The Clorox Company

Good day, ladies and gentlemen, and welcome to the Clorox Company second quarter fiscal year 2021 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 conference call, Ms. Lisa Burhan, Vice President of Investor Relations for the Clorox Company. Ms. Burhan, you may begin your conference.

Thank you, Sharon. Welcome, everyone, and thank you for joining us today. We hope you and your families are continuing to stay safe and well. On the call with me today are Linda Rendell, our CEO, and Kevin Jacobson, our CFO. Now, a few reminders before we go into the 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 statement section which identifies various factors that could affect such forward-looking statements, and the non-GAAP financial information section, including the tables that reconcile 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. I'll start by covering our top-line commentary with highlights from each of our segments. Kevin will then address our total company results, as well as our FY21 outlook. Finally, Linda will offer her perspective and will close with Q&A. For the total company, Q2 sales increased 27% with growth in every reportable segment. It reflects about one point of net benefit from the July acquisition that gives us a majority share in our Saudi Arabia joint venture and unfavorable foreign currency exchange rates. On an organic basis, Q2 sales grew 26%. I will now go through our results by segment. In our health and wellness segment, Q2 sales were up 42%, reflecting double digits increases in two of three businesses. Our cleaning business had double digit sales growth behind strong ongoing demand across our portfolio. Consumption remains high, and importantly, we're continuing to see increases in household penetration and repeat rates among existing and new users, driven by new routines developed from the prolonged pandemic, as well as strategic brand investments. While we expect tough comparisons as we lap these very high growth rates, we'll continue to work to retain the larger base of loyal consumers we've built for our cleaning and disinfecting products, even after a critical mass of the population has been vaccinated. We're continuing to make progress on our supply expansion, including a new line of wipes plant coming online this quarter. We're also continuing to identify new sources of supply for other products experiencing constraints, including our disinfecting spray products. As we're able to better meet consumer demands for our base products, we're looking forward to bringing back our Clorox compostable wipes, along with a stream of exciting innovation in the coming months. Our professional products business had another quarter of double-digit sales growth behind continued high demand for our cleaning and disinfecting products. It's worth noting, though, that while demand from businesses such as healthcare facilities has remained high, we've seen softer demand from businesses negatively impacted by ongoing mobility restrictions, like commercial cleaning and food service institutions. That's why we're leaning into other out-of-home spaces through strategic alliances and are encouraged by our progress. While not yet a meaningful contributor in Q2, our out-of-home partnerships are expanding. We're excited to announce a new multi-year deal with the NBA, an existing partner. Lastly, within this segment, our sales in vitamins, minerals, and supplements business decrease in Q2. This is a business where results have not been consistent, and we clearly have more work to do. As you remember, we relaunched Renew Life last fall. While we've seen improvements in all outlet consumption, it is not yet delivering the consistent results we want. With more than half American consumers saying they intend to continue taking vitamins and supplements, we continue to believe in the attractiveness of this category. Now turning to household segment. Quarterly sales were up 20%. with growth in all three businesses for a third consecutive quarter. Brewing sales were up double digits, driven by continued strong consumption, which reflects the dramatic rise in in-home meal occasion, as people continue to spend more time at home. Behind our strategic collaboration with retailers, we've been able to grow household penetration for a third consecutive quarter, including among millennials and low-income consumers. As we begin planning for the next grilling season, we're building on our innovation through expanded distribution of our new Kingsford pellets and bringing new flavors to our Kingsford product lineup. With consumers spending more on their backyards and grills, we feel optimistic about the future of this business. Cat litter sales were up by double digits in Q2, supported by innovation and continued strong performance online. Our Fresh Step with Gain Original Scented Litter with the Paro Febreze, as well as our Fresh Step Clean Paws Litter, continue to perform very well, and we're supporting them through a new advertising campaign. A record number of people have become pet parents since the onset of the pandemic in 2020, making this yet another example of how our diverse portfolio is particularly suited to the times. Glad sales increase in Q2, behind strong demands across our portfolio of trash bags, wraps, and food bags as people continue to spend more time at home. Our latest innovation, GladForce Flex with Clorox trash bags, launched in September and is building distribution quickly, earning positive reviews. In our lifestyle segment, Q2 sales were up 9% with double-digit growth in two of three businesses. Brita sales were up by double digits for a fourth consecutive quarter behind continued strong shipments of pitchers as well as filters. Just as with wipes and sprays, we're continuing to work through supply chain constraints in our Brita business, which has been impacting our shares. We feel good about the long-term prospects of this business, especially since once people buy a Brita pitcher, they tend to stay in our franchise with continued purchases of filters. Importantly, as household penetration for Brita keeps growing, we're building brand loyalty among these consumers. The food business had double-digit sales increase for a third straight quarter behind ongoing strong consumption of our Hidden Valley Ranch products, particularly dry seasonings and bottle dressings. With more and more people eating at home during the pandemic, household penetration has grown to an all-time high including above-average growth among millennials. We're building on this momentum with a stream of innovation, including Hidden Valley secret sauces, and most recently, Hidden Valley plant-based ranch dressing, which is being supported by strong advertising investments. Burt's Bee sales decreased by double digits as the business continued to be impacted by mobility restrictions, as well as changes to consumer shopping and usage habits as a result of the pandemic. This quarter, unseasonably warm weather also impacted lip balm sales. Despite these challenges, we're making progress in the fast-growing online channel where the brand had double-digit growth in Q2, and we remain confident in the long-term trajectory of this business. Lastly, in international, Q2 sales grew 23%, driven by double-digit shipment growth in all major regions. The growth reflects about 9 points of benefit from the Saudi acquisition and about 4 points of unfavorable foreign currency headwinds. Organic sales grew 18%. The recent investment we made to create a dedicated international supply chain for Clorox disinfecting wipes is starting to pay off. giving us the ability to not only meet ongoing elevated demand in existing markets, but also to expand to new countries. This is a strategic growth platform for the company, and we're supporting it through additional advertising investments. Now, I'll turn it over to Kevin, who will discuss Q2 results, as well as updated outlook for FY21.

