Q3 2020 Earnings Call
Good day, ladies and gentlemen, and welcome to the Clorox Company third quarter fiscal year 2020, <unk> earnings release conference call I.
At this time all participants are in listen only mode at the conclusion I prepared remarks, we will conduct a question and answer session. If he would like to ask a question. You May proceed star one on your touched on pad at any time.
Anyone should require assistance during the conference. Please press the star zero on your touched on pad at any time.
As a reminder, this call is being recorded.
I would now like to introduce your host for today's conference must be suffer had vice President Investor Relations for the Clorox Company Mr. Han you may begin the conference.
Thank you Christine welcome everyone and thank you for joining us today.
On the call with me today are better outdoor or chair and CEO and Kevin Jacobs and our CFO.
Before I go into result.
Just one express how grateful we are to be seeking to all of you today.
This is clearly an unprecedented.
Our thoughts are with everyone what has been affected by that I've done it.
Especially those with lots of friends and loved ones.
The same time.
We're also inspired by so many.
Line healthcare workers.
First responder.
Delivery in grocery workers are old production employees and more.
We are grateful to them, so so dedication to hold the others.
A few usual reminders before we go into result.
We're broadcasting this call over the Internet and it reflects the coal will be available for seven days and all but second comedy dotcom.
On today's call, we may refer to certain non-GAAP financial measures, including but not limited to free cash flow EBIT margin debt to EBITDA organic sales growth and economic profit.
Management believes that providing insights on these measures enable investors to better understand airlines are going results of operation.
Reconciliations with the most directly comparable financial measures determined in accordance with guests can be found in today's press release. This webcast prepared remarks or supplemental information available on our website as well.
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In particular, it may be helpful to refer to tables located at the end of todays Arnie.
Please also recognize that today's discussion contain forward looking.
Including among others statements related to the expected or potential impact of course.
Actual results or outcomes could differ materially management's current views beliefs assumptions and expectations.
I would also direct you to we weren't looking disclaimer quarterly earnings release.
Please review, our most recent SEC filings with SBC and other.
Right description of important factors.
That could cost results or outcomes to differ materially from management's current views beliefs assumptions expectations and.
The company undertakes no obligation to update.
Any forward looking.
Turning to today's discussion over business results, well start covering our topline commentary as usual with highlight each of our second.
And then will then address our financial results as bullish outlook for fiscal year 2020.
Finally.
And I will offer its perspective, it will close this you anyway.
For the total company.
We still grew 15%.
Reflecting increases in every reportable segment.
Organic sales were up 17%.
Supported by strong volume growth in all segments behind significant demand of our product joined us and Debbie.
Product that either play an important role in public health.
Or support the everyday life, so people, especially if they spend more time at home.
In cleaning segment.
Q3 sales were up 32% for the quarter.
Strong double digit growth all three.
For perspective.
More than two thirds upsale in this segment comes from product with disinfecting clean.
In hope here.
Q3 sales increased by strong double digit.
Behind broad based growth across the portfolio.
With all time record shipments a box disinfecting wipes.
Well it one.
Well I cleanup disinfecting spray.
Works disinfecting back leaner.
Alex and people products and lock toilet global.
Shipments were strong across all channels.
Especially in non tracked channel.
Just club and online.
Or volume growth with nearly double that in tracked channel.
Well early we're encouraged to see from our data that the majority of the higher demand is coming from incremental household rather than just stockpiling or higher usage from existing users.
With the pandemic expected tend to sustain positive impact on consumers disinfecting in hiding habits.
That's brother in all brands.
<unk> incremental usage into loyalty.
[noise] laundry sales also grew by strong double digits for the quarter.
Fueled by higher demand for Clorox bleach.
Which has long been recommended by public Health Authority sports Disinfecting people bleed into positive role it plays in public health.
As was mentioned prior communication.
We're running our plants around the clock to get our products to worry there needed them, though.
In the case Clorox bleach, we've been directing our shipments to health care facilities to prioritize supporting those on the frontline some public health.
Putting recently mattersight or at least complexion rollout is inline with expectation.
