Q2 2020 Earnings Call
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Good day, ladies and gentlemen, and welcome to the Clorox Company second quarter fiscal year 2020, <unk> earnings release Conference call. At this time all participants are in listen only mode. At the conclusion of our prepared remarks, we will conduct a question answer session. If you'd like to ask a question you May press star one on your touched on pad at any time if anyone.
I would 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'd now like to introduce your host for today's conference call at least upper hand, Vice President of Investor Relations for the Clorox Company May spur hand, you may begin your conference.
Thanks, you're welcome everyone and thanks for joining us today on the call with me today, our Benno Dorer, our chairman and CEO, Kevin Jason our CFO or broadcasting this call over the Internet and replaced the call will be available for seven days at our website clocks company dotcom.
On today's call 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 operation.
Conservations with the most directly comparable financial measures determined in accordance with GAAP can be found in today's press release. This webcast prepared remark or supplemental information available on our website as well as it should be filing.
In particular, it may be helpful to refer to people located at the end of todays earnings release.
He's also recognize that today's discussion contain forward looking statements.
Actual results or outcomes could differ materially from management's expectation that plan.
It also directly to lead the forward looking disclaimers in our quarterly earnings release.
Please review our most recent tend to filing with the FCC 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 topline commentary discussing highlight in each of our second.
And then we will then address our financial results as well as outlook for fiscal year 2025.
Finally, I know offers perspective, and we'll close the acuity.
For the total company.
The sales decreased 2%.
These results are on top of solid sales growth in the year ago period.
Organic sales were flat.
Well now go through our results by segment.
You know cleaning segment.
He just sales for sat flat for the quarter as gains in professional products in 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.
Rob toilet Bowl cleaners, and Clarkson Teva, particularly in non tracked channel.
Our thinking about innovation platform continues to show robust growth even three years after initial launch.
We remain focused on driving superior consumer values for meaningful innovation like ours, and she loves what might be Clos, which are doing well and continued to build distribution.
And you send across the platform he should grapefruit will start shipping this summer.
Additionally, we were pleased to deliver record second quarter shipment growth Clorox disinfecting wipes.
However, our shares in this category continued to be down as a result of higher competitive merchandising activity.
And we expect these activities to continue in the back half the fiscal year, we're increasing our investment to support the long term health of our brand.
We're doing this in two ways.
So.
We're strengthening our merchandising plans with higher trade investments.
And second we're increasing our marketing investments behind Clorox compostable cleaning way.
Chip has a positive early reception from both retailers and consumers.
Laundry sales were down for the quarter.
Driven primarily by distribution losses, among retailers select retailers, which continues from last quarter.
We expect improvement going forward as we start rolling out a full lineup compacted leach products. This month.
Our plants. This fiscal year also included in new laundry Sanitizing innovation platform.
Started shipping towards 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 its momentum and delivered another quarter of robust sales growth was broad based growth across all channels and product line supported by innovation.
Turning to the household segment.
Q2 sales were down 8%.
Declines in all businesses.
In backed in rats, she to sales were down due to ongoing distribution losses, and select portions of the portfolio and increased competitive activity.
Well, 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 lease competitive price reductions and higher promotional activities to continue in the back half the fiscal year.
With 18 focus on consumer value, we're further increasing our investments in glad and coupling that with a number of innovation to drive long term profitable growth for our brand and the category.
As expected grueling sales were down double digits this quarter.
Well consumption was strong it was more than offset by lower shipments as we finish working through higher retail inventory from a week 2019 grilling 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 shipment.
Going forward, we remained focus on executing our strategy three areas.
One enhancing the consumer experience to implementing the right trait and pricing structure and three.
Investing in innovation, including our core chocolate products and alternative fuels such as pellets.
As noted in our press release, we've changed the name of this strategic business unit from truck will to grilling.
To reflect our broad 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 F 121.
Finally, our cat litter business was down slightly due to higher trade spending and lapping strong double digit sales growth in the year go quarter, which benefited from price increases.
The fresh step clean pop innovation platform, which saw a double digit increase in shipments. This quarter continues to show promise, we're investing behind this momentum in the back half.
In our lifestyle segment sales grew 4%.
Reflecting volume growth across all businesses.
Burts bees delivered a record quarter sales driven by continued strength in its core categories of lift care and face care.
In lift care burts bees, a cheap in 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.
Workspace lip balm has grown shares for 20 consecutive quarters for five years in a row.
This success was fueled by strong pipeline of innovation, such as the watermelon and and flavors.
In face care math, the restage sensitive skin care line and core cleansers, all had double digit consumption growth.
Well its sales were up again this quarter supported by higher merchandising level driving strong shipments of hidden Valley ranch products.
On the innovation site.
We're ready to eat did platform is expanding to include French I mean, Fiesta ranch, and it's a lux cheese and ranch did.
And while a new hidden Valley Ranch secret sauce line, which was launched in January is continuing to help unlock new hidden valley ranch eating occasion.
Hidden Valley Ranch extended to streak of shared rose to 20 quarters.
We're just sales were up strongly behind higher shipments of our premium filtering bottles and long last filters and water filtration system.
New product, including large capacity plastic and stainless steel bottles are expected to enhance the filtering water bottle information platform even further.
Building on consistent volume growth in Bretaa that now dates back more than a year.
Finally sales for a new trucks 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 investment further to drive additional awareness and trial in these emerging in fast growing categories.
The decrease in non strategic 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, Tony to international.
Sales were down 2% for the quarter, reflecting eight points of foreign currency headwinds mainly from Argentina.
Partially offset by the benefits of price increases.