Thank you, Lisa, and thank you, everyone, for joining us today. We hope you and your families are well. Our sales growth for the second quarter was broad-based, resulting in double-digit growth in each reporting segment for the first half of our fiscal year. Additionally, this led to profitable growth for the first half, which enables us to capitalize on momentum and continue investing behind our global portfolio to strengthen our competitive advantage. As you saw in our press release, we've raised our fiscal year 21 outlook, given the strength of our first half results and our expectation for continued strong demand across our global portfolio over the balance of the year. Turning to our second quarter results. Second quarter sales were up 27%, driven by 23 points of organic volume growth, three points of favorable price mix, and one point of net benefit from requiring majority control of our Saudi joint venture, partially offset by FX headwinds. On an organic basis, sales grew 26%. Gross margin for the quarter increased 130 basis points to 45.4%, compared to 44.1% in the year-ago quarter. Second quarter gross margin included the benefit of strong volume growth, as well as 160 basis points of cost savings and 140 basis points of favorable price mix. These factors were partially offset by 420 basis points of higher manufacturing and logistics costs, which, similar to last quarter, included temporary COVID-19 spending. Second quarter gross margin results also reflect about 50 basis points of negative impact from higher commodity costs, primarily from resin. Selling and administrative expenses as a percentage of sales came in at 14.6%, compared to 14.5% in the year-ago quarter. Advertising and sales promotion investment levels as a percentage of sales came in at about 10%, was spending for a U.S. retail business coming in at about 11% of sales. This reflects higher investments across our portfolio, strengthening our value proposition to support higher levels of household penetration and lasting brand loyalty among new and existing consumers. Our second quarter effective tax rate was 21%, which was equal to the year-ago quarter. Net of these factors, we delivered diluted net earnings per share of $2.03, versus $1.46 in the year-ago quarter, an increase of 39%. As you also saw in our press release, year-to-date net cash provided by operations was $629 million, versus $498 million in the year-ago period, an increase of 26%. Turning to our updated fiscal year outlook, we now anticipate fiscal year sales to grow between 10% to 13%. reflecting the strength of our first half results and higher expectations for the back half. With our overall demand for our products remaining quite strong, we now expect back half sales to be about flat, on top of 19% growth in the year-ago period. We also anticipate about one point of contribution from our Saudi joint venture, offset by one point of foreign exchange headwinds. On an organic sales basis, our outlook assumes 10% to 13% growth. we now expect fiscal year gross margin to be down slightly, reflecting higher commodity and manufacturing and logistics costs, as well as temporary costs related to COVID-19. These factors are expected to be partially offset by higher sales. As a reminder, we expect gross margin contraction over the balance of the fiscal year, primarily from two factors. First, we are lapping very strong operating leverage from robust shipment growth during the initial phase of the pandemic. And second, we're facing commodity headwinds this year versus last year's commodity tailwinds. As a reminder, our gross margin expanded 250 basis points in the back half of fiscal year 20. We continue to expect fiscal year selling and administrative expenses to be about 14% of sales, reflecting ongoing aggressive investments and long-term profitable growth initiatives and incentive compensation costs consistent with our pay for performance philosophy. Additionally, we continue to anticipate fiscal year advertising spending to be about 11% of sales. We spent about 10% in the front half of the year and continue to anticipate about 12% in the back half in support of our robust innovation program. We continue to expect our fiscal year tax rate to be between 21 to 22%. Net of these factors, we now expect fiscal year 21 diluted EPS to increase between $8.05 and $8.25. or 9% to 12% growth, reflecting strong top-line performance, partially offset by a rising cost environment. We now anticipate fiscal year dilute EPS outlook to include a contribution of 45 to 50 cents from our increased stake in our Saudi Arabia joint venture, primarily driven by a one-time non-cash gain. I'm pleased we've raised our fiscal year 21 outlook. Of course, it's important to note we continue to operate in a highly dynamic environment and are monitoring headwinds that could result and impacts moving forward. In closing, I'm also pleased with our broad-based strong results in the first half, which enables us to continue investing in our brands, capabilities, and new growth opportunities, all in support of our ambition to accelerate long-term profitable growth for our shareholders. And with that, I'll turn it over to Linda.