With our Hawks laundry sanitizing products are now on shelf.
Consistent with our ignite strategy will support our brands and innovation with strong marketing investment 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.
And then by unprecedented demands from health care facilities, and commercial cleaning institution that rely on our portfolio disinfecting products.
In the channel higher shipments are driven by higher usage as health care facilities are operating at full capacity, there was a step up including political everywhere.
Turning to the household segment.
Q3 sales were up 2%.
Our cat litter sales were up strongly behind double digit increase in Boeing as cat owners stocked up on its essential products to care for their pets.
A fresh that clean Pos product line continues to resonate well with consumers.
With all time High records, all all time record high shipments this quarter, even it third year after initial launch.
Well continue to build on this differentiated platform.
Also highlights the value proposition or school away from what you've seen us affordable in high performing.
Grilling Socialist sales lift for the quarter with grilling occasion up significantly as consumer stay at home.
Importantly, we begin to see improvement in the based health at this business, even before the surgeon handyman related cobot 19.
There was higher consumption in January February and our share of the brought total grilling category was also up at the end of February and truck gel.
Our innovation and pellets a growing segment shipped in March.
In the process of expanding distribution, which will build throughout the grilling season.
Early retailer response to our plans has its hard to helping drive strong sales.
Going forward, we'll continue to build on this momentum.
Focusing on our strategy that includes enhancing consumer experience.
Letting the right trade and pricing structure and investing in innovation.
Lots sales were down slightly for the quarter.
Like the other businesses, let also saw assertion demand.
Stocked up on essential to stay at home.
However that benefit for this business with more than offset by the negative impact from the loss of distribution tumor.
It's important to note that well there are many puts and takes and a district in distribution in any particular quarter.
We expect to overall net gain distribution by the end of this quarter was significant wins at other customers.
Earlier this quarter before the surge in demand from called at Nike.
We had already begun to see shared Christmas do progressing I got an increased distribution and tracked channel.
And we'll continue to build on this program.
The strong innovation and retail execution to return to profitable category growth.
Going forward, we expect higher demand to continue.
Company by higher usage as long as consumers are staying at home.
In renew life.
Sales declined by double digits due to continued category competitive habits.
Well, there early signs of progress and pockets of success.
This is not where we want it to be.
We continue to believe this is the space with long term tailwind.
Since we acquired this business the category as Frank mentioned more including a proliferation of offerings that has led to an overall category deflation.
We are actively partnering with retailers to reintegrate the category.
We've been seeing volume growth without you.
Our three top customers.
Our brand relaunch in equity 21 is on track.
And our lifestyle segment.
Sales grew 10% reflecting growth in three or four businesses.
We're just sales were up high double digits on top of very strong results in the or go quarter.
Our data shows that people are seeking out Britain filtration system filters to ensure that access to clean we test tasting water joined dependent Inc.
Bretaa, it's a business that had been building momentum even before the onset of the global today 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 was made in household penetration, it's here to drive profitable growth in the long right.
Food sales were up strongly for the quarter driven by higher shipments a bottle hidden valley ranch dressing and dry hidden valley ranch season, as many more people cooking at home.
The search in demand you called it 19 built on an already strong momentum within hidden Valley franchise.
We just growing share and tracked channels for 21 consecutive quarters.
Going forward, we expect this momentum to continue.
In the last recession or food business grew as people at home.
The strong result in this quarter are allowing us to invest further.
In building our stock right online presence to capitalize on the ongoing shift to the channel.
She also feel strongly for the quarter.
Driven by continued strength in lift here and take care.
Sales were driven by volume growth due to innovation, including double digit shipment increases for both renewal and sensitive skin line.
Also contributing to the strong growth this quarter were higher shipments of personal hygiene products in particular, cleansers moisturizers baby care products that are some baby care products that are so important to protecting families today.
In March.
The overall beauty segment was negatively impacted by store closures.
Well as lower for Tropic its towards that remain open.
At the state home measures are prolonged.
Consumer shopping patterns have also changed.
Well, we expect the near term well, we expect sovereign or in the near term with this category continuing to be negatively impacted we believe the future of this business is bright.
