Clorox Company (The)

Good day, ladies and gentlemen, and welcome to the Clorox Company Third Quarter Fiscal Year 2021 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of the prepared remarks, we will conduct a question and answer session. If you would like to ask a question, you may press star 1 at any time. If anyone should require operator assistance, please press star 0. As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Ms. Lisa Burhan, Vice President of Investor Relations for the Clorox Company. Ms. Burhan, you may begin your conference.

Thanks, Christy. Welcome, everyone, and thank you for joining us. We hope you and your families are continuing to stay safe and well. I'll start by providing some context to this quarter to give you an understanding of the dynamic environment we're seeing as we begin to emerge from this pandemic. Then I'll have my usual 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 we'll close with Q&A. 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, that's cloroxcompany.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 outcome. 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, and the non-GAAP financial information section, which includes 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 files with the SEC. To help cut through some of the complexities this quarter, I'd like to share what we see as three important key takeaways. First, we're on track for another strong year. Our FY21 outlook continues to project double-digit sales growth. On a two-year stock basis, we're also positioned to deliver about 19% sales growth. Second, we continue to see opportunity to accelerate our long-term financial performance. For example, many consumer behaviors that have changed during the pandemic are expected to stick, including enhanced hygiene practices. We're leaning into these changes through new growth runways to help Clorox develop into a global disinfecting brand. And third, the pandemic has only reinforced the relevance of our Ignite strategy priorities which center around people and innovation, leveraging technology as a critical enabler. Now turning to our third quarter results. Our strategy has enabled us to deliver flat sales in Q3 on top of 15% growth in the year-ago quarter. Q3 sales reflected about one point of net benefit from July 2020 acquisition that gave us a majority share in our joint venture in Saudi Arabia. On an organic basis, sales were down 1%. In our health and wellness segment, sales were down 8%, reflecting declines in cleaning and PPD. Sales in cleaning business declined this quarter from lower shipments in a number of our cleaning and disinfecting products. The lower shipments are a result of demand normalization in bleach and Pine Sol relative to the year-ago period when consumers turned to these products given the persistent out-of-stocks in wipes and sprays at the onset of the pandemic. Segment results also reflect ongoing supply constraints in our wipes and sprays. Nonetheless, two-year stack growth remains very strong, reflecting a much higher level of consumer demand and household penetration than pre-pandemic, even as we begin to see a return to new normal in the U.S., with a growing percentage of the population vaccinated. As we continue to increase supply in our wipes and sprays, product availability and assortment will improve, which in turn should lead to improvements in shares. We're also excited to be bringing back some of the innovation we've had at pause during the pandemic, including Clorox compostable wipes and Clorox Centiva disinfecting sprays and wipes. Sales in our professional products business were down by double digits this quarter, due to lower shipments of cleaning and disinfecting products, as many businesses remain closed during the third quarter relative to the year-ago period. Similar to the trends in cleaning, demand for our consumer-preferred disinfectants like wipes and sprays remain elevated, and consumption continues to be limited by our ability to supply. And as expected, consumption of bleach and other cleaning and disinfecting products has normalized. With continuing category tailwinds, progress in our out-of-home partnerships, and a strong innovation pipeline, PPD fundamentals remain healthy. Importantly, we feel good about the prospects of this business. Lastly, within this segment, sales in our vitamins, minerals, and supplements business were up in the third quarter, driven by higher shipments of our strategic brands and lower trade spending. Notably, we were lapping a double-digit decrease from the year-ago period, driven by a disruption in our supply chain related to COVID-19. As noted in today's press release, we recorded a $267 million net non-cash impairment charge related to this business, which Kevin will address in more detail shortly. Despite this setback, we're moving forward focused on implementing a refreshed portfolio strategy and incorporating what we've learned since acquiring these brands. There continue to be strong tailwinds in the VMS space, and we have clarity on the path of this business becoming a more meaningful contributor in the long term. Again, just some brief context before I get into the results in our other businesses. Similar to cleaning, inventory levels in the year-ago period impacted Q3 results, especially in Brita, where we remain supply constrained. With continued elevated demand and supply challenges, several of our businesses in these segments have gone back on allocation. In household and lifestyle, consumers continuing to stay at home as well as business closures impact our businesses differently, benefiting some and challenging others. Nonetheless, our two-year staff growth across our segments remain very strong. and well above our long-term sales