Organic sales in the segment grew 6% consistent with art, 6% consistent with our ignite strategy that aims to improve profitability in international.
We're continuing to invest selectively in profitable market and growth platforms to keep yielding returns on businesses like burts bees cat litter and the parks equity.
Now, let me turn it over to Kevin who will discuss our Q2 financial performance in our updated outlook for F. Why 20.
Thank you Lisa and thank everyone for joining us today I'm pleased with the progress you've made in Q2 as we delivered sequential improvement organic sales.
For fiscal second quarter gross margin expansion and another quarter strong cash flow.
I'm also encouraged by our continued progress bags and wraps grilling business units.
I can see continued sequential improvement on these businesses in the back half of the fiscal year.
As you saw a press release I'm update around book, 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 corridor.
Second quarter gross margin included the benefit of 150 basis points from cost savings.
100 basis points from pricing.
These factors were partially offset by 90 basis points are a trade spending 80 basis points higher manufacturing and logistics costs.
Second quarter gross margin also reflected ongoing cost fairborn commodities, partially offset by the impact from foreign currency headwinds.
Selling and administrative expenses as a percentage of sales came in slightly higher at 14.5 per cent compared to 14.3% can you go quarter due to reduced operating leverage year over year selling administrative spending for the quarter was relatively flat.
Advertising and sales motion investment levels as a percentage of sales came in about 10% of sales or dot equal to a year ago corridor.
We're spending in our U.S. retail business coming in at 11% of sales.
Second quarter effective tax rate was 21% compared to about 19% year ago corridor.
Net of all these factors, we delivered diluted net earnings per share of $1.46 versus the dollar forties in a 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 a year ago period, an increase of 11%.
Year over year increase was primarily due to lower working capital.
Partially offset by the timing of payments.
Now I'll turn to our fiscal year 2020 outlook.
As we mentioned our press release, we've confirmed our fiscal year sales outlook of down low single digits drew up 1%.
We're now projecting a lower devaluation of the Argentine peso, which we expect to be offset by increased competitive activity and the bags and wraps and whites categories, partially driven by resin cost deflation.
Our fiscal year organic sales I look now assumes a range of about flat to 2% growth.
Embedded in organic sales assumption is a more cautious near term view of our back enough sales expectations for bags and wraps reflecting increased competitive activity.
Importantly, we continue to expect our drilling business to return to growth in the second half of the fiscal year.
As a reminder, we've 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 just your gross margin to be up slightly.
Reflecting our expectations for ongoing cost favorability in commodities and a slightly lower impact from foreign currencies.
These factors are expected to be partially offset by a lower pricing benefit in the back half as we've now lapped the majority of our 50 or 19 pricing actions.
Our fiscal your gross margin also reflects higher trade promotion spending to address increased competitive activity and select categories.
In addition are typically your gross margin outlook continues to anticipate additional supply chain investments to support long term value creation.
Including a roll out of Clorox liquid bleach compaction, beginning this quarter.
We now expect disappear advertising and sales promotion investment levels to be slightly above 10% of sales, reflecting increased investments in support or what 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 disappeared EBIT margin to be about flat.
Our outlook continues to anticipate our fifth gear tax rate to be in a range of 20% to 23%.
Net of all these factors we now expect this 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 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 gross margin expansion were strong contributions from our cost savings program. We also delivered another quarter of strong cash flow.
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 courses, taking the right actions to low results that are more in line with our long term financial goals as we continue to focus on executing our night strategy to drive long term shareholder value.
With that I'll turn it over to battle.
Hello, everyone and thank you Kevin.
They are my freaky messages for the second quarter.
First.
Well, let's hope I performance is not yet where it needs to be I'm pleased with the progress we're making on a business, which is evident in our Q2 results.
As I look at the results of our overall portfolio in the quarter I do feel good about the growth. We saw the number of growth Clorox branded products in a home care business, even as I fully expect stronger growth in the wife's category in the future.
I'm also pleased about the broad based strength in our professional products business.
In lifestyle Burts bees continues its strong topline momentum with record quarterly sales and we saw a sustained strength in our food business behind increased merchandising support and also in water filtration behind innovation.
And once again our team in international continues to drive a very good results in currency neutral terms behind strong execution about pricing initiatives.
I'm also pleased to have delivered a fifth consecutive quarter of gross margin expansion supported by a strong cost savings program.
Importantly.
We are continuing a focus on improving our bags and wraps and grilling businesses.
Well not grilling business, we're pleased to see solid consumption growth and we feel good about retailer reception to our go to market plans for the 2020 grilling season.
No. There's we're finished working through retailer inventory from the year ago season, we continue to expect this business to grow in the second half.
No it's Kevin mentioned.
Were taken a somewhat more cautious near term view about bags and wraps business given our expectations for continued increased competitive activity.
Moving forward on glad.
We are focused on driving superior consumer value.
We'll do this with a consistent stream of unique innovations leveraging of superior capabilities and technology and consumer insights backed by category leading advertising investments.
We believe these focus areas will allow us to sustain our competitive advantage and helping gauge retailers leading to strong is still positions.
As I look at the other parts of our portfolio generally I feel good about a backup plans.
Which reflect our expectation for improved sales behind strong innovation and marketing plans as well as progress on the distribution front.
This brings me to my next message, which is that we have strong consumer and retail plans for the second half of the fiscal year fueled by increased investments that reflect confidence you know innovation program.
Bringing value to our consumers and retailers is the key to returning to growth.
Our second half plans emphasizes that we're executing with a strong sense of urgency yet also the right way.
