Clorox Company (The)

Good day, ladies and gentlemen, and welcome to the Clorax Company third 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 would like to ask a question, you may press star 1 on your touch-tone pad at any time. If anyone should require assistance during the conference, Please press the star zero 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, Ms. Lisa Burhan, Vice President, Investor Relations for the Clorox Company. Ms. Burhan, you may begin the conference.

Thank you, Christine. Welcome, everyone, and thank you for joining us today. On the call with me today are Ben Odor, our Chair and CEO, and Kevin Jacobson, our CFO. Before I go into results, I just want to express how grateful we are to be speaking to all of you today. This is clearly an unprecedented time. Our thoughts are with everyone who has been affected by this pandemic, especially those who have lost friends and loved ones. At the same time, we're also inspired by so many. Frontline healthcare workers, first responders, delivery and grocery workers, our own production employees, and more. We're grateful to them for their selfless dedication to helping others. A few usual 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. 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 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, including, among others, statements related to the expected or potential impact of COVID-19. Actual results or outcomes could differ materially from management's current views, beliefs, assumptions, and expectations and plans. I would also direct you to read forward-looking disclaimers in our quarterly earnings release. Please review our most recent 10-K filings with SEC and our other SEC filings for a description of important factors that could cause results or outcomes to differ materially from management's current views, beliefs, assumptions, expectations, and plans. The company undertakes no obligation to update or revise any forward-looking statements. Turning to today's discussion of our business results, I'll start 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 fiscal year 2020. Finally, Benno will offer his perspective and will close with Q&A. For the total company, Q3 sales grew 15%, reflecting increases in every reportable segment. Organic sales were up 17%, supported by strong volume growth in all segments and significant demand of our products during this pandemic, products that either play an important role in public health or support the everyday lives of people especially if they spend more time at home. In cleaning segments, Q3 sales were up 32% for the quarter, with strong double-digit growth in all three businesses. For perspective, more than two-thirds of sales in this segment comes from products with disinfecting claims. In home care, Q3 sales increased by strong double-digits behind broad-based growth across the portfolio, with all-time record shipments of Clorox disinfecting wipes, Clorox toilet wand, Clorox clean-up disinfecting spray, Clorox disinfecting bathroom cleaner, Clorox Centiva products, and Clorox toilet bowl cleaner. Shipments were strong across all channels, but especially in non-track channels such as Club and Online, or volume growth was nearly double that in tract channels. While early, we're encouraged to see from our data that the majority of the higher demand is coming from incremental households rather than just stockpiling or higher usage from existing users. With the pandemic expected to have a sustained positive impact on consumers' disinfecting and hygiene habits, we'll invest further in our brands, turn incremental usage into loyalty. Laundry sales also grew by strong double digits for the quarter, fueled by high demand for Clorox Bleach, which has long been recommended by public health authorities for its disinfecting capabilities and the positive role it plays in public health. As we've mentioned in prior communication, we're running our plans around the clock to get our products to where they're needed the most. In the case of Clorox Bleach, we've been directing our shipments to healthcare facilities to prioritize supporting those on the front lines of public health. Putting recent demands aside, our bleach compaction rollout is in line with expectations, with our Clorox laundry sanitizing products are now on shelf. Consistent with our Ignite strategy, we'll support our brands and innovation with strong marketing investments to drive awareness and trial at a time when hygiene and disinfection is top of mind for consumers. Lastly, within the cleaning segment, our professional products business also saw strong double-digit sales growth, driven by unprecedented demands from healthcare facilities and commercial cleaning institutions that rely on our portfolio of disinfecting products. In this channel, higher shipments are driven by higher usage, as healthcare facilities are operating at full capacity, and there's a step-up in cleaning protocol everywhere. Turning to the household segment, June 3 sales were up 2%. Our cat litter sales were up strongly behind double-digit increase in volume as cat owners stocked up on essential products to care for their pets. Our FreshSap Clean Paws product line continues to resonate well with consumers, with all-time record high shipments this quarter, even its third year after initial launch. We'll continue to build on this differentiated platform and also highlight the value proposition of our Scoop Away brand, which is seen as affordable yet high performing. Grilling saw solid sales growth for the quarter, with grilling occasions up significantly as consumers stayed home. Importantly, we began to see improvements in