growth targets. Turning to the household segment, quarterly sales were up 6%, with growth recorded in all three businesses for a fourth consecutive quarter. Drilling sales were up by double digits in what was a record-setting quarter of shipments for the business. Through strategic collaborations with our retail partners, we've been able to continue to grow household penetration and share. In the past year, we've introduced Kingsford's products to more than 1 million new households, and they've invested in their backyards, including buying new charcoal and pellet grills, which will create a lasting tailwind for this business. Our pricing strategy has also led to a less promotional environment, which will reduce pantry loading going forward. And we've improved our product lineup and distribution. making it easier for consumers to find our Kingsford pellet innovation and new flavors of our Kingsford product lineup at even more locations nationwide. All these goodness is helping us build a healthy momentum for this business, which is especially important as we head into the peak of the grilling season and tough comparable periods. Cat litter sales increased this quarter, despite lapping consumer stockpiling in the year-ago period. The driving forces behind the business' strong performance have been its success in the e-commerce channel and innovation. Fresh Step with Gain continues to do well in bill distribution, with more innovation planned for Q4. Additionally, the record number of pet adoptions that has occurred during the past year will resonate for years to come, as cat parents continue to purchase necessities like litter long after the pandemic has ended. Glad sales increase in Q3. mainly behind lower trade promotion. As a reminder, while we began to see elevated demand at the tail end of the year-ago quarter, heavy consumption didn't occur until late in FY20, so Q4 will be a more challenging comparison than Q3. In recent months, we've also seen a significant resin price inflation. To manage those rising costs, we have announced a pricing action on this brand effective in July. As we've mentioned, we'll manage inflationary pressures holistically using all the tools in our toolbox. This approach will allow us to continue introducing innovation that resonates with consumers, which has driven profitable growth for the category for a long time. For example, over the past decade, we've started using higher quality resin that has allowed us to reduce overall use by 20%. resulting in a stronger bag with a reduced environmental footprint, all while improving our cost structure over time. Our latest innovation, GLAT ForceFlex with Clorox Trash Bags, has been performing well since its fall 2020 launch. In lifestyle segment, Q3 sales were flat. The food business had a double-digit sales increase for a fourth straight quarter, behind continued consumption growth of our Hidden Valley Ranch bottle dressings and dry seasonings. This growth was on top of high single-digit growth in the year-ago period. The ongoing trend of at-home meals has driven household penetration to another record high. Our optimism for this business is further fueled by the success of our latest innovation, Hidden Valley Secret Sauces and Hidden Valley Plant-Based Ranch Dressing, which have both been performing well. Brita sales in Q3 were down by double digits as the category consumption decelerated from its COVID-related buying spikes in the year-ago period. Despite these results, consumption level has remained much higher than pre-pandemic, partly fueled by strong filter replacements. As with wipes and sprays, our supply chains have not caught up with demand in Brita, particularly for filters, and impacting our shares and sales. On a positive note, we're continuing to make progress in addressing these supply issues, which has already helped us begin to recover share. First fee sales also decreased by double digits due to the changes in shopping and usage behavior that have occurred during the pandemic. The business was also lapping the effect of pantry loading in the year-ago period. Mask wearing and decreased mobility have created headwinds in both the lip care and face care segments. Still, the brand has not only maintained but fortified its position as the number one lip balm. As we prepare this business for improving consumer mobility and consumers returning to cosmetics and colors, we'll be launching Towelette's innovation in value sizes and a new watermelon set. These bright spots, combined with the continued growth in online channels, contribute to our confidence in the long-term growth prospects of this business. International has its own unique dynamics that sets us apart from our other segments. Unlike the U.S., most international markets where we operate don't yet have high vaccination rates. As a result, demand for cleaning and disinfecting products remain elevated. The two-year stock growth rate for this business is about 22%. In our international segment, Q3 sales grew 9%. These results show which reflect the combined impact of about seven points of benefit from the Saudi JV acquisition, and about two points from foreign currency headwinds, are on top of 11% growth in the year-ago period. Excluding the impact of Saudi acquisition, half of all sales growth was driven by the introduction of a new line of Clorox disinfecting wipes, mainly Flatpak's innovation source from our dedicated international supply chain, and launched in more than 30 countries this fiscal year. With strong innovation like this, and differentiation of our brands in their respective categories, we feel good about the growth runway of this business. Now, I'll turn it over to Kevin, who'll discuss our Q3 performance, as well as our updated outlook for FY21.

