT margin by 110 basis points. and we delivered a 16% increase in diluted earnings per share for fiscal year 20. While our financials for the quarter and full year were very strong, there's one area of ongoing focus for us, keeping up with continued elevated demand. We take very seriously the important role we play in this pandemic, and customers are counting on all our products. Frankly, we thought we would be in a better position by now, but demand in Q4 exceeded our expectations. We're certainly not at all happy with our service levels for our retail customers on many products, as demand for our products exceeded our own expectations in the face of this persistent pandemic. We have a high sense of urgency on this, with all hands on deck. We're accessing third-party supply sources and focusing our manufacturing on those products that can be supplied more quickly. And we are ahead of plan on this. Since Q3, we were able to bring on more than 10 new suppliers to help us maximize our output, not just for disinfecting products, but for other parts of our portfolio too. For disinfecting products, we're continuing to run our plans 24-7, and we'll be bringing more disinfecting capacity online in the midterm. With all the levers we're pulling to expand output, I am confident in our ability to do better for our customers and consumers. Before I go on to my next message, I'd like to say again how much I value the commitment of Clorox people and their contributions to our Q4 and fiscal year results. Our team of 8,800 strong continues to step up every day to contribute to our efforts of supporting our consumers, customers, and communities. My second message is this. The fundamentals of our business are strong. given the progress on our core business, which contributed to our overall fiscal year 20 results and gives us momentum for fiscal year 21. I feel good about the fundamentals of our business and the continued progress on our core. In fiscal year 20, incremental sales from innovation exceeded the company's historical average. As you've heard from Lisa, we introduced a number of exciting products in fiscal year 20 and continue to see growth from big innovation platforms. Our relentless focus on delivering superior consumer value through market-leading innovation continues to differentiate our products and brands. And I'm proud that in fiscal year 20, the percentage of our U.S. portfolio seen by consumers as delivering superior value has risen to an all-time high, positioning our brands well in this recession. In Q4, we also had more than 90% of our U.S. portfolio at growing or stable household penetration, the strongest results we've achieved to date. I'm also pleased that total company market share and track channels grew. And our market shares in the fast-growing e-commerce channel continue to grow as well, supported by increase in digital advertising. After fiscal year 20, our sales in the e-commerce channel now represent about 12% of total company sales compared to 8% in fiscal year 2090 and well ahead of our plan. Results like these demonstrate we made the right choice to lean into advertising investments in fiscal year 20, including spending about $70 million more in the back half of the fiscal year compared to the same period in fiscal year 19. Importantly, our progress against business fundamentals is setting us up well for fiscal year 21, and I feel confident about our ability to continue driving long-term momentum. And this leads me to my last message. We remain committed to building on this momentum for our global portfolio through strong investments to further strengthen our competitive position, grow our categories, and deliver long-term shareholder value guided by our Ignite strategy. Clearly, these are extraordinary times, so it's hard to anticipate what will happen even in the near-term future. We continue to believe COVID-19 will have lasting impacts on global consumer behavior and trends, including how consumers engage in our categories and with our brands, leading to meaningful long-term growth potential for our company. And as people continue to navigate what looks to be a significant recession, we anticipate that pressures related to unemployment and discretionary spending will spotlight the need to focus on value. We also anticipate they will keep turning to trusted brands to help them and their families stay safe, as well as to support their health and wellness and day-to-day needs. As Kevin noted, our fiscal year 21 earnings outlook reflects this significant volatility and uncertainty and also deliberate and aggressive investments behind our global portfolio and longer-term growth initiatives. During these uncertain times, we plan to play offense to grow sales in fiscal year 21 off of an elevated fiscal year 20 base. And we plan to continue investing in long-term value creation with a focus on our ambition to accelerate sales growth beyond the fiscal year. Here's what you can expect in fiscal year 21. We will plan to increase advertising to about 11% of sales. We will invest in innovating experiences behind brand purpose, frictionless shopping, and sticky product innovation, including our strong innovation pipeline in fiscal year 21. We will increase capital spending to expand production capacities so that, together with our customers, we can better meet consumer demand, particularly for disinfecting products, but also so that we can begin to fully take advantage of the opportunity to support public health out of home. As you've likely seen, we've started collaborating with leading brands like Uber Technologies, United Airlines, and AMC theaters to support their efforts to keep their customers safe. And we recently announced our partnership with Cleveland Clinic, which brings together our respective capabilities and expertise to support public health as we all continue to face COVID-19. As a people-centered company, everything we do through our Ignite strategy continues to be in service of delivering superior value because now and longer term, We know it's the key to keep winning with consumers. And of course, we'll continue to focus on growing our business the right way, committed to our values, with ESG integrated in our business, so that we're also creating value for all of our stakeholders. We're proud that last week's Axios Harris Poll 100, a survey of about 35,000 Americans, ranked the Clorox company number one for corporate reputation in the U.S., based on seven dimensions, trust, vision, growth, products, culture, ethics, and citizenship. Now and in the future, Clorox will remain focused on good growth, growth that's profitable, responsible, and sustainable. And with that, let me turn it over to Linda.