It's fundamentals up a burts bees brand remains very strong.
Finally sales for new trucks were down by double digits this quarter.
Mainly driven by disruption up our supply chain related to cobot Nike.
Well orders reached a record high March fulfillment. It was challenged due to a shortage of labor at our third party distributor in the face of dependent.
Excluding the impact of this supply disruption or strategic brands would have grown strong.
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 household sensible 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 benefit the pricing.
Which was implemented before the onset of dependable.
The cleaning and disinfecting products accounting for more than half the second sales.
We expect consumer demand international to remain elevated in the near term.
Now I'll turn it over to Kevin will discuss our Q3 financial performance.
And our updated outlook for at least one.
Thank you Lisa.
Thank you everyone for joining us today, particularly during difficult times, you don't view your loved ones are well.
I'm extremely proud struck financial results. We delivered this quarter I can say reflect our company responded so quickly to address an unprecedented demand for disinfecting products and our other trusted products people count on every day as a shelter in place during the school pandemic.
Yeah, It back from Cowen Nike at a significant impact on our third quarter results.
At the same time I'm also encouraged by the continued progress we see our core business acquired increased sales as a result.
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In addition to our strong sales performance, we delivered our sixth consecutive quarter gross margin expansion.
And another quarter of strong cash flow.
As you saw in a press release, well this quarter strong performance and our expectation for continued strong demand for products in the fourth quarter.
Raised or just your outlook, which owns questionable.
Turning to our third quarter results.
Sales increased 15%, reflecting 18 point to avoid growth.
Partially offset by two points of unfavorable foreign currency headwinds.
One point of unbearable price next.
On an organic sales basis third quarter sales grew 17%.
Additionally, based from the trends, we're seeing in the quarter prior to the impact of covert 19 sales are 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 to 46.7%.
<unk> 0.3, 0.4% a year ago corridor.
Third quarter gross margin, including the benefits of increased volumes as well as 150 basis points from cost savings.
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 was 50 basis points 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.
Well, we did begin to incur cost late in the third quarter and our supply chain as a result of cold and 90. These costs would be more pronounced in our fourth quarter.
Selling and administrative expenses as a percentage of sale came at 15.1%.
Third a 13.9% in your good quarter.
It's 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 non profit organizations and supportive covert 19 relief.
Advertising and sales motion investment levels as a percentage of sales came in at about 10% of sales.
About equal to the year ago corridor.
On an absolute basis spending increased about $23 million versus 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 your go quarter due to higher excess tax benefits on stock based compensation.
Net of all these factors, we deliver diluted net earnings per share of $1.89 versus the dollar 44, and a 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 806 million from 603 million in your go up here.
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 off just your 2020 outlook, which we have updated and notice in our press release.
Or just your sales outlook is now expected to be in the range of 4% to 6% growth.
Driven by increased demand for products as a result of Copel 90 or.
Our sales outlook also reflects our ongoing efforts to accelerate the sales momentum or portfolio.
By strong customer plans.
Meaningful backup innovation programs and higher consumer investments leading to increased distribution.
Our updated sales outlook continues to assume about two points a foreign exchange headwinds.
Our fiscal 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 ourselves momentum.
Strong cost savings and favorable category mix as or cleaning segment grows at an accelerated rate.
This will be partially offset by temporary increase investments, we're making within our production team in a form of increased wages and benefits as well as enhance safety majors.
In addition to investing in our team, we're incurring increased transportation and warehousing costs as we expedite shipments to our customers.
For the heightened demand for products.
We estimate these temporary cost increases to negatively impact our fourth quarter gross margin by about 250 basis points.
We continue to expect disk your advertising and sales promotion investment levels to be about 10% of sales.
We now expect selling administrative expenses to come in at about 50% of sales.
Reflecting anticipated higher incentive compensation consistent with our commitment to our pay for performance philosophy.
We now expect disappear EBIT margin to be up modestly reflecting strong gross margin expansion.
Partially offset by higher selling administrative expenses.
