Clorox Company (The)

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

Thanks, Sharon. Welcome, everyone, and thanks for joining us today. Happy Halloween. On the call with me today are Ben Odor, our Chairman and CEO, and Kevin Jacobson, our CFO. 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. On today's call, we may refer to certain non-GAAP financial measures, including but not limited to free cash flows, EBIT margin, debt to EBITDA, organic sales growth, and economic profits. Management believes that providing insights on these measures enable investors to better understand and analyze our ongoing results of operations. Reconciliations with the most directly comparable financial measures determined in accordance with GAAP can be found in today's press release, this webcast's prepared remarks, or supplemental information available on our website, as well as in our SEC filings. In particular, it may be helpful to refer to tables located at the end of today's earnings release. Please also recognize that today's discussion contains forward-looking statements. Actual results or outcomes could differ materially from management expectations and plans. I would also direct you to read the forward-looking disclaimers in our quarterly earnings release. Please review our most recent 10-K filing with the SEC and our other SEC filings. for a description of important factors that could cause results or outcome to differ materially from management expectation and plans. The company undertakes no obligation to publicly update or revise any forward-looking statements. I'll start by covering our top line commentary, discussing highlights in each of our segments. Kevin will then address our financial results as well as our outlook for fiscal year 20. Finally, Benno will offer his perspective and we'll close with Q&A. For the total company, Q1 sales decreased 4%. The results are on top of solid sales growth in the year-ago period. Organic sales were down 2%. I'll now go through our results by segment. In our cleaning segment, sales decreased 2% for the quarter. Our professional products business delivered strong sales growth, driven by a successful back-to-school campaign, particularly in the e-commerce channels. We also continue to see strength and longevity of our innovation in this business, with platforms such as Clorox Hydrogen Peroxide and Clorox Fusion, both disinfectants used in healthcare settings, delivering double-digit growth even four years after their initial launch. In home care, sales were down slightly, with volume growth offset by unfavorable mix and increased performance bifurcation between tracked and non-tracked channels. Shipments of Clorox disinfecting wipes grew solidly for the quarter, with growth in non-track channels outpacing track channels by a wide margin. Our investments, where fully implemented, are working and helping grow the category. Our near-term focus is to strengthen our results consistently across all channels. Additionally, as highlighted in our Ignite strategy launch, we have a strong innovation plan based on bigger, stickier platforms, with Clorox compostable cleaning wipes launching in late Q2. Our Centiva platform continues to perform well, with high single-digit volume growth three years after its initial launch. Lastly, within the cleaning segment, our laundry business sales were down for the quarter, driven primarily by distribution losses of Clorox liquid bleach in select retailers, coupled with increased competitive promotion. We're addressing this with innovation on multiple fronts, including launch of a full line of compacted bleach products in spring 2020. During the same period, we're also launching a sanitizing innovation platform, including a trigger spray, aerosol spray, and a liquid laundry additive product, bringing the strong Clorox equity to the fast-growing sanitization segment. Turning to the household segment, Q1 sales were down 14%, driven mainly by declines in backs and reps and charcoal. In backs and reps, Q1 sales were down double digits, driven by the same factors we discussed previously, wider price gaps, as well as distribution losses in select portions of the portfolio. Higher trade investments on GLAAD trash bags are now in place. We're seeing sequential improvements in volume as well as market share, and we're focused on building on this momentum. As expected, charcoal sales were down double digits this quarter, driven by lower shipments. The sales decline also reflected higher trade spending, part of an ongoing effort to reduce market inventory from a weak 2019 grilling season and to gear up for a stronger 2020 grilling season. Building on a strong grilling category consumption and a normalized inventory level going into the upcoming grilling season, we'll be focused on executing our plans to turn this business around. In Renew Life, sales declined double digits due to category slowdown and persisting consumption headwinds. As part of our effort to return this business to growth, we're continuing to focus on engaging retailers in support of our category growth plans, supported by full grand relaunch next calendar year. Finally, our cat litter business was down slightly, lapping strong double-digit sales growth in the year-ago quarter. Similar to the other businesses, we're seeing much stronger sales and share performance in non-track channels than in track channels. Our fresh step clean pause innovation platform continues to grow strongly beyond its first year. So we'll lean in further with dedicated advertising and continued trial building activities. In our lifestyle segment, sales grew 4% reflecting growth in three of our four businesses. Burt's Bees delivered double-digit sales growth fueled by strength in its core categories of lip care and face care. Successful innovation in lip care, including the new watermelon lip balm that was the number one overall flavor at a key retailer in Mass Channel, drove share growth for a 19 consecutive quarter and reinforced the brand's position as the number one overall lip balm in the category. In face care, there were record shipments of products such as face masks and core cleansers, as well as relaunched sensitive skincare lines. The business also has a strong pipeline of innovation, including a hemp line, as well as men's line, launching in Q3. For Burt's Bees, a combination of pricing and innovation has been a successful formula in driving strong category growth. Food sales were up for the quarter as well, reflecting higher shipments of dry Hidden Valley seasonings and dressings. The results were on top of strong sales growth in the year-ago quarter. The ready-to-eat dips innovation remained on track, with plans to increase demand-building investments to expand usage occasion. The brand also extended its streak of share growth to 19 quarters. Brita sales were up slightly for the quarter, behind higher shipments of our new Brita bottles and RIDA Long Last water filtration systems, which performed strongly in the e-commerce and mass channels. The RIDA business continued its streak of solid, consistent volume growth dating back a year. Finally, sales for NeutronX were down this quarter, reflecting growth in our strategic brands and a double-digit decrease in our non-strategic brands. Our strategic brands grew behind strong shipments of NeoCell and Natural Vitality. The decrease in the non-strategic part of this portfolio is mainly driven by our decision to exit the private label business that came with the acquisition. Moving past the initial integration phase of Nutrinex, we're now working on optimizing the portfolio, focusing on a few strategic brands representing more than 80% of the portfolio. We continue to be excited about the growth prospects of this business. Lastly, turning to international, sales were flat for the quarter with volume growth, innovation, and the benefit of price increases offset by about eight points of unfavorable foreign currency impact. Despite the strong headwinds, we grew sales in Latin America, and the international segment grew sales 8% on an organic basis. Consistent with our Ignite strategy that aims to improve profitability in international, we continue to invest selectively in profitable platforms and see the returns on businesses like Burt's Bees and Cat Litter. Now I'll turn it over to Kevin, who will discuss our Q1 financial performance and our outlook for FY20.