Thanks, Benno, and hello to everyone on the call today. First, let me start off by saying just how excited I am to be Clorox's next CEO. After 17 years with the company, what makes me most proud about taking the reins from Benno is that Clorox is truly a special company. We have iconic brands people love and a wonderful, values-led team that takes to heart our role in making people's lives better. Second, I'm optimistic about the company's future and look forward to working with the executive team to accelerate growth. This is a pivotal time for the company, and there's no better time to be CEO at Clorox. What's become even clearer during this pandemic is that we're a health and wellness company at heart. Whether through our disinfecting products that support public health, our vitamins, minerals, and supplements that enhance wellness, or other essential products that people count on for their families and homes, I firmly believe that our global portfolio of trusted brands is in a strong position to address the shifting consumer mindsets and behaviors related to health and well-being. What's also clear is that we have a big opportunity to build on our momentum from fiscal year 20 for long-term value creation. And we're investing behind this momentum to support our ambition to accelerate profitable growth in fiscal year 21 and beyond. And finally, before we begin Q&A, I want to take the opportunity to thank Benno for his just terrific leadership as CEO. Under Benno's guidance, Clorox more than doubled total shareholder return, By putting innovation front and center, recognizing its critical role in differentiating our products and brands to deliver superior consumer value. By investing in digital consumer engagement as a means to interact with people on their terms and through more personal experiences. And by taking ESG to the next level, challenging each of us to demonstrate its value to our business and society. Benno talked earlier about our commitment to good growth, growth that's profitable and responsible, and sustainable. What he didn't say is that he was the one who introduced this. It captures most simply what we're all about. Profitable growth achieved the right way for our consumers, our shareholders, and society. I've been very fortunate to work closely with Benno over the years. He's been a great mentor, and I look forward to continuing to partner with him to drive the business when I step into my role as CEO. Operator, you may now open it up for questions.

Thank you. Ladies and gentlemen, if you have a question, please press star one on your touch-tone telephone. Our first question comes from Andrea.

Hillary, are you still there? Yes, I'm here. Can you hear me? I see a list on the Q&A.

Yes, I'm here. Can you hear me? Yes, I'm here. Can you hear me?

Operator?

Can you hear me?

I think there may be a technical problem, so give us a couple of seconds, those that are waiting in line for questions. I apologize.

Yes, I'm here. Can you hear me? Lisa, can you hear me?

Just in case this is not going to get resolved quickly, you can also send me your questions. This is Lisa again. All of you have my email and my text as well. We can also handle it that way. Operator, are you still online?

Yes, I am, Lisa. Can you hear me? Lisa, can you hear me?

Yes, we can hear you now. Somehow the volume got turned down. But anyway, let's go straight to questions.

My apologies. Your first question does come from the line of Andrea Teixeira of JP Morgan.

Thank you. And Linda, congratulations on your promotion. And Benno, thank you for the great leadership all these years and for dedicating significant time from your business agenda with our investment community over the years. So it's good to see that you likely have more time to dedicate to strategic topics going forward. So I wanted to, if you can, talk about a bit with those agreements and you or Lisa or Linda with the 10 new production partners on board and also the partnership with the Cleveland Clinic and the business partners like Uber, United, and AMC Theaters. So I was hoping you can cite this opportunity I understand it's now about 7% of your sales, but I remember being like just about 6% in the prior fiscal year. So if you can give us kind of an idea how you can continue to outpace this growth with this bottlenecking capacity and how we could be thinking of the B2B against the B2C going forward, that would be great. Thank you again, and congrats to both.

Thanks, Andrea. I'll get us started here. So as Benno mentioned earlier, we're very serious about the role that we play in public health. And as we look at our cleaning and disinfecting portfolio, we see opportunity broadly in the U.S. and international across several spaces. And I'll outline, you know, high level what those are. The first is continuing to delight people with products in the retail space. We know that we are not able to meet the demand, and that is priority number one, is getting as much supply as we possibly can into the retail space. to ensure that consumers have products they need during this time. The same is true in our traditional professional business, which you highlighted is about 7% of sales in fiscal year 20 and has been a high single-digit grower for us over a number of years. So we're working on supply in both of those. But the opportunity that you highlighted is one that we're aggressively pursuing, and that is the merger of those two areas. As people reenter public life, they're looking to be reassured that the spaces they enter are clean and disinfected. And what they would be reassured by is a trusted brand, like the brand Clorox, to ensure that that space is clean. They have that reassurance in their mind. And what we're helping businesses do is welcome people back, whether they would be their employees or their guests. And by using and partnering with Clorox's protocols and brands, they can offer their guests that reassurance that a space is safe. That's how we're thinking about that broader, what we're calling out-of-home opportunity. We staffed a dedicated team to go after these partnerships and have resulted in things like you highlighted with United Airlines, Cleveland Clinic, AMC Theaters, and Uber Technologies. What will be really important for us moving forward, though, is getting supply. So these are initial stages of agreements, and what we're looking for is increased supply before we continue to expand the test markets that we have today, but we're seeing very good consumer and business response in the initial days. And if you think about B2C and B2B in total, I think the thing for us to consider is those lines will continue to blur as we move forward, and that's what we are really well-suited to do with all of our technologies and capabilities.