Thank you, Lisa, and thank you everyone for joining us today. We hope you and your families are well. Before I review our third quarter results, let me first address the non-cash impairment charge we reported today. The Better Health vitamins, minerals, and supplements business represents about 4% of total company sales, comprising several small brands we acquired in two separate transactions. Performance on this business has not delivered on our expectations. The impairment was a result of our update evaluation, which assumes lower sales and profit projections versus our initial expectations at the time of the acquisition, primarily driven by an increased level of competitive activity and the need for more investments to scale these small brands. As a result of our updated evaluation, we recorded a pre-tax, non-cash impairment charge of $329 to lower the carrying values of goodwill, trademarks, and other assets of the vitamin, mineral, and supplement business unit. Net of a deferred tax benefit of $62 million associated with this impairment, we recorded a $267 million charge to net income, or $2.11 per share. This represents about 27% of its initial purchase price. Going forward, we are implementing our refreshed portfolio strategy. We continue to believe in the attractiveness of the VMS space, driven by strong consumer tailwinds, and the strategic fit given our focus on health and wellness. Importantly, we fully expect that our VMS business will be a meaningful contributor to our company results over time. To ensure clarity around the underlying operating performance of our overall business, My comments on the third quarter results will exclude the impact of this non-cash impairment. In addition, my comments will exclude the impact of the one-time non-cash gain related to our Saudi joint venture acquisition. It's important to note that while the Saudi joint venture is expected to contribute 45 to 50 cents to our reported EPS, it includes a 60 cent non-cash gain that we're excluding from our adjusted EPS outlook. Moving forward, In our fiscal year adjusted EPS 21 outlook, we are continuing to include 10 to 15 cent charge, primarily from an ongoing intangible amortization related to the acquisition. Before I review our third quarter results, I'll comment briefly on our fiscal year outlook. As you saw in our press release, we've confirmed our fiscal year sales outlook and provided an adjusted EPS outlook, which excludes a non-cash impact from the VMS impairment in the third quarter as well as a one-time non-cash gain of the Saudi joint venture acquisition in the first quarter. For perspective, excluding these items helps provide clarity around our underlying operational performance, which is unchanged from our previous outlook. Importantly, I'm pleased we're on track to deliver another strong year for our shareholders, targeting a two-year stack of about 19% sales growth, well above our historical financial performance. Now, turning to our third quarter results. Third quarter sales were flat in comparison to 15% growth in the year-ago quarter when we saw the initial spike from COVID-19. Our sales results reflect a five-point decline in organic volume, offset by four points of favorable price mix and one-point benefit from our Saudi joint venture acquisition. On an organic basis, third quarter sales declined 1%. Our sales results came in largely as expected, although there's certainly variability across our portfolio. which reflects the very dynamic environment we continue to navigate. Importantly, we grew sales in six out of our 10 businesses. Gross margin for the quarter decreased 320 basis points to 43.5%, compared to 46.7% for the year-ago quarter. Gross margin results reflect a pronounced inflationary environment, resulting in 360 basis points of higher manufacturing and logistics costs, including temporary COVID-19 spending. as well as 170 basis points of higher commodity costs, primarily related to the rising cost of resin, partially impacted by the extreme weather events we experienced in the southern US earlier this quarter. Gross margin also reflects 100 basis points of negative impact from lower volume in the quarter. These factors are partially offset by 140 basis points of favorable trade promotion and 110 basis points of cost savings. Selling administrative expenses as a percentage of sales came in at 13.3% compared to 15.1% in the year-ago quarter, reflecting lower incentive compensation expenses primarily related to the non-cash impairment on the VMS business. Advertising and sales promotion investment levels as a