A relentless focus on strengthening the value proposition of our brands through meaningful innovation continues with a strong pipeline of new products in the back half, including the complexion of clorox liquid bleach as well as the introduction of Clorox compostable cleanly whites draw fabric Sanitizers Kingsford grilling pellets.
And several innovations and bags and wraps food and natural personal care.
As you saw in our press release, we're leaning harder into supporting awareness and trial behind these new products.
With plans to increase year over year advertising spending in the second half of fiscal year.
And of course will continue to invest behind the momentum in significant upside opportunity in ongoing innovation platforms, such as clorox since Eva fresh step clean pause grid up filtering water bottles and hidden valley ready to eat dips.
As I mentioned last quarter.
We expect a retailer engagement in the strength of our innovation programs will contribute contributes to better back half results.
I'm very encouraged by the strong retail receptions to our innovation, so far which is part of why we're stepping up our advertising investments.
And finally, I'm pleased about a progress to prove distribution trends moving forward.
Well prove another will provide another update in Q3 runs result, so in market, but I do feel good about the constructive conversations with retailers overall, putting us in a position to earn meaningful net distribution gains across our portfolio into any 20.
And so my last message I'd like to reinforce that I have the confidence that I ignite strategy will guide us into ongoing pursuit of delivering long term shareholder value.
The focus of ignite is to innovate across the entire clorox value chain burn People's enduring loyalty to our leading brands.
We are innovating, how we build friends.
And on track to begin implementing purpose on all major U.S. spreads by the end of this fiscal year, which should significantly boost marketing ROI overtime.
We are innovating shopping experiences and making good progress engaging customers in strategies to grow their businesses through new and frictionless experiences that can help eliminate shopping barriers in our categories.
We are innovating, how we work by continuing to invest in digitizing our supply chain to drive productivity and we remain focused on achieving on new higher annual cost savings target of about 175 basis points.
And finally, we are driving our ESG commitments to create value for all our stakeholders.
As we invest in major sustainability driven product innovations in the second half. We also are accelerating our goal of achieving 100% renewable electricity in the western Canada to 2021.
Full years ahead of our original goal.
We continue to view as she is fundamental to long term value creation.
And I'm pleased with our progress to integrate you see even further in our business strategy.
Operator, you May now open up the line for questions.
If you have a question. Please press star one on your Touchtone telephone. Your first question comes from Steve powers with Deutsche Bank.
Great. Thanks, Hey, guys.
Maybe maybe first Kevin just a quick cleanup and clarification on Argentina are you getting incremental pricing in that market I just asked because I think your October outlook presumed do you would not just wanted to understand what the current state was.
Yeah, Hi, Steve Good morning, Yes, we are getting pricing Bennett from Argentina.
Maybe just a little more background there as you saw we've updated our expectations for devaluation, we assume 50%.
We've seen the currency hold up pretty well in our second quarter and so we revised up to 40%.
But additionally, we get out pretty early with pricing Argentina. So.
So we took a number of price increases in the first quarter that are certainly benefiting the overall profitability matching our international segment.
Okay, Perfect and then second clarification I think despite the competitive challenges the flat organic result, this quarter came in a little better than you telegraphed in October you know was there a particular driver there and then like in the context of of the full year coming down that implied second half reversal is that just bags.
Perhaps in grilling staying weaker than plan for a bit longer requiring more work or other areas showing less resilience versus what you hope doors or that you know I think it's the former but just wanted to want to clarify that.
Sure. So on the first part of the question, Yeah did come a little bit better than we anticipated. There's really two areas. The first was FX a wall is still about a two point drag there was a little bit better than we anticipated in the quarter and the other area was our lifestyle segment.
It was really strong performance underperformance is really broad based we saw every business within that segment performed quite well and exceeded our expectations.
And then as we look out over the full year or would it be the two areas that we've highlighted is we are seeing increased competitive activity in two categories are wipes category and our bags and wraps category. So.
Because of that we will increase trade spending to defend share in those categories and and specifically maybe to bags and wraps I'd tell you not surprising we've seen this before when you when you see the type of resin deflation, we typically see manufacturers invest more when that occurs and so we're gonna have to spend some money to defend there.
And then Steve on your question on growing we continue to feel very good about grilling its on track with their expectations for the full year, we fully expect to return that business the growth and so that business is very much on track, Okay, and if I could maybe for benno.
In addition to the promotional investment you're also as we discussed stepping up to AMPU investments.
Mike My guess is that that's target a different businesses than the than the promotional spend so.
Can you confirm that then I guess, what's really motivating the uptick is it's just that you have more funds given the given the FX environment. So you figure out the flexibility to spend or is there there's something you've seen that's giving you more confidence in the and the ROI now versus three months ago. Thanks.
Let's see if the stepping investments really reflects our confidence in our plans that's a sole motivation.
It certainly does include a strong retail reception to our innovations also had a few cases strong initial consumption results out of the gate on some of the innovations that we launched in January which includes compostable wipes.
So we're leaning into this innovation to lean into the momentum that we all see and of course three months ago six months ago. We would have said that we're taking a more realistic view of our spending given that there were still cycling through distribution losses and now of course in the back half.
We are lapping those distribution losses, we expect given the productive discussions that we have with retailers.
You know solid results on a distribution fronds. So it's really driven by the confidence that we have enough plans the spending will go into.
Novations that we launched for the back half, but also innovation is from previous years that I mentioned, some like Clorox, utiba, which still showing robust growth a clean pause on fresh step, which grew double digits last quarter, you know brito filtering bottles switch is showing a nice.
Nice continued progress.
Ready to eat tips on hidden valley, which.
We are supported with more innovation go into back half we feel.