No, that's great. And can you also like the capacity growth? I think you exit the last quarter with growing like 20%. As you develop your capacity, how are you tracking now as you exit the quarter?

Yes, our plan is on pace to increase supply versus what we committed in Q4. But what Benno highlighted is the key. The demand that we're seeing is significantly higher than we had expected in Q4, and we expect that demand to remain elevated as we head into fiscal year 21. Our increase that we were able to deliver and supply did support strong double-digit growth in our cleaning businesses. But to be clear, we're not satisfied with our service levels right now, and we have the absolute highest urgency to improve. Some of the things we're pleased to see, though, and give us confidence as we move into the fiscal year 21 is that our supply chain remains very stable. So we have had very few COVID-related disruptions. We were able to bring on more than 10 new suppliers, the majority of those in disinfecting, to help us to support the increase in demand. We had anticipated that some businesses would begin to recover quicker. And we have seen that in the case of bleach, where in-stock levels at retail are looking much stronger than they have been, despite the fact that we've been prioritizing healthcare. And, you know, the key message for Takeaway is we're aggressively investing to expand capacity. We're working across the entire supply chain, all the way back into raw materials, up through manufacturing, packaging, and conversion. And we expect sequential improvement in fiscal year 21 in meeting that increase in demand.

That's great. Thank you again, and best of luck. I'll pass it on.

Our next question comes from the line of Wendy Nicholson of Citi.

Hi. Congratulations to both of you. And, Benna, we will miss you. My question had to do with advertising. I'm a little bit surprised that you're increasing it or you're targeting right now sort of a 100 basis point increase For fiscal 21, number one, because I assume as your revenues to those partners grow, that's actually revenue that you don't need to spend advertising behind. And I know that's kind of a rounding error probably in the grand scheme of things, but still, that's a big increase. It would be the highest level of ad spending that we've seen in a long time for you, and it's coming at a time where you're having a hard time meeting demand. So I would buy Clorox twice whether I saw an ad or not. So can you talk a little bit more about the decision to increase ad spending by that magnitude, maybe which businesses you're targeting it to, and whether this is a new, you know, level going forward that we should expect, or if there's something specific in 2021 that's driving that increase? Thanks.

Yeah, thank you, Wendy. You know, what you should take away is that this is an aggressive investment that's is into the momentum that we have in the business. It also signals confidence in our strategy. And of course, as always with our company, it's done with an eye on the long-term. For us, advertising sales promotion is not a quarterly expense. It's a long-term investment in the health of our brands. And while 10% continues to be the level long-term that we're comfortable with, we see a particular opportunity at this time to invest in this pivotal opportunity that we have for our company to accelerate growth. It will go into demand building across all businesses, both in the core as well as in innovation. I mentioned earlier we have a very strong innovation program in spite of the supply challenges right now that we have great confidence in and we have so much opportunity ahead So we feel like this is the right thing to do. It is an investment in the long-term health of the business. And if you look at the fundamental business drivers of our business, as I mentioned them in Q4, with rising market shares, with household penetration growing or stable in north of 90% of our U.S. portfolio, with market shares growing internationally, with further opportunity to build out our international business to serve more consumers in the face of the pandemic, with consumer value perception being at its all-time high, with well north of 50% of our portfolio being seen as superior, all those things are particularly strong indicators of future business momentum. So against all of that, and in particular also with the looming recession, which we think is going to be significant and is perhaps underestimated or somewhat overlooked at this time, in particular here in the U.S., we think this is simply the right thing to do. And it's certainly part of our recession playbook that we've successfully applied once before, about 11 years ago. So we have great confidence in this choice as Americans. part of a long-term growth strategy for our company.

And specifically just first half versus second half, so to those comments specifically, if the economic environment really deteriorates, is there a scenario where you'd say, wow, these marketing dollars would be better spent in price rollbacks or promotional spending? How much of the ad spending itself are you expecting first half versus second half or kind of no different?

Typically, we don't provide quarterly outlook, but it can certainly vary by quarter depending on, for instance, the timing of innovation launches. So you should expect that variation. Based on what we know today, even though you can never say never, right, in this business, but I cannot see us touch advertising sales promotion because, like I said, it's not a tactical thing. expense, it's an investment in long-term growth. So we will remain committed to spending the dollars. And frankly, if the recession gets worse, that's even more of a reason for us to spend in advertising sales promotion, in particular at this time when people are looking at trusted brands to meet their needs. And as you know, we have many of those trusted brands that people rely on, in particular during a recession.

Got it. Thank you so much. And again, best of luck.

Our next question comes from Nick Modi of RBC Capital Markets.