percentage of sales came in at 11%, reflecting continued strong investments across our portfolio with U.S. spending at about 12% of sales. to support a robust innovation program in the back half of the fiscal year. Our third quarter effective tax rate was negative 1.4%, driven by the impairment charge we took on our VMS business. Excluding the impairment charge, our third quarter tax rate was 23%, compared to 19% in the year-ago quarter, as we lapped excess tax benefits on stock-based compensation. Net of all these factors, adjusted earnings per share for the third quarter came in at $1.62 versus $1.89 in the year-ago quarter, a decline of 14%. As you also saw in our press release, year-to-date net cash provided by operations was $893 million versus $806 million in the year-ago period, an increase of 11%. Our strong cash flow was due to profitable sales growth, partial offset by higher tax payments, and higher employee incentive and compensation payments. Turning to our updated fiscal year outlook, we continue to anticipate fiscal year sales to grow between 10 to 13%, reflecting the strength of our first half results and our ongoing assumptions for moderating demand over the balance of the fiscal year as we move beyond the peak of the pandemic in the U.S. and lap exceptional prior year comparisons. Our assumptions for one point of contribution from our Saudi joint venture, all set by one point of foreign exchange headwinds, remain the same. On organic sales basis, our outlook continues to assume 10% to 13% growth. We now expect fiscal year gross margin to be down due to a more pronounced headwinds from elevated commodity and transportation costs. We now expect fiscal year selling and administrative expenses to come in below 14% of sales, reflecting lower incentive compensation costs primarily due to our third quarter non-cash impairment on our VMS business. Additionally, we continue to anticipate fiscal year advertising spending to be about 11% of sales, reflecting our ongoing assumption to spend about 12% in the back half to support our innovation program. For perspective, this fiscal year, we're planning to spend about $125 million more versus a year ago to ensure we're leaning into engaging consumers to build lifetime loyalty to our brands. We continue to expect our fiscal year tax rate on a reported and adjusted basis to be between 21% and 22%. Net of these factors, we anticipate fiscal year adjusted EPS to be between $7.45 and $7.65, or 1% to 4% growth, reflecting the continued assumptions I mentioned last quarter, including strong top line performance, partially offset by an increasingly elevated cost environment. In closing, I'd like to note that as we transition from the peak of the pandemic in the US we're navigating a highly dynamic operating environment with the following factors that can influence our results in the near to medium term. First, category dynamics and consumption trends. As more people get vaccinated and become increasingly mobile in the U.S., although we recognize different markets are in varying stages of the pandemic, we're keeping an eye on short-term changes in these trends as they could cause variability in our top line. That said, longer term, we believe our portfolio will continue to play a meaningful role in addressing consumer megatrends that have accelerated over the last 12 months, which will contribute to higher demand for our products relative to demand levels prior to the pandemic. Second, more pronounced cost headwinds, which we'll plan to navigate with all the tools in our toolkit, including opportunities for pricing in key areas of our portfolio. And third, increased production capacity to support ongoing elevated demand, This remains a key priority for us as our teams continue to look for every opportunity to expand our production capacity while recognizing the ongoing volatility this creates in our extended supply chain. And finally, I'll reinforce that we're on track to deliver another strong year for our shareholders while keeping our sights set on the long term. As you saw in February, we raised our long-term annual sales target to 3% to 5% based on the early success of our Ignite strategy and our continued plans to lean in even further with strong investments behind our brands, people, technology, production capacity, and, of course, our new growth opportunities, where we believe we have a right to win. These efforts are all in service of our broader ambition to accelerate profitable growth to create long-term value for our shareholders. And with that, I'll turn it over to Linda.