Really strongly encouraged about all the back half plans and we're not afraid to invest behind it.
A question and maybe that could come up in the context of it.
That is maybe worthy of addressing upfront is do we expect the change in our midterm outlook on how much we will spend in advertising and sales promotion that we answer to that is no. This is really a an increase that is really related to the back couple of this fiscal year, we certainly comedy in the past that we.
Thinks that an average level of about 10% of sales per.
Fiscal year is the right level and we continue to believe that.
Perfect. Thanks again.
Next question comes from Steve Strike, you Love would you be us.
Hi, good morning, or good afternoon.
So I know a just a very straightforward question wanted to understand the back half sales as a relatively wide range and just wanted to understand based off your retail conversations with seemed like they went well well take just to the low end versus the high end.
You know, whether it's the distribution clarity or maybe the consumer pull through and responsiveness to some of the innovation. Thank you.
Yes, it's a combination Steve.
You know certainly what we.
First slow its assayed or six months left in the in the fiscal year, but.
You know several things can make up for the range first of all competitive activity right. We cannot predict that than we have commented that certainly in twoq.
Categories were seeing the promotional and merchandising environment increase as.
Those categories tend to be more sensitive in spending towards the.
In particular resin environments, which as you know is a little more favorable at this point, so cannot fully predictive pretty competitive activity, but that can have a major impact a distribution outcomes. You know so we know quite a bit of course on what distribution outcomes are but we don't know everything.
We also know.
<unk> from the information that we have.
About decisions that retailers may have taken as it relates to all brands, but not competitive brands.
That's still ahead of us.
And then of course, you know Corona virus, a cold and flu you know that hasn't been a factor in Q2.
And you know so far we're not seeing an uptick but it's a rapidly evolving.
Situations. So we're certainly watching that and we're getting ready to.
Able to supply our customers and also a health care institutional customers.
With product should they need that's to help consumers combat the virus. So this of three pretty important swing items that could lead us to the lower or higher ends, but all in all we feel like the midpoint of the range would point to a 3% sales growth.
In the back half on average which of course is very much in line with the ongoing algorithm because we're investing in.
Items that they will just have a short term impact, but drive our brand equities and have a long term impact we feel like those investments also set us up nicely for.
A solid fiscal year 21.
Thank you.
Next question comes from Andrea Teixeira with JP Morgan.
Hi, Thank you so I understand you have easy [noise].
[noise] [noise], Andrea you're breaking up quite a bit.
Next question.
Hey, operator, maybe we move onto the next question I'm trying to have Andrea call Bye.
Next question comes from Wendy Nicholson with Citi.
Hi, I'm. Good afternoon, a couple of quick ones first thing, Kevin maybe just to clarify the trade spending in the quarter I think he said it was 90 basis points.
Gross margin pressure, but if my memory is right I think it was 180 basis points in the first cornerstone is that just a timing issue I would've expected higher spending this quarter as you try we gained distribution et cetera, et cetera, and see more gross margin pressure from that but curious if there's any commentary on that.
Yeah, Hi, Wendy good good afternoon, you're right on your memory was 90 basis points. This quarter. It was 180 basis point hit the margin last quarter.
The biggest change from the first quarter is less investment in charcoal as we cycle through the bulk of the season is rising lesa mentioned her prepared remarks.
Q2 is a pretty small quarter for us so we have less investment in the category in Q2.
And as we also said what we're really working on the trade spending is working through higher retail inventories is and we had a poor season, you're 19, we want to make sure. We're set up for a strong season here 20, and so we've been investing in trade in that business, both Q1 and to a lesser extent Q2, and we feel like we're in a good position now as we had to seed your 20 that we've got Reid.
Inventories right and we're ready for a much stronger season.
Got it got it that makes sense it on the bleach compaction and I think you said we're shipping this month, what's your expectation for competition do you think they follow the same degree of compaction do you think theres going to be incremental promotion.
How much of a price increase are you embedding maybe can you just talk a little bit more about that that'd be great.
Yeah, what do you so or complexion, starting this month as you rightly said that it.
We'll take until the end of fiscal year Ah Theres no pricing.
It's a straight conversion typically with with the initiation of retailers, we see a whole can we move so of course, we have yet to see that's because that's really.
Well outside our control, but if this compaction wave mirrors previous compaction waves than what we typically see is the whole koby to move because this really is an initiative said.
Certainly good forward of manufacturers is good for retailers. It's good for the category. It's also good for the planets. So it's a win win win win and there really is a reason for that category now to move consumers of course are getting a more convenient product.
And again Theres no performance trade off for consumers need eight or so we are optimistic that this will be an initiative that will see the whole category rules and he will provide an update after Q3.
Got it fair enough and then my very last question. It's just on [noise] trash bags, you know in the Nielsen data that we saw today and I know Nielsen enter doesn't tell the whole story or even even close to the whole story, but still.
You commented on a higher level of competitive activity in in the bags category on the trashed side in particular on it looks like private label is the one who is actually doing more of the promotions, but their market shares are increasing so I wondered if you could just comments kind of on your read where the promotion is coming from.
What do you see in in the in the broader University, where do your more worried about the branded side of the competitive dynamic or where the private label side. Thanks.
It really varies by category Wendy on the glad side, we see what you see that.
You know if I take us back a few months ago. What we said is that we are spending.
In trades to address price gaps that really works, we sell price gaps or moved down and we saw a significant increase in momentum on our business. What we've seen more recently a in a more benign resin environment is set in particular from private label.
You know we are seeing more activity and we see price caps increase again now we also see what I think you hinted on and that has said that's really not working for the category a category trends are softer. We've always comments is that people are not.