Yeah, good afternoon, everyone. Benno, kudos to you for a remarkable career. And Linda, congrats on your appointment. The question I had was on capacity. And I guess Clorox, like most CPG companies, is in a really tough spot in terms of how do you make a decision on long-term capacity decisions when the category growth profile, you know, two years out is very uncertain. So I guess I'm just asking, like, how are you guys at Clorox, with all of your analytics, are thinking about longer-term category growth and how that's feeding into your decisions on capacity? Now, I'm not just talking about disinfecting, because obviously that's going to remain elevated for a long time, but I'm also talking about charcoal and Hidden Valley Ranch, you know, because clearly at-home food consumption is also elevated at the moment and may continue in the future. Thanks.

Hi, Nick. Thanks for the question. So you're right. We're at a time where it is not a precise science right now to predict what the future is going to hold given what we're facing. But we are putting our analytics hard at work to understand what we think that future will look like. And if you take cleaning and disinfecting, for example, we do strongly believe the category will remain elevated for the mid- to long-term future, and we're building capacity to address that. But how we're taking the approach on this one is to make sure that we build the right mid- to long-term that allows us to have flexibility in whether we in-house or we use co-packers for that production. So right now, as we've said, we've added 10 new suppliers to help us with this incremental production. And over time, if it's appropriate, we can insource that production, which helps us balance quality and cost. and also gets us to the right ratio from an efficiency perspective. So feel really confident about our ability to do that, and that we're making choices that allow us to pivot depending on where this all shakes out.

And Linda, if I could just follow up on that. How long do you think it'll take for Clorox to catch up with your expected level of demand over fiscal 21? I mean, is it going to take three quarters to get to where you want to be, or is it two quarters, any perspective around that?

Yeah, for a good portion of our businesses, Kingsford, Brita, GLAAD, Nutrinex, for example, we feel like we'll be normalized by the end of the calendar where we have a really good supply and demand match. From a cleaning and disinfecting perspective, we do expect this to continue to be a ramp-up over the entire fiscal year, and we'll see sequential improvement throughout the fiscal year, but given the fact that cold and flu sits in the middle of the year, and that we expect the pandemic to be with us for the entirety of the year. It will take the full year to get up to the supply levels that we need to be at.

Great. That was very helpful, and good luck to the both of you.

Thanks, Nick.

Our next question comes from Kevin Grundy of Jefferies.

Hey, thanks. And Benno and Linda, I want to extend my congratulations to the both of you as well. My question pulls together a couple elements from Wendy and Nick's question, but tying it into the longer-term outlook for the company, so beyond fiscal 21 and really looking beyond. So the current outlook is for 2% to 4% core sales growth, but as you look at that target, the low to midpoint certainly seems to be inadequate, given a lot of the dynamics that we've spoken about, increased structural demand in some of these categories, particularly around cleanliness and health and wellness. You're clearly investing a lot in capacity. As Wendy rightly pointed out, the advertising and marketing, if we're tracking this correctly, we haven't seen these sort of levels as a percent of sales since fiscal 2003 for the company. So there's an awful lot of investment, both OpEx and CapEx, going into the business. So it certainly seems and certainly what's reflected in the stock right now is nothing in the 2% to 3% kind of range. So with all of that being said, When will the company be prepared to provide an update to investors? Or to the extent you can comment today, what are you thinking as part of your planning around capacity, around other investments in the P&L? So any commentary there would be helpful. Thank you.

Hey, Kevin. It's Kevin. And I can take that question. And you're right. Look, we have an outlook right now as part of Ignite, which is 2% to 4% growth. But what I think you're hearing from myself, Linda, and Benno today, it is clear our aspiration is to accelerate the profitable growth of this company. And we are leaning in. You know, we have millions of new consumers coming into our categories. We have new growth opportunities, particularly out of home. And we are leaning into these opportunities with the intent to accelerate the performance of the company. It is too early for us to raise our long-term goals. Remember, these goals go out over five years. So it's I would say it's in the early innings of the work we're doing, but that certainly is our intention. And at some point, we'll come back to the investor community and update you on our expectations, but I'd say a little too early for that right now. But trust, what you're hearing from us is our intent to accelerate performance, and we're leaning in to do that.

Okay. Fair enough. Thanks, Kevin. I'll pass it on.

Thanks, Kevin. Our next question comes from Olivia Pong of Bank of America.

Great, thank you. Good afternoon and congrats to Linda and Benno. It's been a pleasure. All the best to you guys and Benno in your next endeavors. We'll miss you. Wanted to talk a little bit about the performance of your categories in recession because obviously you're leaning into quite a bit of spending. And if you could provide a bit more specificity on your expectations by segment because you're looking for obviously a pretty rapid deceleration against the COVID backdrop and You talk about new customers without losing the old, the potential to further expand the professional partnerships, which seems obviously pretty meaningful in this environment. And you seem more amenable to potential international expansion, too, with the Saudi JV, and obviously there's innovation. So, you know, on top of that, still catching up to demand. So if you could just talk through, you know, how drastic maybe the last recession was in some of your categories or what you had to do in terms of promotion or advertising to help us understand the outlook a little bit better, that would be super helpful. Thank you.

