Clorox Company (The)

Good day, ladies and gentlemen, and welcome to the Clorox Company Second 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. 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 on our website, thecloroxcompany.com. On today's call, we may refer to certain non-GAAP financial measures, including but not limited to free cash flow, EBIT margin, debt-to-EBITDA, organic sales growth, and economic profit. Management believes that providing insights on these measures enables 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, 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 outcomes to differ materially from management's expectations and plans. The company undertakes no obligation to publicly update or revise any forward-looking statements. With that, 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 outlook for fiscal year 2020. Finally, Benno will offer his perspective and we'll close with Q&A. For the total company, Q2 sales decreased 2%. These results are on top of solid sales growth in the year-ago period. Organic sales were flat. I'll now go through our results by segment. In our cleaning segment, Q2 sales were flat for the quarter as gains in professional products and home care were offset by a decline in laundry. In home care, sales were up behind strong volume growth across a number of product lines including Clorox disinfecting wipes, Clorox toilet bowl cleaners, and Clorox Scentiva, particularly in non-track channels. Our Scentiva innovation platform continues to show robust growth even three years after its initial launch. We remain focused on driving superior consumer value through meaningful innovations like our Scentiva wet mopping cloths, which are doing well and continue to build distributions. A new scent across the platform, Tahitian Grapefruit, will start shipping this month. Additionally, we were pleased to deliver record second quarter shipment growth of Clorox Disinfecting White. However, our shares in this category continue to be down as a result of higher competitive merchandising activities. As we expect these activities to continue in the back half of the fiscal year, we're increasing our investments to support the long-term health of our brands. We're doing this in two ways. First, we're strengthening our merchandising plans with higher trade investments. And second, we're increasing our marketing investments behind Clorox compostable cleaning wipes, which have had a positive early reception from both retailers and consumers. Laundry sales were down for the quarter, driven primarily by distribution losses among select retailers, which continued from last quarter. We expect improvement going forward as we start rolling out a full line of compacted bleach products this month. Our plans this fiscal year also include a new laundry sanitizing innovation platform, which started shipping toward the end of 2019. We're supporting this innovation through strong marketing investments to drive awareness and trial. Lastly, within the cleaning segment, professional products continues this momentum and delivered another quarter of robust sales growth, with broad-based growth across all channels and product lines supported by innovation. Turning to the household segment, future sales were down 8%, with declines in all businesses. In bags and wraps, future sales were down due to ongoing distribution losses and select portions of the portfolio and increased competitive activity. While we continue to make progress and have seen sequential improvement in both volumes and sales, we've seen a further increase in competitive activity consistent with what we've seen in past periods when there was a pullback in resin price, even on a temporary basis. We expect these competitive price reductions and higher promotional activities to continue in the back half of the fiscal year. With a keen focus on consumer value, We're further increasing our investments in GLAD and coupling that with a number of innovations to drive long-term profitable growth for our brand and the category. As expected, grueling sales were down double digits this quarter. While consumption was strong, it was more than offset by lower shipments as we finished working through high retail inventory from a weak 2019 grueling season, an effort that started in Q1. We expect to return to normal retail inventory levels as we enter the new grilling season. As a reminder, Q2 is a relatively small quarter for this business, representing about 10% of annual shipments. Going forward, we remain focused on executing our strategy in three areas. One, enhancing the consumer experience. Two, implementing the right trade and pricing structure. And three, investing in innovation including our core charcoal products and alternative fuels such as pellets. As noted in our press release, we've changed the name of this strategic business unit from charcoal to grilling to reflect our broadened strategic view of the category. In Renew Life, which represents about 1% of total company sales, sales declined by double digits due to the continued category and competitive headwinds. However, We're encouraged by the early signs of progress we're seeing, with two of our three biggest customers now showing growth. As a reminder, a full brand relaunch will occur in the first half of FY21. Finally, our cat litter business was down slightly due to higher trade spending and lapping strong double-digit sales growth in the year-ago quarter, which benefited from price increases. The fresh-set CleanPos innovation platform which saw a double-digit increase in shipment this quarter, continues to show promise, and we're investing behind this momentum in the back half. In our lifestyle segment, sales grew 4%, reflecting volume growth across all businesses. Burt Fees delivered a record quarter of sales, driven by continued strength in its core categories of lip care and face care. In lip care, Burt's Bees achieved a market leadership status in 2019 as the number one overall lip balm in the United States for the first time ever over a 52-week period. Burt's Bees lip balm has grown shares for 20 consecutive quarters or five years in a row. This success was fueled by a strong pipeline of innovation such as the watermelon and hemp flavors. In face care, masks, The restaged sensitive skincare line and core cleansers all had double-digit consumption growth. Food sales were up again this quarter, supported by higher merchandising level, driving strong shipments of Hidden Value Ranch products. On the innovation side, our ready-to-eat dip platform is expanding to include French onion, fiesta ranch, and a deluxe cheese and ranch dip. while a new Hidden Valley Ranch secret sauce line, which was launched in January, is continuing to help unlock new Hidden Valley Ranch eating occasions. Hidden Valley Ranch extended its streak of chevros to 20 quarters. Brutus sales were up strongly behind higher shipments of our premium filtering bottles and long-last filters and water filtration systems. New products, including large-capacity plastic and stainless steel bottles, are expected to enhance the filtering water bottle innovation platform even further, building on consistent volume growth in Brita that now dates back more than a year. Finally, sales for Neutronex were down slightly this quarter, reflecting double-digit decrease in our non-strategic brands, partially offset by solid growth in our strategic brands. We're encouraged by the success of our strategic brands, which was fueled by higher demand creation investments and we're increasing those investments further to drive additional awareness and trial in these emerging and fast-growing categories. The decrease in non-strategy part of this portfolio was driven mainly by our decision to continue rationalizing the lower margin part of this business that came as part of the acquisition. Lastly, turning to international, sales were down 2% for the quarter reflecting eight points of foreign currency headwinds, mainly from Argentina, partially offset by the benefit for price increases. Organic sales in the segment grew 6%, consistent with our Ignite strategy that aims to improve profitability in international. We're continuing to invest selectively in profitable markets and growth platforms to keep yielding returns on businesses like Burt's Bees, Cat Litter, and the product's equity. Now, let me turn it over to Kevin, who will discuss our Q2 financial performance and our updated outlook for FY20.