We now expect or 50, your effective tax rate to be in the range of 21% to 22% due to higher excess tax benefits on stock based compensation.
Net of all these factors, we now expect fiscal year 2020 diluted EPS to be in the range of 676 nine.
Well this range is wider than what we would normally provided this time of year. We think arrange is appropriate given the heightened volatility, we're managing which makes estimating our fourth quarter results more challenging because they'll be influenced by a number of factors. We don't directly control are difficult to predict accurately at this time.
Importantly, this outlook assumes minimal supply chain disruptions for the remainder of the fiscal year.
Additionally, we have temporarily suspended both of our share repurchase programs.
Well the company maintains a very strong balance sheet and access to additional capital. We believe this is a prudent action to take what we further assessed environment and our capital allocation plants.
Before I turn it over to panel I would like to reinforce that I'm pleased with the progress we continue to make our base business, we've begun to rebuild distribution that third quarter prior to the impact of Coke 90, I expect that to continue this quarter.
Additionally, we remain on track to delivered 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 a central 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.
Today, we have had no major disruptions with all of our plans currently running and the vast majority of our contract manufacturers and suppliers continuing to operate.
And finally, we like celebrating revenue and cash flow Corks maintains a strong investment grade balance sheet, given the company plenty of financial flexibility.
I believe costs as well position to manage through an economic recession, what capitalizing on changing consumer behaviors as result of this health crisis.
And with that I'll turn it over to Benno.
Thanks, Kevin.
Appreciate all of your joining the call today.
Hearts go out to everyone, who has been impacted by this global health crisis.
We hope that you and your family, so safe and well.
Crosses a health and wellness company at heart and doing these past few months a mission has never been clear.
In the uncharted territory presented by coping 90, we knew it was important to act quickly to help always grounded in our most important company value to the right thing.
We know that the public is counting on of course company on a products around the world.
And our team of 8800 strong is stepping up everyday to make a difference the right way.
But this in mind here to three important takeaways from today's call.
First I am proud about People's leadership, and passion in serving public health.
Which has been rewarded by a consumer's customers and the communities. We serve and has led to strong Q3 financial results.
Back in early January we activated our company to guide our response to increase supply to protect public health. Some people and we have pursued three priorities since then.
Center first protecting to health safety, and well being up by employees second, making cash and product contributions to support caregivers and other organizations, providing corona virus really.
Third.
Maximizing supply to get up products when I needed most.
In the U.S., our employees qualify as critical infrastructure workers, because we make a central household products.
A third quarter results reflect directly on the outstanding job that people are doing in the face of extraordinary circumstances.
Health and wellbeing and that about families is top of mind.
To support those who continue to work enough facilities, we've enhanced our infection prevention measures, we've increased pay and added benefits for the frontline work is making up products for a broader global team. We've established an initial 1 million dollar employee really fun to provide covert 19 support to them and the fan.
Please.
For more than 100 years.
The Cross company has helped communities in times of local health crisis and natural disasters.
As we work with our communities to help support them in paddling. This crisis, we have now committed about $14 million in cash and product the nation.
In addition to our initial 5 million dollar to support caregivers on the front lines or additional support extends to organizations such as feeding America and americares as well as local organizations in the United States and internationally, helping to meet the needs of vulnerable populations in our communities.
Clearly, we have faced extraordinary demand for our products, especially our disinfecting products to try and meet demand to the greatest extent possible, we've been running out cleaning and disinfecting product plans 24 seven.
To increase output, we've accessed third party supply sources focus on manufacturing of disinfecting products and those that can be supplied most quickly and we've been partnering with suppliers and retailers to get product where it is needed the most.
In the United States in Q3, we supplied 40 million more disinfecting units for consumers and end users for an increase of more than 40% persist the ever go quarter.
We are very grateful to our he ROI production associates, who made this possible.
Additionally, we continue to find new ways to produce more disinfecting wipes and other products such as Jeremy title Bleach for health care facilities.
Importantly, we have zero tolerance for price gouging.
And we want to ensure that everyone has access to outside of Tizing disinfecting products that standard prices at all times and especially now.