I'll start and then Kevin can build on that. So, you know, typically what we see in a recession, if you take the last recession, you see about a 0.2 growth in our categories lower than what you'd see in an average year. And then if you double click, there are a number of categories in a normal recession. And again, right now you have the pandemic, of course, as an additional impact. but you have a number of categories that actually see stronger sales during a recession, and intuitively that makes sense to see businesses like Kingsford as people grill more at home, Brita as people use less bottled water and move to filtered water for its much superior value, Hidden Valley for more at-home eating occasions, those categories have historically performed very well. And we'd expect to continue that. So there will be puts and takes. And again, the difficulty, of course, for this outlook is in the volatility created by recession, but also the pandemic as an outlook. And of course, a fiscal year 21 back half that will lap some pretty formidable numbers. But, you know, what's been part of the outlook recipe last time in 2008-9 was to really focus on investing into the consumer, play offense as we call it, which is our intention now. The playbook includes innovation and we have a strong innovation portfolio in fiscal year 21 and the playbook includes to emphasize consumer value and of course we're going into this recession with a lot of momentum being seen as superior in value on so many of our brands at this point. So we have a strong recession playbook. Our portfolio typically has been recession resilient. And importantly, we have a very experienced team where nine out of 10 BU general managers have been with the business at the time of the last recession. And a very experienced senior management team knowing how to handle this. So we feel like we have an established playbook, and we will certainly continue to invest in the long-term health of the business, and the elevated advertising sales promotion spend is certainly part of that. Kevin, any additional thoughts from you?

Hey, Olivia, maybe just a couple other thoughts as it relates to the recession and how we managed through the last recession about 11 years ago. So as Benno said, our belief is, and what we've seen is our categories tend to be fairly resilient. If you look at our business performance in the last recession, I believe eight of our 10 business units grew sales over that period. And so not only have the categories been resilient, but our brands have also been resilient during that period of time. And what I'd also have you note is, You know, you always have to think about what drove the recession. Back in 2008, 2009, that was a financial crisis. This is a healthcare crisis, so it's very different. We have much more engaged consumers in our categories than we did back in 2008 and 2009. In addition to that, if you look at our CVM, we're at an all-time high with about 59% of our portfolio identified as superior relative to competition, and we've got the highest household penetration, either stable or growing, that we've had in the history of the company. So, You never look forward to recession, but I can tell you, having been through three at Clorox, this is the strongest our portfolio has been going into recession. And then the only other item I'd offer is what may be different about this recession is the government has obviously stepped in, and this is the most support we've ever seen for consumers during this recession right now in terms of unemployment benefits. We'll have to see how that plays out, but if you assume the government is going to continue to actively support consumers through this process, that'll certainly help us as well. And so we'll see how that plays out. But, you know, I feel pretty good about the overall health of our portfolio heading into this recession.

Thanks. That's helpful. And then, Linda, you're obviously taking over arguably with a lot of growth priorities today versus history. So I'm wondering if you could talk more about how you're prioritizing them relative to one another. I'm sure, obviously, the first order of business is increasing the capacity for cleaning and disinfecting, but there's e-commerce, stepping up support for professional, obviously driving the rest of the business as well. So how are you thinking about allocating those investment dollars that you're planning for next year? And then with that JV acquisition, does that in any way signal how open you are to M&A in support of some of the initiatives? Thanks.

Thanks. You hit it on the head. The absolute number one priority is executing with excellence this year and increasing supply to meet the demand. We'll be focused on delivering the plan that we put in place, which we have passion and conviction around. The business fundamentals are strong across categories, but we must do better on supply to meet demand. Second, Ignite for us is the right strategy. I was the lead architect of that, got to lead our team in creating that. And what it has done for us over these last many months is helped us lead through really troubling and volatile times. And what that strategy commits us to is putting people at the center of everything we do, knowing consumers and the people we serve in communities better than anyone, innovating great experiences for them with our products, And that's what we're going to continue to lean into. And we have a team of 8,800 people and an executive team that's passionate and own that strategy and want to accelerate it. And that gets me to my third point. Where we'll place investment is in those Ignite areas that we have passion and conviction around. We're going to lean into our global portfolio and given the strength of it across the board and we will do what we always do is we'll follow the money and where we think the best long-term value creation opportunities exist. Cleaning is certainly one of those areas, and we've talked a lot about the opportunities we have there around the globe. And then last, what I'd leave you with is we're committed to how we work. This pandemic has allowed us to reimagine work quicker than we had ever imagined, moving our people to work from home, keeping our essential workers healthy, and our manufacturing running at full speed. But now what Reimagine Work will turn to is playing offense 100% of the time. That will be our focus. We'll use technology to do that, to make quick decisions and pivot, to put investment where we'll get the highest long-term return. But we feel really confident about those choices. And we've managed a number of categories and brands for years, and we always feel like we are able to put the investment where it's best suited, and we'll do that again this year. And then Naja is a continued focus actually on the core. Excuse me. Saudi Arabia is a continued focus on the core. You know, we've been in that business for 50 years in a joint venture with a family-owned business. It is core to our cleaning business where we serve many countries in the Gulf region. And we have tremendous confidence in the ability for that business to continue strong growth in the future. It's, you know, it's core to health and wellness. We know that consumer has high demand for those products today. We saw double-digit growth in our Saudi business in fiscal year 20, and it's margin accretive to the company. So to us, this isn't a right turn, but this is just a focus on what we talked about in international, which is accelerating profitable growth and leaning into areas that are stable and that we can ensure, you know, have long-term growth runways for us.