Thank you, Lisa, and thank you, everyone, for joining us today. I'm pleased with the progress we've made in Q2 as we delivered sequential improvement in organic sales, our fifth consecutive quarter of gross margin expansion, and another quarter of strong cash flow. I'm also encouraged by our continued progress in bags and wraps and grilling business units and expect to see continued sequential improvement on these businesses in the back half of the fiscal year. As you saw in our press release, I've updated our outlook, which I'll discuss in a moment. Turning to our second quarter results, sales decreased 2%, reflecting two points of unfavorable foreign currency headwinds. On an organic sales basis, second quarter sales were flat. Gross margin for the quarter increased 40 basis points to 44.1% compared to 43.7% for the year-ago quarter. Second quarter gross margin included the benefits of 150 basis points from cost savings and 100 basis points from pricing. These factors were partially offset by 90 basis points of higher trade spending and 80 basis points of higher manufacturing and logistics costs. Second quarter gross margin also reflected ongoing cost variability in commodities, partially offset by the impact from foreign currency headwinds. Selling administrative expenses as a percentage of sales came in slightly higher at 14.5% compared to 14.3% in year-goal quarter due to reduced operating leverage. Year-over-year selling administrative spending for the quarter was relatively flat. Advertising and sales promotion investment levels as a percentage of sales came in at about 10% of sales, or about equal to the year-ago quarter, with spending in our U.S. retail business coming in at 11% of sales. Our second quarter effective tax rate was 21%, compared to about 19% in the year-ago quarter. Net of all these factors, we delivered diluted net earnings per share of $1.46 versus $1.40 in the year-ago quarter. an increase of 4%. Turning to year-to-date cash flow, net cash provided by operations for the last six months of the fiscal year came in at $498 million versus $449 million in the year-ago period, an increase of 11%. The year-over-year increase was primarily due to lower working capital, partially offset by the timing of payments. Now we'll turn to our fiscal year 2020 outlook. As we mentioned in our press release, we've confirmed our fifth-year sales outlook of down low single digits to up 1%. We are now projecting a lower devaluation of the Argentine peso, which we expect to be offset by increased competitive activity in the bags and wraps and wipes categories, partially driven by resin cost deflation. Our fifth-year organic sales outlook now assumes a range of about flat to 2% growth. Embedded in our organic sales assumption is a more cautious near-term view of our back-to-back sales expectations for bags and wraps, reflecting increased competitive activity. Importantly, we continue to expect our grilling business to return to growth in the second half of the fiscal year. As a reminder, we had previously assumed devaluation of the Argentine peso at about 50%, and now our expectation is closer to 40% devaluation over the course of the fiscal year. Turning to gross margin, we now expect fiscal year gross margin to be up slightly, reflecting our expectations for ongoing cost favorability in commodities and a slightly lower impact on foreign currencies. These factors are expected to be partially offset by a lower pricing benefit in the back half, as we have now lapped the majority of our fiscal year 2019 pricing actions. Our fiscal year gross margin also reflects higher trade promotion spending to address increased competitive activity in select categories. In addition, our fifth-year gross margin outlook continues to anticipate additional supply chain investments to support long-term value creation, including a rollout of Clark's liquid bleach compaction beginning this quarter. We now expect fifth-year advertising and sales promotion investment levels to be slightly above 10% of sales, reflecting increased investments and support a robust innovation pipeline in the back half of the fiscal year. We also continue to expect selling administrative expenses to come in about 14% of sales. We now expect fifth-year EBIT margin to be about flat. Our outlook continues to anticipate our fifth-year tax rate to be in the range of 22% to 23%. Net of all these factors, We now expect fifth year 2020 diluted EPS to be in the range of 610 to 625, which raises the low end of our range by five cents. Before I turn it over to Benno, I'd like to reinforce that I'm pleased with the progress we continue to make on our business. We delivered our fifth consecutive quarter of gross margin expansion with strong contributions from our cost savings program. We also delivered another quarter of strong cashflow. Importantly, we remain on track to return to organic sales growth in the back half of the fiscal year. Looking ahead, I continue to believe Clorox is taking the right actions to deliver results that are more in line with our long-term financial goals as we continue to focus on executing our Ignite strategy to drive long-term shareholder value. And with that, I'll turn it over to Daniel.