Buying more trash bags, if there are cheaper and that's pretty much a how it's playing out and what that really does this gives us optimism that in the long run.
Rational behavior will prevail and that's we're going to see a continued a balance a in the category that will allow a premium brands to grow behind innovation is delivering value that consumer see a superior and that's certainly our focus in this category.
Got it thank you very much.
Next question comes from Andrea Teixeira with JP Morgan.
[noise], taking thank you for taking me back sorry for before so I was hoping to go back to the cadence of the second half for organic.
I understand what do you decide in terms of into passive regaining distribution interest to one I believe one large customer a is that something that we should be looking more into the fourth quarter voting with why do you intend to Wendy and then on the gross margin just a clarification in terms of the gross margin breaches that Kevin with.
Talking about is I commodities actually getting better like for the second half for I understand you're going to lap. Some of these oh this improvement by the fourth quarter. So I just want to know if embedded on that you are actually having a better outlook for commodities then done before thank you.
Sure Hi, Andrew it's Kevin or anything but your question.
On organic progression what you should assume is we continue to demonstrate sequential improvement as we move through the year and so as you recall in Q1 organic was down about 2%.
It was flat in our most recent corridor and if you take the midpoint of our organic sales outlook. It would suggest three points of organic sales growth in the back half year and I'd expect to continue to see sequential improvement as we move through the back half year much of the distribution benefits will have a bigger impact in Q4, then they will in Q3.
And so that's what I expected to progress.
And then maybe just also you know as we think about organic sales go from here the zero to 2% you know I would just offer I'm I'm much less concerned about the average for the year end and much more focus on the momentum we're creating as we head into 15 or 21, so I feel very good about the progress you're making in where I believe we'll end up in the fourth quarters, because we haven't.
21, and then on gross margins on in terms of the commodity environment. What I'd tell you is if I sent resident side commodities are pretty much playing out as we expected which is slightly inflationary I'm generally in line with broader inflation in the and the economy and that's pretty consistent what we expected. What we are seeing is while we expect.
I would rather than to be deflationary, we certainly saw a bigger movement in the second quarter than we anticipated I still think it'll be down in the back half the year, but to a lesser degree.
Hi, typically what we see as a manufacturers go down for planned maintenance in the spring and that usually put a little upward pressure.
Now I think what we have to balance out right now is with what's going on with the Corona buyers and it's certainly reducing overall global productivity, we want to see what that does to global demand for resin, but for right. Now my expectation is that continues to be favorable but not to the same degree was on the front half.
Thank you appreciate.
Your.
Next question comes from Lauren Lieberman men with Barclays.
Great. Thanks.
I just wanted to go back to distribution. Because then I think the specific language you use was that well we positioned ourselves well to earn back distribution. So I just wanted to get a sense for how much visibility you do have at this point for boasting building and kinda traditional.
Reset timeline of this quarter and then even you know going into Q4.
Yes, so overseas wording carefully chosen because you know as always and there's all manufacturers we have to earn distribution from retailers like because they have to believe that oh products of value added said that two things are going on first of all as you as you remember there a number of distribution losses post pricing.
That will now lapping in the back half.
And so you know that that should play in our favor and then you know realize that you'd all like a very detailed updates but the reality is not all decisions are made by retailers, Rick Rodriguez, requiring us to be respectful here or there of course also competitive implications because.
This is all sensitive and like I said earlier, we know a quite a bit of our.
Distribution results for the back half, but not all this will play out with implementation in Q3 into Q4, but clearly I think as you are also saw let's talk about.
The conversations that we have we feel good about them being constructive and productive we have a lot of innovation innovation is generally is effective in driving distribution and you know our sales outlook for the back half a you know wouldn't be doable without generally.
A more favorable environment on distribution. So you know I think this is probably the appropriate way for us to characterize where we are there will be a further updates in Q3, but you know the fact that we're investing more in our brands is based on confidence as we balls.
Said earlier.
And certainly how we feel about the conversations that we have with retailers an indication that we may get should they materialize the way we think they might.
We feel positive about what we'll see in that environment, and then or more update in Q3.
Okay, great. Thanks, and then just continuing to another question on the bags and wraps category to one thing that change you know very recently is now your competitor right is it's public. So we've got a lot more visibility on into dynamic in that category and I think.
Many of us really understood in the path.
No.
You know one of the things it was interesting to me in that process was seeing the innovation with in particular with ultra strong Richard or the bad that's a real competitor to force left and that it's actually been on its been capacity has been capacity constraint there so [noise].
You just you looking forward as you're thinking about competitive dynamics I'm thinking about your branded competitor thinking about innovation there thinking about that they were capacity constrained. While you were losing distributions just anything more you can offer on this builds back right is there a lot of innovation in your plan is there adjustments in your pricing.
Sure.
That kind of helps you regain leadership positions that you know as it is a total in that business. Thanks.
Yeah. One of course, we're following the close even though I will tell you that you know many of the things that he accord were news to us a certainly don't want to speculate.
About what what might happen, but there are two things for them, perhaps the most important here. The first one is that generally publicly traded companies care about the topline and also margin growth and what that does is drive productive and rational behaviors. So you know we just leave it there and second you know we remain confident.
Right to win in these categories, which really isn't affected by them going public first of all.
You know we have commented on a superior innovation capability.
You know that we continue to have with the joint venture that we maintained with Procter and Gamble I'd just point to the more than hundreds patents and patent applications that we have a over the last five years and that compares to less than 10 for the said company and then.