As such we have taken aggressive action to combat price gouging, including partnering with Andre online retail platforms to identify and remove such offers or sellers into third party marketplace.
Need it we're collaborating with law enforcement agencies in connection with third party price gouging increase readout regarding disinfecting products.
[noise] more than ever in an uncertain environment people trying to trusted brands. They can count on a clock says the most trusted brands in many of the categories. We competed.
And we see that reflected in strong market share performance and in rising household penetration on many of our U.S. brands.
We also see it and strong double digit sales growth of six consecutive quarter of gross margin expansion and up 31% diluted Dps growth this last quarter.
My second messages I feel good about their progress, we're making on our core business, which also contributed to our strong Q3 growth and he is on track against our expectations for the back half.
In Q3 before the impact of Cobot 19 volume and sales growth trends were in line with expectations and we were seeing anticipated distribution gains.
We were particularly pleased with a significant progress we will make it on our drilling business.
Sure trends have been improving prior to the impact of Koby 19 and have accelerated since that.
I'm pleased that we go share in six out of my businesses and track channels.
Our strong innovation program for the back half played a meaningful part in these improvements in grilling, we launched a new kingsford hard wood pellets, which help gained strong retail attraction for a 2020 Realty grilling season plans and we'll build distribution throughout the season.
In laundry, we started shipping out called pack to bleach product and we're very pleased with initiatives performance to date.
Other innovations off to promising starts, including a new platform of talks older eliminating fabric and some traffic Sanitizers I know glad section steel food storage pact that stretch around food to keep it fresh which builds on a highly successful crescent see an innovation.
[noise], one exception to our Q3 innovation plans was a new clocks compostable cleaning wipes, which were off to a tremendous start.
However, we made a deliberate choice to temporarily suspended production in order to prioritize disinfecting wipes at this time.
We will pick up on this initiative as soon as possible and remain very excited about its future prospects.
What's important to understand is a business is performing well at its core prior to the impact of the pandemic. We were very pleased with the trends we're seeing on the majority of the business.
We were rebuilding distribution sales were strong gross margin was continuing to expand.
We expect those core trends to continue into fourth quarter, even as we experience for the impact from Koby nineties.
[noise] and my last point today is we remain confident that our strong portfolio, how ignite strategy, our organization and a core capabilities will position us to pursue imagine emerging opportunities and to manage through the expected near term challenges to perform well and generate long term shareholder.
Value.
[noise] as we're facing a period of volatility with a global economy now in economic recession. There are number of external factors monetary.
Cobot 19 will continue to impact global consumer behavior future government actions and no supply chain and it's difficult to predict the near term future.
With predictions that personal income will decline during the recession as unemployment rises we anticipate discretionary spending will contract that's consumers prioritize essential.
At the same time.
We are seeing new households, entering several of our categories and we will invest strongly to try and many of them into loyal consumers.
Most prominently early indications are that the heightened awareness of the role disinfecting products play in public health brought about by this pandemic, maybe more lasting and following past global health crisis, and will provide a meaningful long term growth trend for a company.
Crocs is the most trusted brand in the United States home care category.
With differentiated products fueled by strong innovation program and our commitment to strongly invest in this business.
Optimistic about a future prospects given the elevated roll disinfecting products will haven't consumers' lives for the foreseeable future.
Moreover, our portfolio has proven to be relatively recession resilient in the past as major caulks categories like trash grilling and food generally benefit from consumers eating out less that's when its water filtration as consumers recognize the superior value grid or filtered water.
Comparing to bottled water.
The percentage of a U.S. portfolio that is seen by consumers as delivering superior value was at an all time high level. Since we began using this measure.
Visioning, our brands as well as we enter this recession.
We will remain keenly focused on consumer value through brought strong brand investments meaningful innovation inadequate price caps.
And given our expanding margins and strong cash flow backed by strong portfolio strategy and core capabilities clocks is uniquely positioned to play offense, but anything into investments into long term health about business.
As we manage through an unprecedented business environment near term, we remain committed to long term value creation for shareholders and all stakeholders.