the base health of this business even before the surge in demand related to COVID-19. There was higher consumption in January and February, and our share of the total grilling category was also up at the end of February in tract channels. Our innovation and pellets, a growing segment, shipped in March, and we're in the process of expanding distribution, which will build throughout the grilling season. Early retailer response to our plans has been positive, helping drive strong sales. Going forward, we'll continue to build on this momentum focusing on our strategy that includes enhancing consumer experience, implementing the right trade and pricing structure, and investing in innovation. GLAAD sales were down slightly for the quarter. Like the other businesses, GLAAD also saw a surge in demand as consumers stocked up on essentials to stay at home. However, that benefit for this business was more than offset by the negative impact from the loss of distribution at a customer. It's important to note that while there are many puts and takes in distribution in any particular quarter, we expect an overall net gain in distribution by the end of this quarter through significant wins at other customers. Earlier this quarter, before the surge in demand from COVID-19, we had already begun to see share improvements due to progress in closing price gaps and increased distribution in track channels. And we'll continue to build on this progress coupled with strong innovation and retail execution, return to profitable category growth. Going forward, we expect higher demand to continue, accompanied by higher usage as long as consumers are staying at home. In Renew Life, sales declined by double digits due to continued category and competitive headwinds. While there are early signs of progress and pockets of success, this business is not where we want it to be. We continue to believe this is a space with long-term tailwinds. Since we acquired this business, the category has fragmented more, including a proliferation of offerings that has led to an overall category deflation. We're actively partnering with retailers to reinvigorate the category. We've been seeing volume growth with two of our three top customers. Our brand relaunch in FY21 is on track. In our lifestyle segment, sales grew 10%, reflecting growth in three of four businesses. Root and fails were up high double digits on top of very strong results in the year-ago quarter. Our data shows that people are seeking out Brita's filtration systems and filters to ensure they have access to clean, great-tasting water during this pandemic. Merida is a business that has been building momentum even before the onset of the global pandemic, with consistent volume growth dating back more than a year. During this recession, we'll be focusing our marketing communication on value to further build on the good progress we've made in household penetration and share to drive profitable growth in the long run. Food sales were up strongly for the quarter, driven by higher shipments of bottled Hidden Valley Ranch dressing and dry Hidden Valley Ranch seasonings, as many more people cooked at home. The surge in demand due to COVID-19 builds on an already strong momentum within the Hidden Valley franchise, which has grown share and track channels for 21 consecutive quarters. Going forward, we expect this momentum to continue. In the last recession, our food business grew as people ate at home. The strong results in this quarter are allowing us to invest further in building our fast-growing online presence to capitalize on the ongoing shift to this channel. Sales were up strongly for the quarter, driven by continued strength in lip care and face care, and sales were driven by volume growth due to innovation, including double-digit shipment increases for both renewal and sensitive skin lines. Also contributing to the strong growth this quarter were higher shipments of personal hygiene products, in particular cleansers, moisturizers, baby care products that are so important to protecting families today. In March, the overall beauty segment was negatively impacted by store closures, as well as lower foot trapping in stores that remain open. As the stay-at-home measures are prolonged, consumer shopping patterns have also changed. While we expect the near-term While we expect softeners in the near term, with this category continuing to be negatively impacted, we believe the future of this business is bright, as fundamentals of our Burt's Bees brand remain very strong. Finally, sales for Nutrinex were down by double digits this quarter, mainly driven by a disruption of our supply chain related to COVID-19. While orders reached a record high in March, Fulfillment was challenged due to a shortage of labor at our third-party distributor in the face of the pandemic. Excluding the impact of this supply disruption, our strategic brands would have grown strongly. Lastly, turning to international, sales were up 11% for the quarter, driven mainly by 60% volume growth, as we saw very high demand from not just our cleaning and disinfecting products, but also our essential household products. Growth was broad-based, with double-digit volume increases in every single region. Sales were also impacted by unfavorable foreign currency headwinds of about 11%, partially offset by the benefits of pricing, which was implemented before the onset of the pandemic. With cleaning and disinfecting products accounting for more than half of the segment sales, that consumer demand in international to remain elevated in the near term. Now, I'll turn it over to Kevin, who will discuss our Q3 financial performance and our updated outlook for FY20.