Thanks very much. All the best.

Our next question is from Jonathan Sini of Consumer Edge.

Thanks very much for the question, and let me add my congratulations to both Benno and Linda. Thank you. I wanted to follow up on – last quarter you gave us some very, very helpful – breakdowns of household penetration versus repeat. And I guess two questions in there. First, can you tell us, can you give us any more update about how much of your growth this quarter in cleaning particularly has been household, new households, new cleaning behaviors? And then now that we're about, I don't know, a few months into this and you have some new users, any additional data you could give us about repeat, particularly among new users, new cleaning behavior, people buying more wipes, you know, are these people coming back to the store for a second, third, at what rate? Thank you.

Yeah, thanks, Jonathan. You know, double-digit growth in Q4 in all four segments. and certainly seeing elevated consumer demand across the majority of our categories. Your consumer fundamentals, as we've noted and as you've picked up on, are very strong and certainly fueled by the incremental $70 million that we put in in advertising sales promotion in the back half of last fiscal year. But I would say in the vast majority of categories, if you double-click, on the consumer behavior leading to such strong growth. It's very, very strong. You know, what we're seeing is more usage occasions in many categories caused by the pandemic, of course, but also by people staying at home. And we're seeing household penetration increases in most of our categories, and that's really been the major growth driver here. And then we're also seeing, which is very encouraging, a higher purchase frequency in several categories specifically. indicating that it's more people using our product more than they ever have. We see very, very little stock up. The exception maybe is Burt's Bees, where store closings and lower food traffic in beauty care, but also less usage in some categories like facial towelettes and color cosmetics, which makes sense as people stay home, has led to pressure on sales. And litter, where we're seeing a category-wide trough from initial pantry loading. But more broadly, this is all fundamentally healthy growth with higher household penetration and higher purchase frequencies. I want to maybe point out Kingsford as an example, beyond cleaning and disinfecting, where it's quite obvious, I think, that we're seeing particularly strong household penetration increases but also strong increases in usage frequency. Kingsford, for the first time in a while, is going household penetration again. And all the fundamental underlying indicators in the category are very healthy. We are seeing people buy more grills. And, of course, that grill purchase increase leads to more consumption of consumables like charcoal. We are seeing millennials come into the category. A big reason why we've been able to grow household penetration is that millennials now come back into the category. So we're seeing incredibly strong growth, even with a complete absence. Jonathan, I don't know if that's you, but we need a phone on mute. Thank you. But we're seeing new people come in. We're seeing millennials enter the category. and we're seeing them use the product often. So a lot of positive underlying metrics behind our Q4 sales growth, and we expect this to continue for sure mid-term.

Our next question comes from Lauren Lieberman of Barclays.

Thanks, good morning, and congratulations to both of you also. I wanted to talk a little bit about international. I know that the Saudi Arabia Joint Center is something that, you know, Clorox has been very proud of for many years. But you mentioned, you know, Linda, I think you mentioned the word global. There's been international a few times. And the company, I think, has – you know, the last several years has been more about the go lean, get tight control costs and really, you know, focus on a right model for where you were playing. But to what degree does, I guess, the current landscape both in terms of consumer need and in terms of, you know, the strength of the Clorox brand and the sort of flexibility you presumably have on profitability change? Does that enhance your international growth aspiration? You know, maybe, Linda, if you were looking at Ignite and setting the strategy today versus 12 months ago, do you think international would play a bigger role? And, you know, if not, why not? Thanks.

Thanks, Lauren. So we absolutely have the opportunity to meet more consumer demand in the U.S. and internationally. And we're moving quickly with supply chain investments to support expansion in both. You know, what I'd want you to take away is we don't see a fundamental change in the composition between the percent of our business in the U.S. and international. We see the ability to grow both strongly. But if you think about the international opportunity specifically, there are three things that we're focused on. The first is we just need to increase supply to meet the demand that we have in the markets we're already in, in the products that we already have in those locations. And we're focused on that just like we are in the U.S. The second is we absolutely have an opportunity to expand our product forms in countries we compete in today. So, for example, there are many places around the world where wipes have low penetration or we don't play, and we see that as being an offering that consumers might be ready for in different areas of the world. And then the third, we are evaluating expansion into new geographies, and we certainly see very high interest from consumers in different parts of the world for the Clorox brand in particular. And where there's interest, we will look and see if there's a long-term disciplined approach we can take to entering that market where we see strong return on investment. So that will be very consistent with how we've approached international to date. And that's what I would leave you with is definite opportunity in international, no change in terms of how we think about the role it will play in our overall portfolio, and we'll be aggressive in pursuing opportunities when we have confidence in them.