And we'll continue to be a purpose driven business committed to U.S.G. and to doing the right thing.
This call value of our company has served us well since 1913.
And it has never been more important than though.
Operator, you May now open up the line for questions.
Thank you Mr. Douglas ladies and gentlemen, if you have a question. Please press Star then one on your touched home telephone. Your first question comes from line of Andrea Teixeira from JP Morgan.
Hi, Thank you and hope always well and congrats on your resolved so been always hoping if you can comment on your increasing production production capacity in into the fourth quarter and I understand you you were using third parties and using some of these capacity that you always had.
True peak season, a cold according to <unk>. So you can comment on hobbies being done in the same sizing and and all your first party returns are saying, it's about 20% to 25% and need to the international too. If you can keep that productions and in terms of consumption trends against shipments. If you cannot say does a entry.
Still seeing a lot of demand from replenishing inventories at the show.
And also what do you were seeing in terms of the grilling season for the other products. You commented on that would put prepared remarks, but just to see if you can position I was on the other portions of the portfolio and then I have a follow up on the on the gross margins I hope that's.
Yeah. Thanks, Andrea that's a that's a lot of Oh, good ground to cover and product supply of course is on everybody's mind. What do we commented on is that demand has been.
Clearly unprecedented and were in uncharted territory for our supply chain in particular in disinfecting products.
You know typically if you think about supply chains.
They're built.
To be in the sweet spot of quality safety efficiency cost effectiveness required to produce to recoup the necessary output for the long term, but when you have situations like we faced where in March we saw demand spikes for somebody sick.
Disinfecting products, so a 500 plus percent.
I think its evidence to everybody that that despite heroic efforts or you have out of stocks and clearly we are continuing to see out. It is still out of stocks. We're really proud of our organization has responded as Kevin comments. It we haven't seen any major supply.
Disruptions on our side.
We have been able to increase our.
Production of disinfecting products by 40%, we focused on fewer rescues or we saw great partnership and patients from retailers and I want to thank all of them for it.
To help us.
You know bring products to market as quickly as possible.
We accept that Oh incremental costs like air Freighting speeding up the supply chain to serve stores as quickly as possible.
And as you comments, it's we activated third party suppliers.
To help us curb cope with a surge in demand.
We will continue to do that do that we continue to find new ways.
To increase our capacity, we should see meaningful a continued improvements this summer and of course, we're also investing in the right capacity.
Long term as we expect that demand for disinfecting products is going to be elevate it's a for a long time as they will continue to play significantly increased role in People's lives as we've commented a we're seeing.
Very little stockpiling, we're seeing a lot of use come from incremental households, and disinfecting in particular.
As you think about the future you know as people stay at home.
They were going to protect themselves at some point when countries open up again, they will still want to stay safe when they get out and we have a lot of to go products as well in particular with wipes.
So that will continue to drive demand demand continues to be exorbitant Lehigh.
Look at consumption data and tracked channels that it's very very high and of course that doesn't factor in the fact that there's a lot of latent demand.
Given the out of stocks, which you know as people see a wipes in store it they grab them, they're pretty much sold out right away.
And we're far from a refilling customer inventories typically customers keep about four weeks of inventory. So at some point hopefully we'll be able to also we feel a inventories which will also give us an opportunity to.
I'll keep selling a lot of lifes wipes sometime in the future or as we said in the U.S. wipes is about or disinfecting products account for about.
A quarter all of our sales its definitely more right now, but we will see a an elevation in demand for a while we've also commented that in international that number is about 50% of.
Our sales being and disinfecting products and of course, we're seeing about the same dynamics. There. So we feel like this is ongoing demand that we'll be able to serve.
On.
Many of our other product lines were on allocation as well given the spikes in demand.
But we expect to come out of that this quarter, a which will.
Help us.
ER and you know I feel like not core business. The demand continues to be a high we made a lot of progress even before the pandemic as we've commented.
But there are number off a product categories that see higher demand as consumers or stay home gritting of course is one of them. We're really pleased with the progress on drilling even before the pandemic as we made strong progress to engage retailers are not 2020 grilling season.