Thank you, Lisa, and thank you, everyone, for joining us today. First quarter results came in generally as expected as we continue to work through the challenges in our bags and wraps and charcoal businesses. Importantly, as we noted in our press release, we remained on track for fiscal year 2020 and confirmed our outlook. Turning to our first quarter results, sales decreased 4%, reflecting about three points of higher trade spending, about two points of unfavorable mix, and about two points of foreign currency headwinds. These factors were partially offset by about three points of pricing benefit. On an organic sales basis, first quarter sales decreased 2%. primarily driven by our bags and wraps and charcoal businesses. Gross margin for the quarter increased 60 basis points to 44%, compared to 43.4% for the year-ago quarter. First quarter gross margin included 180 basis points of benefit from cost savings and 120 basis points of benefit from pricing, partially offset by 180 basis points of higher trade spending. I'd like to note that a portion of the benefits to gross margin was related to timing. First quarter gross margin also reflected favorability in commodity and logistics costs. And while it's still early in the fiscal year, we're encouraged by the cost favorability we're seeing in these markets. Selling and administrative expenses as a percentage of sales came in at 14% compared to 13.6% due to reduced operating leverage. Importantly, Year-over-year selling and administrative spending for the quarter declined. Advertising and sales promotion investment levels as a percentage of sales were about flat, with spending for a U.S. retail business coming in at about 10% of sales. Our first quarter effective tax rate was about 22%, equal to the year-ago quarter. Net of all these factors, we delivered diluted net earnings per share of $1.59 versus $1.62 in the year-ago quarter. a decrease of 2%. Turning to year-to-date cash flow, net cash provided by operations in the first quarter came in at $271 million versus $259 million in the prior quarter, an increase of 5%. Now, I'll turn to our fiscal year 2020 outlook. As we communicated in our October 2nd press release, we expect fiscal year sales to be down low single digits to up 1%. reflecting our recently updated assumption of about two points of impact from unfavorable foreign currencies, primarily from Argentina. As I mentioned at our analyst day, we previously assumed devaluation of the Argentine peso at about 25%, and now our expectations are closer to 50%. Importantly, our 50-year organic sales outlook remains unchanged, reflecting 1% to 3% organic sales growth, driven by innovation and our expectation for stronger business performance on bags and rafts and charcoal in the back half of the fiscal year. Turning to gross margin, we continue to expect fiscal year gross margin to be down slightly, reflecting our recently updated assumption on foreign currencies. Our fiscal year gross margin outlook continues to reflect our expectation for additional supply chain investments to support long-term value creation, including our investment in the rollout of liquid bleach compaction in the spring of 2020. We continue to expect fiscal year advertising and sales promotion investment levels to be at about 10% of sales. We also continue to expect selling and administrative expenses to come in at about 14% of sales. Consistent with our fiscal year gross margin assumptions, we expect fiscal year EBIT margin to be down slightly. Our fiscal year 2020 outlook continues to anticipate our fiscal year effective tax rate to be in the range of 22 to 23%. Net of all these factors, we continue to expect this year 2020 diluted EPS to be in the range of 605 to 625. In closing, first quarter results came in generally as anticipated. We continue to work through the short-term challenges we're facing in bags and wraps and charcoals and continue to expect improvement in our overall results in the back half of the fiscal year. We're certainly pleased that our cost savings program is off to a good start, contributing significantly to our fourth consecutive quarter of year-over-year gross margin expansion. Looking ahead, we'll continue to address short-term challenges while executing against the strategic choices we have made under our IGNITE strategy. As you said at Analyst Day, our focus with IGNITE is to create a virtuous cycle of generating fuel to continue investing to drive superior consumer value. We have a long track record of doing this successfully, and I continue to believe that once we work through the challenges we're facing on bags and wraps and charcoal, Clorox will be in a position to deliver results that are more in line with our long-term financial goals. And with that, I'll turn it over to Benno.