You know as we think about a brand building efforts. The fact that we continue to be a leading investor and in the consumer in this category along with our commitment and superior consumer value that's been a robust.
Right to win for.
For sure a decade and a half now since we've had a the joint venture and the proof will be in a in our continued innovation and without getting into details. All I can say is that we we have a lot of confidence in not just step back kind of innovation on this business and as you know there's quite a bit.
In the long term innovation as we manage innovation with the minimum three year timeframe.
We know obviously about the innovation that we have coming onto the business and.
They're pretty happy with the innovation platform that we have on glad and we're pretty confident that we can get this business back on track once we've cycled through other well documented issues, which we continue to characterize a short term.
Okay. Thanks, so much.
Next question comes from Olivia Tong with Bank of America.
Great. Thanks [noise].
But on your commentary around [noise].
And why you think that about 10% to celebrate number because if competition spending more and you feel good about your line up why wouldn't you look to invest more heavily over a longer time period or is it just would you prefer to keep that flexibility in between training support between promotion.
Thanks.
The only be we've always commented that we're not afraid to spend more or should there be an opportunity and right now certainly there's an opportunity and spending of course is also broadly defined right, whether that's in advertising sales promotion or capital spending and initiatives that deliver growth. So we will always prior.
Hi, just a long term health about brands, we will always manage this business for the long term versus for the quarter. So all those things that I know you, but you used to from Clorox. They remain a true said that you know we think this does the overall spending level in advertising sales promotion isn't going up.
So as a general rule of thumb, we like the 10% part of why we're taking it up in the back half is fed into front half, we spend less than 10% because we have waited for a backup innovations of two to come on and certainly the fact that a margin situations.
Slightly more positive gives us a little bit of room to do so but 10% continues to be the right number will always take a look at that but a that's been a <unk> right number for awhile and we don't see any reason.
Why we should move off of that.
Got it and then just on gross margin raw materials. Obviously, we can see has been a nice driver, but has there been any change in your expectations in other areas, particularly either coffee or manufacturing logistics last quarter, you mentioned a delay in the winter plant any other changes in terms of timing project that might be helping me here, but.
<unk> expenses will eventually common.
Further down the line.
Hi, Livia, Yeah, I would say no no real changes in time your expectations for the year as we mentioned we have Q large.
Hi savings projects bleach compaction, our nuclear facility.
Those projects both continue to progress as you know obviously compaction, we're starting this quarter Lennar, we're probably a 18 to 24 months out before we bring in new plant online, but those both continue on track.
[noise]. Thank you.
Next question comes from Nik Modi with RBC.
[noise] Yeah. Good afternoon, everyone. Then can you just talk about what's going on in laundry in terms of some of the.
Distribution losses, I mean in Japan here can we build distribution or was it just cutting space overall oh.
The aisle and then on the compaction you know how should we think about the margin implications of that as as you guys kind of get the full scale of the distribution of that product.
Yeah, Thanks, Eric laundry was down for the quarter suddenly in volume and share and yeah, that's not a aspiration for the business. So certainly not happy with that.
The reason is mostly a post pricing distribution losses, you know sounds like a broken record, perhaps but that's.
Course been a known issue on several of the categories and something that we're cycling through.
You know said that also give the perspective set up past 15 Bucks a share through November.
It's about 61% and that's well within the long term range and just to name three examples it's higher than it was two years ago, two years ago and four years ago. So maybe that's helpful.
Oh perspective.
Feeling good about back half plans, obviously on the distributions I cannot say what will happen to the category, we have seen a little bit all the contraction in overall space that's a retailers.
Dedicate to this category, which isn't necessarily a bad thing and generally a leading brands and importantly, leading skews up benefiting from that because its greatest a shelf clarity. So we haven't seen a reduction in.
Overall shelf space for the category leads to.
Or.
Reduction in sales so a reduction in market share.
It wouldn't be our expectation that among compaction, perhaps.
African compaction, perhaps a distribution is about neutral or versus what it is today because all we're trying to do is convert the category, we're not using that as an opportunity to.
Built distribution, we really leveling the playing field with compaction.
You know margin.
Impact on complexion, obviously is positive you know what we've commented on in the past is that the last time, we contacted it was a 500 basis point margin improvement to the business.
We'd expect this wanting to be somewhat lower but still meaningful.
To that business. So you know feeling good about complexion feeling a that this initiative is on track.
Also won a point in laundry to fabric Sanitizers switch, we're launching now and is off to a good start.
And that will be one of the initiatives that we're investing in quite significantly because it's a a growing category that's become quite sizeable and it's one given the nature of the category Sanitization, where we feel like the clorox name.
Has a strong equity with consumers and customers for that matter.
And we feel like our products can add meaningful value to that category and its momentum. So people feel good about the back half in laundry and expect better results certainly not happy with the share losses and also the volume losses in a in Q2.
Thank you very helpful.
Next question comes from Ali Dibadj with Bernstein.
Hi, guys. So I have a few I wouldn't like first to just go back to Lawrence question.
You know we've seen no glad volatility based on commodities for a while it just feels like that the market share shifts have been a little bit more severe this time, particularly.
Hi, I'm back them out specifically sorry, particularly.
Given the fact that you change your portfolio on bags and wraps and gotten out of that kind of lower end stuff for the past few years.
And so I I, you know I I struggle with.
You know Reynolds hasn't changed the dynamic of the industry that margin dynamic for you that much, particularly because you guys will remember that the think lock it one if I remember this impact it was public it's not like things, where we're easier in fact, it sounds like there are harder than they were the past few years. So just want to go back to that question and really get a sense of.