And we've ever rewarded with a.
Much better plans.
You know clearly as we think about grilling, there's not a lot of merchandising happening right. Now so we expect that to partially offset the growth that we're seeing memorial day, usually is a big.
Drilling occasion, and I doubt that we will see a lot of.
Merchandising at this point up around Memorial Day said that it's you know offset by a really strong base business. So in a nutshell supply has been difficult.
We have done an extraordinary work or two to meet the demands, especially as we can we expect substantial improvements this summer.
Both and disinfecting as well as earlier, perhaps on our core business and we're not seeing.
Demand slowed down if you think about the midpoint of our fiscal year sales outlook.
Which we've increased to 4% to 6%, it's still assumes that double digit sales growth in Q4. So that tells you that we believe that elevated consumption is gonna be around for awhile.
That's that's helpful banner, but if you.
If I can also a alcohol and gross margin points, but before we go into the gross margin just even if you do the midpoint of your range. It sounds a little conservative celebrity you've just said Oh. So was wondering if he was just the levels being conservative at this morning, just for the puts and takes and.
Potentially retailers.
Taking their own issues because it looks like it's everything you said in her prepared remarks are now indicates that.
You can see if need be at the top of that range, we'd just like you're trying to be conservative.
Given their searching.
Yeah, we think we have a balanced outlook Andrea.
Do you think about the range also 4% to 6% with one quarter to go and you can do the math that implies a very wide range Oh, we again, we think its balance.
We think that there's a lot of uncertainty is as far as the consumers concern.
You know, we're assuming that supply is not going to be disrupted importantly, and.
No as we learn more about asymptomatic cases and.
You know the safety of our employees is very critical and of course, you know for US it's important to continue to be able to manufacture the way we have but we can't take that for granted so I would say at this point. This is our best foot forward with a wide range and it's a balanced outlook and perhaps Kevin can comment on gross margin.
Do you want to yeah, Okay. The nature of the question, though and you did you ever question, Andrew specifically related gross margin yeah. Yeah. Yeah. Appreciate the time in just just quickly on your point about 260 basis points, you said I just see a separate Lucy fixing parents or.
If you were saying that we should be seen it seems to me just isolate it impacts and temporary but obviously that's a trend for gross margin as he replied into guidance is opt for the fourth quarter.
Yeah. So thank you for the question on the 250 Bips Oh, we do believe that's temporary it's really related to two items, we are investing more with our production team as I mentioned, both in wages benefits as well as enhance cleaning majors. So that's part of it as well. They don't just mentioned some of the specifics of the increased transportation warehousing cost weren't.
Correct.
And I'd say, that's going to continue until we can catch up with the demand signals. So I'd expect in the near term that that's something we'll see hitting margin and want to see how this plays out and that'll be very much influence by the shape of the demand.
Thank you fishing.
Your next question comes from line of Stephens strike Young from you, but yes.
Hi, good afternoon, and congratulations on a pretty strong quarter.
So been holding I have a question as retailers have a new found appreciation for some of the the disinfectant strength you guys. Having your portfolio how are your conversations going as retailers think about planning for it maybe for fall winter resets in terms of the amount of linear display space for some of the disinfecting products and then as you think.
About your international business.
Given that cobot as a global pandemic situation does it extend your portfolio reach in U.S, maybe the wipes business as a foot forward into some markets, where maybe you didn't have a strong precedents previously thank you.
The international first Steve. So we do think that this gives us an opportunity to think about international expansion plans and without getting into too much detail.
We're certainly not expecting that disinfecting in general ER and perhaps wipes in particular are going to be seeing a lot of consumer demand and this would give us an opportunity to serve more consumer. So it's something we're certainly look at and and something that has.
We have no shortage of dry powder to invest in growth or we would be willing to.
Invest in should there be.
ER.
Profitable.
Opportunities that.
We can take advantage off within the high on sustainable competitive advantage show or we wouldn't probably not be interested in opportunistic market entries, but where we see a strategic long term opportunity. We're certainly prepared to take advantage of it and.
We're seeing what do you see on this.