Thanks. And then if I may just also question on competition. So I think you all went through, you know, very clearly reasons why market share performance, at least in track channels, is what it is and is, you know, maybe not the best gauge of kind of what's really going on in your business. But I was curious still how you were thinking about an increase in, you know, competitive dynamics, you know, more players, more brands, with, you know, with real reasonable and strong brand equities looking to play in some of your spaces. Historically, I feel like part of the hallmark of Clorox has been this sort of, you know, big share, we talk about big share brands and in kind of mid-sized categories. Your categories aren't going to be mid-sized anymore, possibly with where we're talking today. So, You know, what do you do in the dynamics of categories change, the competitive landscape changes? What, you know, how are you thinking about that?

Thank you, Lauren. I mean, look, our competitors, our categories have always been very competitive. They are competitive, and they will be competitive. There's no question. And, you know, we also can assume, I think, that reasonably – assume that in the disinfecting space in particular, it's an attractive space looking at the growth and the profitability and the ability to make a difference to so many consumers around the world. We can't expect that that will be more competitive. But for us, that's our daily bread and has been our daily bread for a very long time. And how do we go about that? We build leading brands. And as we've commented a few times, those brands generally are in a great shape. We invest behind them. We invest with an eye on the long term. We keep the value sharp. And we've also commented how that's in the best shape it's ever been. And we innovate, innovate, innovate. So, you know, we're not waiting for competition to come in. And we're certainly used to competition to try and come in and disinfecting. And, you know, without sounding arrogant, a lot of times the competition came and went. And, you know, we will defend our home turf. And importantly, as Linda said earlier, we will play offense 100% of the time. So we can assume that this business is going to continue to be very competitive, but we're ready for it. And we certainly, as you noted, are taking the stance and have the financial flexibility to invest in our business in order to ensure success with an aspiration of accelerating long-term growth for the company.

Great. Thanks so much, and congratulations again.

Our next question is from Steve Powers of Deutsche Bank.

Thank you, and sincere congratulations from me as well, Benno. And Linda, obviously, big congratulations your way too. I guess I was hoping you could talk more about The biggest drivers underlying what I see is a fairly wide bottom line range for fiscal 21 relative to an arguably more narrow top line range. And I guess I'm specifically interested in how you're thinking about gross margins amidst the demand volatility and supply constraints, recessionary pressures that you've alluded to, as well as some of the competitive dynamics that Lauren just called out. So is there a way to talk about gross margin as a driver of 21 guidance?

Hey Steve, this is Kevin, and I can talk about both our EPS range and gross margin. You know, I'd say to your point, our EPS range we're providing this year is wider than what we typically provide on a normal year. And I'd say that that wider range is really driven by two areas that we expect to see increased variability in our results. The first is the top line, and I think that's probably pretty obvious. The ongoing impact of COVID-19 is the impact of the recession, how that will play out on our portfolio will clearly be difficult to predict over the course of the full year. I think we've got decent visibility as we look out over the very near term, but as we get into the back half of the year and we're lapping the 20% organic growth from last year, more difficult for us to determine exactly where that will play out. And so there will be some level of variability from the top line. I would say in addition to the top line variability, when you look at our supply chain, Where I expect to see increased variability from previous years is specifically in manufacturing and logistics in terms of the impact we're seeing from COVID-19 and maybe to dimensionalize that. In our fourth quarter, we had about $30 million of upcharges we incurred in our supply chain related to COVID-19. And now, as I look forward to 21, we expect those to be temporary charges, and we expect them to diminish over time. But a lot of that will be driven by how the pandemic plays out, which is clearly outside of our control. And so it's difficult to call exactly where our gross margin will land. And if you think about it, $10 million change in profitability is worth about one point of EPS growth for this company. And so it's not inconceivable that we could see $20 or $30 million variability in the supply chain as it relates to the impact of COVID over the course of the year. that would generate two- to three-point change in our EPS performance for the year. And so I think when you look at the variability in the top line, you look at the variability on the COVID cause hitting our supply chain, that's the reason why we have a wider EPS range to start the year. Now, as it relates to gross margin, I actually think gross margin would be very much in line with where we land on EPS. If we end up with negative EPS for the years because we had larger COVID costs in the supply chain than we anticipated and likely declining gross margin, And conversely, if we generate EPS growth this year, it'll be driven by COVID costs doing better than we anticipated and growing margins for the year. And so that's how we're seeing it right now. It's obviously very early in the year. As we get smarter, we'll certainly update you as we learn more in terms of how we think it's going to land. But I think to start the year, this feels like a prudent place to start with the range we've set.

Yeah, that's fair. Thank you for that. I guess, Kevin, while I have you talking, is there a way you can put some numbers around your expectations for cash generation next year and also the usage of that cash? I'm particularly interested in CapEx, just given the manufacturing ramp that you've called out.