Well, you really think theres no impact or is even better that that a big competitors now public and and I'd say that in the context of Academy that just doesn't grow sort of go topline you really have to go to market share.
Ah, Yes, and profit. So you know all assays that are that want to speculate at this point and what it all I did say is that for a publicly traded company.
Buying growth in my buying market share it doesn't necessarily work because margins and profit growth matters too you know so we'll see how it all plays out you and I followed this category for long time, obviously I don't remember it being.
Easier more difficult when packet was public. The reality is this is a very competitive category. There's no question.
And we have a lost some market share, but you know if I unpack that a little bit the market shares are mostly because of a post pricing distribution losses, so its own doing and what I've commented on in the past is that we have taken into account very conscious.
A tradeoff between short term and long term.
If you then look at swear to distribution losses occur, though and also the share losses occur there mainly in the in the less profitable based trash segment as you note and also in food storage as you know, we're very focused on trash if I look at the into a premium trash bag, which is the hard about business.
And also the largest sub segments a in trash and as you can imagine a one of the more profitable parts of the business that part actually grew in Q2, you know so there's puts and takes on Glads. Clearly you know, we're taking a more cautious approach clearly we are in.
Mode of defending this business and not everything is rosy, while we're seeing green shoots, but what I'd say is that we have confidence and our right to win in this category the right to win in this category does not change.
And ER, we're investing behind it switch expenses are a confidence going forward.
Okay helpful contacts that do you want to go back to you mentioned long term a short term and ended on investments.
Do you guys over the Ohio, while.
I've looked at things like charcoal strategically and bread and strategically and others that I'm sure you're not going to name strategically I'm sure glad isn't as well.
I guess, if you take a step back what why do you own glad strategically.
[noise]. So you know first of all I can confirm that we've looked at certain businesses that you've mentioned under so so I guess there wouldn't be speculation on your end and I Hope you can tolerate me, saying that how do we own glaxo why do we own glad strategically is first of all its very aligned with our capable.
Deliveries.
First of all the second.
Over the long term, it's added an enormous amount of shareholder value. So obviously, we want to each of the businesses that we own to add shareholder value in the long term.
That doesn't mean that you know every now and then there's a business that struggles in the short term.
And you know whether that was britt a year or two ago, which is now one of our strongest performing businesses or.
No later and no charcoal certainly falls into that camp right now as well that doesn't happen in a highly diversified portfolio. So while we always look at.
Whether and how we can be the highest value owner of our business.
We like this business were confidence in our plans forward and it's a very solid fit with our capabilities on multiple fronts.
Okay, and then last question maybe for Kevin.
On a gross margin drivers.
If you look at kind of a net price so price change and then subtract out the trade spend that you mentioned in a footnote.
You know went negative 16 negative and really if you go back as part of positive 19, a negative 16 negative 10 for Q1 Q2.
Right well maybe twist on.
I think wendy's question earlier, but I like what should we expect.
Gross margin impact a net pricing to be as we go forward.
[noise] definitely there is a pretty big inflection points. It will start in Q3 does as I'm sure as you recall most of the pricing we took last year was front loaded so.
So it's driven very nice benefits to margin.
You'll see a pretty material change starting in Q3. So if you think about the front half of this year pricing generated about 110 death benefit to gross margin I.
I expect in the back half the year, you'll see that closer to 2025 bit benefit as we now cycled through it and so what I expect to see going forward is a smaller benefit from pricing.
A little bit of international still to go and then you'll have the impact of trade spending as we've talked about some increased competitive activity that will address with increased trade spending and so trade spending will outpace the benefit from pricing as we're thinking about the back half the year.
Got it sounds like a negative 990 basis points, you saw from higher trade promotion spending that but no number four will be even higher than 90 has a price changes will be closer to 20 to 25.
Yeah, I think in terms of net benefit just because you'll see less benefit from pricing you know you won't see ongoing trade investment got it. Okay. Thank you very much. Thanks again for thanks, Sean.
Next question comes from Camille Gosh, why along with credit Suisse.
Thank you everybody [laughter] I know you mentioned that you know happy with inventory levels can you give a little more context on the impact that.
Decreasing inventory levels had on your topline over the past couple of quarters.
Yeah, well Hey, this is Kevin I can address that one and I would say we feel very good about the progress you're making on inventory.
I can view out if you saw in our prepared remarks.
We had very nice growth in and cash provided by operations over the first six months is up 11%, that's primarily driven lots of really good work, we're doing on on improvements in working capital and specifically inventory.
And I would highlight a number of areas. The first is on our neutral next acquisition. We go in that business, a little less than two years and I think we continue to get better understand the demand signal and managing inventory to meet demand. So we've got more efficient on that business overtime.
The other two my point do you have on Bretaa. If you recall, we moved our supply chain were just finishing up moving or just lodging out of China do the Dominican Republic.
We started to do that work because of the tariffs that were in Bose.
But we don't know some additional safety stock inventory to to manage that transition were which were mostly through now.
And beyond gave the safety stock out one system. We also now have moved production much closer to the market and to allow us to keep less inventory I going forward.
And then the last one of my point do is as we've done some nice work in our glass business you know as as we recapitalized that plan based on new technology. If you recall forced like came off patent while back we've introduced our new patent protected technology, and we've invested manufacturing assets behind that technology we.
Lots more on line recently this allowed us to reduce overall inventory levels like glad that's been very nice benefit that should continue and so good work to date, what I'd also tell you know as as we look forward and then what made this comment earlier, we do understand the krona involved Corona virus is something we're thoughtful about.
We'll see how that plays out with retailers, but we are taking up inventory levels to be prepared for the pendulum potential increases demand for our some of our bleach products and so that's something you'll see in the back half a year.