Thank you, Lisa, and thank you, everyone, for joining us today, particularly during this difficult time. We hope you and your loved ones are well. I'm extremely proud of the strong financial results we delivered this quarter because they reflect how our company responded so quickly to address an unprecedented demand for disinfecting products and our other trusted products people count on every day as they shelter in place during this global pandemic. The impact from COVID-19 had a significant impact on our third quarter results. At the same time, I'm also encouraged by the continued progress we see in our core business prior to the increased sales as a result of COVID-19. In addition to our strong sales performance, we delivered our sixth consecutive quarter of gross margin expansion and another quarter of strong cash flow. And as you saw in our press release, with this quarter's strong performance and our expectation for continued strong demand for our products in the fourth quarter, we have raised our fiscal year outlook, which I'll discuss in a moment. Turning to our third quarter results, sales increased 15%, reflecting 18 points of volume growth, partially offset by two points of unfavorable foreign currency headwinds and one point of unfavorable price mix. On an organic sales basis, third quarter sales grew 17%. Additionally, based on the trends we were seeing in the quarter prior to the impact of COVID-19, sales were tracking in line with our original plan to return to organic sales growth in the back half of the fiscal year. Gross margin for the quarter increased 330 basis points, 46.7% compared to 43.4% for the year-ago quarter. Third quarter gross margin included the benefits of increased volume, as well as 150 basis points from cost savings and 90 basis points from pricing, primarily in our international markets to offset inflation. These factors were partially offset by 70 basis points of higher trade spending, 60 basis points of unfavorable mix and assortment, as well as 50 basis points of higher manufacturing and logistics costs. Third quarter gross margin also reflected ongoing cost favorability in commodities, partially offset by the impact of foreign currency headwinds. Additionally, while we did begin to incur costs late in the third quarter in our supply chain as a result of COVID-19, these costs would be more pronounced in our fourth quarter. Selling and administrative expenses as a percentage of sales came in at 15.1% compared to 13.9% in the year-ago quarter. This higher rate primarily reflects higher year-over-year incentive compensation expense, consistent with our pay-for-performance philosophy. In addition to higher incentive compensation expense, it also includes donations we made to nonprofit organizations in support of COVID-19 relief. 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. On an absolute basis, spending increased about $23 million versus a year ago quarter. Additionally, spending in our U.S. retail business came in at nearly 12% of sales. Importantly, we continue to invest in our brands and are not reducing investment levels during this period of heightened demand. Our third quarter effective tax rate was about 19% compared to about 22% in the year ago quarter due to higher excess tax benefits on stock-based compensations. Net of all these factors, we delivered diluted net earnings per share of $1.89 versus $1.44 in the year-ago quarter, an increase of 31%. Turning to cash flow, at the end of Q3, year-to-date net cash provided by operations increased to $806 million from $603 million in the year-ago period. The 34% year-over-year increase was primarily driven by lower working capital, due to reduced inventory positions to support increased demand and profitable sales growth. Now I'll turn to our fiscal year 2020 outlook, which we have updated at notice in our press release. Our fiscal year sales outlook is now expected to be in the range of 4% to 6% growth, driven by increased demand for our products as a result of COVID-19. Our sales outlook also reflects our ongoing efforts to accelerate the sales momentum of our portfolio, fueled by strong customer plans, meaningful back-up innovation programs, and higher consumer investments, leading to increased distribution. Our updated sales outlook continues to assume about two points of foreign exchange headwinds. Our fiscal year organic sales outlook now assumes a range of 6% to 8% growth. Turning to gross margin, we now expect fiscal year gross margin to be up strongly, or about 100 basis points. reflecting the continued benefit of operating leverage driven by our sales momentum, strong cost savings, and favorable category mix as our cleaning segment grows at an accelerated rate. This will be partially offset by temporary increased investments we are making within our production team in the form of increased wages and benefits, as well as enhanced safety measures. In addition to investing in our team, we are incurring increased transportation and warehousing costs as we expedite shipments to our customers to support the heightened demand for our products. We estimate these temporary cost increases to negatively impact our fourth quarter gross margin by about 250 basis points. We continue to expect fiscal advertising and sales promotion investment levels to be about 10% of sales. We now expect selling and administrative expenses to come in at about 15% of sales, reflecting anticipated higher incentive compensation. consistent with our commitment to our pay-for-performance philosophy. We now expect fiscal year EBIT margin to be up modestly, reflecting strong gross margin expansion partially offset by higher selling administrative expenses. We now expect our fiscal year effective tax rate to be in the range of 21% to 22% due to higher excess tax benefits on stock-based compensation. And out of all these factors, we now expect fiscal year 2020 diluted EPS to be in the range of 670 to 690. While this range is wider than what we would normally provide at this time of year, we think the range is appropriate given the heightened volatility we are managing, which makes estimating our fourth quarter results more challenging, as they will be influenced by a number of factors we don't directly control and are difficult to predict accurately at this time. Importantly, this outlook assumes minimal supply chain disruptions for the remainder of the fiscal year. We have temporarily suspended both of our share repurchase programs. While the company maintains a very strong balance sheet and access to additional capital, we believe this is a prudent action to take while we further assess the environment and our capital allocation plans. Before I turn over to Benno, I would like to reinforce that I'm pleased with the progress we continue to make on our base business. We've begun to rebuild distribution in the third quarter prior to the impact of COVID-19, and I expect that to continue this quarter. Additionally, we remain on track to deliver another strong year of cost savings, and we continue to increase brand investment in support of our strong innovation program focused on improving consumer value. Additionally, I'm pleased with our team's effort to significantly increase manufacturing production capacity while continuing to operate safely to help provide essential products needed during this global health crisis. We've made good progress to date, and expect to continue to expand disinfection production capacity over the balance of the calendar year and beyond, supported by the resiliency of our supply chain. To date, we have had no major disruptions, with all of our plants currently running and the vast majority of our contract manufacturers and suppliers continuing to operate. And finally, with accelerating revenue and cash flow, Clorox maintains a strong investment-grade balance sheet, giving the company plenty of financial flexibility. I believe Clorox is well positioned to manage through an economic recession while capitalizing on changing consumer behaviors as a result of this health crisis. And with that, I'll turn it over to Benno.