Yeah, so as it relates to cash and maybe specifically CapEx, we... significant acceleration of cash we're generating as a company. I think you saw in my prepared remarks, it's up about 56% for the full fiscal year, although I'll tell you in the back half year, we had doubled the rate of cash we were generating over the last six months of fiscal year 20. So the company is in very good financial position in terms of access to cash to allow us to invest in the business. And again, what you're hearing from the three of us today is We are doing just that. We're taking that cash and we're putting it into the business with our intent to accelerate our performance over the long term. As it relates specifically to CapEx, we are also investing in capacity expansion as the primary focus for us. Typically as a company, our capital spending is somewhere between 3% and 4% of sales revenue each year. I'd say if you look back over the last few years, we've been closer to low into that range, a little over 3%. We started investing in the fourth quarter. We invested about $100 million of additional capital in the fourth quarter, and that put us just below 4% last year as a percent of sales. As I look forward to 21, as we continue to invest in capacity expansion, particularly in disinfecting, Steve, I think we'll end up somewhere between 4% and 4.5% as a percent of sales and capital spending. And that puts us, if you do the math, that gets us to about $300 million in CapEx spending for the year. And I think it's probably a pretty good assumption for now to work with.

Makes sense. Congratulations again, Lisa. I mean, sorry, Linda and Benno. Thank you. Thanks, Steve.

Our next question is from Jason English of Goldman Sachs.

Hey, good afternoon, folks. And I'll echo that last sentiment. Congratulations, Linda and Benno. I wish you well, and I'm going to miss our quarterly banter. So on to my questions. The guidance for sequential deceleration, albeit to still strong levels, is a little bit surprising in context of what I'm hearing you guys say, that your demand is massively outstripping your supply, and you're shipping pretty much – you're selling everything you can. And selling everything you could in the fourth quarter translated into 23% organic sales growth and nearly $2 billion of revenue. Why couldn't you match that in the first quarter if demand is so robust and so meaningfully outstripping supply?

Yeah, Jason, as Kevin, you know, I think your question is specifically related to Q1. And while we don't typically provide quarterly guidance, we thought it was helpful to provide some perspective front half, back half. And what we said is we do expect double-digit top-line growth in Q1. To your point, we continue to see very strong demand for our products. It is outstripping our ability to supply demand. In the near term, we expect that to continue, and because of that, we do expect a very strong first quarter.

Okay. I'll try offline on that one later. On components of your growth, price was obviously a meaningful contributor this quarter, and I imagine promotions, I suspect a lot of that's trade spent with the promotional programs pulled out of the market, given supply, demand, and balance issues. What does the cadence of that look like, based on your expectations as we progress through the year? Should we expect similar price contribution in the first quarter and waning over the quarter, or could it moderate even faster?

Jason, clearly, as you noted, there hasn't been a lot of price promotion in our categories, for sure. It's part of what's encouraging, for instance, on Kingsford, that we were able to grow double digits without what is usually a pretty healthy price. a price promotion during peak events or holidays like 4th of July and Memorial Day, so that's all encouraging. If you think about our trade spend, the vast majority of our trade spend is performance-driven, meaning it's tied to customer performance. the customer performance is there. So there aren't a lot of savings in trade spend because we're honoring the commitments and because for many of our customers, the trade spend is rolled into everyday low pricing. And that's going to continue. So as you think about trade spend, there's not going to be a windfall over the next – It's been a little lower in Q4, as you will have noted, and that could continue, but it's also going to vary by quarter, and trade spend is not going to be a big source of savings going forward.

Okay. Thank you very much. I'll pass it on.

And our final question comes from Linda Bolton-Weiser of DA Davidson.

Hi. Thanks for taking my question. You made some comments about the general charcoal category and the growth there and what's driving it, but I was wondering if you could be more specific about your own share recovery. At least in the tract channels, it does look like your share is improving. And was the hickory pellet launch important in share growth, or is that just too small at this point? And when can we expect the next innovation in charcoal? Thanks.

Yeah, thanks, Linda, and welcome back. That's a nice way to end it. You know, I would characterize Kingsford as a good story in that we had implemented much improved plans, which led to a really strong retailer support. And that came just in time as consumers were looking to grill more in the face of pandemic. So a really nice turnaround story with the second quarter, consecutive quarter of growth after certainly a weaker period than Q4 2020. up double digits. Share was up strongly. It's one of our strongest growing businesses share-wise. And if you look at the underlying factors, it is strong retailer support, as mentioned. It's household penetration returning to growth. On the brand, it's a a growing category even without the aggressive peak holiday discounts, heavy grill sales, all of it really encouraging. So the vast majority of the sales and share growth is just on the core. And the good news is there's so much opportunity left given the performance in previous years. We're really just scratching the surface of – what we can do to recover lost share growth, but also benefit from a category that clearly is on trend. Pellets itself is off to a strong start and also continues to build and will also keep building in the fiscal year 21 season, but really has not been a strong factor in the grand scheme of things as we think about the sales growth. So really solid momentum on Kingsford as we enter fiscal year 21 with so much opportunity ahead.

Thank you, and good luck.

Thanks, Linda. Thanks, Linda, and thanks, everybody. Thank you, everyone, again, for joining us today. I hope that all of you and your families will stay healthy, and I also hope that our paths will cross again at some point after we get through this pandemic. And in the meantime, please stay well And Linda, Kevin, and Lisa will speak to you about Clorox's Q1 fiscal year 21 results on November 2nd. Thank you all.

Thank you. This concludes today's conference call. You may now disconnect.