Okay got it and then you also mentioned in your in here in the press release on cleaning.
Some unfavorable mix effect from from channel shift.
Can you just talk a little bit about what you're talking about there was this product specific as a margin specific what exactly is the difference there.
They are pretty pretty simple camille thanks for allowing us to clarify so there's some non tracked channels where.
The net sales for volume sold is lower right. So think about club typically where.
Products are sold at a discount.
That shows up as a drag into sales or at least in the volume to sales ratio and that's happening in cleaning, where we see you know certain parts of our portfolio in part of a non tracked channel performed particularly well.
Got it thank you.
Next question comes from Jason English with Goldman Sachs.
Excellent. Thank you guys or excuse me and I appreciate it.
HM two questions from me first a pretty simple one.
Compaction.
You start shipping this quarter should we expect a nice pipeline fill given the the shelf holding capacity.
For the comedy many more bottles with a smaller size.
No not really I don't think it's gonna be their material Jason.
Okay.
Like I said that was quick and easy one now stepping back.
You mentioned a few times the.
The broad based distribution losses that you have suffered in the wake up the price increases.
I I step back and I I rewind the clock to the time, where you were taken these prices in do you were very pleased then and you were very confident then like you are now oh into in the strength to the relationship. So the retailers you know TQL you remember you, saying the top to top the the conversations are strong the message is one of support for you.
Yeah in the wake Weve Youve, we've seen a lot of lot of negative negative ratification suppose action. So.
What change.
Where what did you sort of misjudge in that that caused that derailment incense all that's happened.
Well what steps if you take into kind of go the other way in men those relationships and strengthen them to the point, where you now how this resounding confidence and your ability to recover the distribution and drive the sharpest question on the back half.
Yes, if I rewind and what what really happened was that first of all right. After we took pricing.
Our consumption was very strong as you will remember.
That was prior to it it is distribution losses, but what we said then is that we expect significant bumpiness and the significant Bumpiness would show up for example in distribution losses any merchandising losses. So that's exactly what happens and and as a result, I don't really see any change.
So you don't find me any <unk> more or less confidence on this than I was six months ago or 18 months ago. The reality is that we're playing a long game here, we're protecting our ability to.
Grow margins.
In the face of cost adversity with an eye on the long term and retailers understand that's the retailer certainly also didn't consistent they like that as we had anticipated you know where their cases, perhaps like I'm glad that where it was more pronounced dead, we had anticipated I would absolutely.
We say that that's true in parts because as Weve duly noted.
Like so many.
Institutions in companies, we didnt necessarily get the resin forecast right right. So if I if I look back I would have liked to gets.
More accuracy into our resident forecast because maybe a plan forward then would have been different and maybe distribution losses. If I speculate for a second would have been more benign, but by and large this is playing out exactly as we anticipated then.
We've always said that we're after good growth and good growth is.
Profitable and sustainable and responsible and you know we don't like the distribution in the share losses, either at the same time, we do like our margin enhancements, which allows us to invest in the momentum of our brands in the back half and that's what we're focused on.
Okay. Thank you I'll pass it on.
Well, we'll take one more question after this.
Yeah, we have a question from Kevin Grundy with Jefferies. Please go ahead.
Hey, Hello, everyone. Thanks for squeezing me in HM two quick ones for me because we've covered a lot of ground, but I just want to make sure I'm clear on the messaging with respect to the adequacy of the investment levels in your guidance for this year. So it sounds like the additional investment behind price and trade investment and advertising and marketing well positioned the company well.
To get back to its normal type of algorithm back half of this year and into next year. So the both topline and from an earnings perspective as best we know sort of steady state commodities. If you could confirm that I'm just trying to handicap. The rest of this is a multiyear necessity for higher restaurant level. So maybe you could just or comment on that and then quickly on M&A given some of the challenges.
And in some of your bigger businesses are you any less inclined near term.
On the M&A front, given the potential distraction and integration risk. Thank you.
Deltic I'll take M&A and then Kevin It's Gonna take your good question on.
But as assist force levels.
Not anymore or less inclined to do M&A. Then we always are as we always comments, we look at many things.
Throughout the year, certainly continue to find desired valuations to be on the higher side and we'll continue to be disciplined what do we have said in the past is that our priority is to have a healthy core. So I'll focus right now is on just bats, and we like the progress.
Said that you know for a good acquisition that is on strategy and where we feel like we can add clear value to a business. We couldn't we remain open so that there's no change to what we've.
Talked about doing on Investor day in October.
And Kevin on on your questions about investment levels I would make a couple of comments first as I'm sure. You can appreciate and will provide the outlook for fiscal or 21, we'll come back and do that the labor day, but what I would say is as Ben mentioned, we do believe 10% about is the right investment level, sometimes a little bit more sometimes a little bit.
Last but feel like that's the right level.
Levels of investment long term.
And we are working to get back to our ignite financial goals. We set back in October if you recall, 2% to 4% topline growth.
We believe we're taking the right actions to get back to those levels in the back half a year and that's certainly what we care about is that momentum going into fiscal or 21 that we get back to growing the top line.
It's over the long term goals, while extending margins and we feel pretty good about our ability to do that.
Okay. Thank you good luck.
Thank you Kevin.
This concludes the question answer session Mr. door I would now like turn the program over to you.
Yeah. Thank you all and Ah all except to say is that I look forward to talking with you again in may when we discuss our Q3 results. Thank you and have a good day everyone.
Oh.
This concludes today's conference call. Thank you for participating you may now disconnect.
[music].