As far as we feel that conversations Shareable I will tell you that most of the conversations right now or are about meeting the current demand.
Or which is difficult enough, but you know what I would expect of course is that we're going to have those discussions with retailers at the right time and a they certainly see the numbers as we see them. Its a lot of a incremental usage coming out of Ah Ah.
Disinfecting products.
The wipes household penetration sits a little north of 50%.
Bleach is about the same so [noise].
What we're seeing more recently is that the household penetration. So on those two categories is climbing so that would suggest that there's an opportunity to.
Expand shelf space and those two categories, but you know it's a conversation that's still a lies ahead of us but it could certainly contribute to what we believed to be strong ongoing.
Opportunity to serve more consumers with disinfecting products or through you know the right amount of.
Shelf space in store.
Great. Thank you.
Your next question comes from the line of Steve powers from Deutsche Bank.
Hey, Thanks, good to hear your voice is then it just to build on your capacity planning comments, including as you think about.
Getting ahead of the structural demand for disinfecting that you mentioned not just from the U.S. in the near term, but perhaps also overtime or overseas.
How are you thinking about capacity builds.
Against that backdrop and should we begin to think of elevated capex associated with that.
Or it can this all be handled through third party supply.
Now lets Kevin calling on Capex, but we we are prepared to invest and frankly have started investing in more capacity in disinfecting with an eye on the long term.
Because of the the anticipated demand and.
It will be a mix, but typically we are on an ongoing basis always like to manufacture our products in house, because we can deliver to write combination of quality and cost. So I'll, let Kevin or give you see tell perspective on how we should be thinking about capex, hey, Steven as it.
Relates to Capex, you know typically we spend about 3% of sales each year on capex.
We're doing the work right now, but I suspect as we look to fiscal year 21 would be closer to 4% and it's really for though the reason spend I was just talked about we see a number of opportunities to increase investments and expanding capacity of our our self manufacturing facilities.
Because as I think you're hearing from us today.
Well, we're seeing heightened demand certainly in Q3 in our Q4, we expect it to continue over a longer term basis and so we're leaning in right now to start increasing capacity and we're investing right now to do that.
Okay. Thank you and then if I could just follow up real quick on the household business and I'm glad specifically, you're clearly a step back on the distribution loss in the third quarter, but if I. If I heard you correctly, Lisa I think you spoke of net wins as is the fourth quarter. So I guess your net of all the moving parts how should we think about yours.
Shipments relative to take away in the fourth quarter and beyond does everything settles out across the market based on that thanks.
Yeah. So first of all I will say that this distribution last which occurred was contemplated in the previous outlook. So it's not a change to the previous outlook.
We noticed for awhile and you know as we think about by quarter. It's simply a timing thing. So we lost this in Q3, but ER for that for a total back half of the fiscal year as Lisa has commented we expect distribution points to be up.
Because we will.
Get significant wins with auto customers, including new distribution with significant customer. So it's a net positive.
You know and what what we expect is.
For the mid term. This this business should do quite well given that it's also positively impacted by the pandemic as people stay home more but we're also as you will have seen a growing share marketshare quite significantly as a result of not just the improved distribution a position.
And but also some spillover from the lost distribution.
We know that someone class customers consumers are willing to change stores or to buy their brands and of course, the core fundamentals as we think about innovation as we think about price gaps, which we have continued to invest in couldn't continue to improve so.
You know, we're comfortable with where glad isn't the path forward on the business.
Yeah, [laughter] I, just want to make sure I hear I mean, my impression based on all that is that we should think about shipments you know coming in ahead of whatever wherever consumption lands in the fourth quarter, but before I walk away with I just want to test the hypothesis would you.
Yeah. So we always try to stay away from being that specific on any business forward looking.
So pair bear with us at this point you will continue to see the negative impact of the lost distribution for a while right, but a that will be partially offset by.
Or it will be offset by the distribution gains that were attic. So it's gonna be a little bit noisy for for a quarter or or or two but it will normalize and.
After that period of time.
Okay fair enough. Thanks, so much.
Your next question comes from line of Nik Modi from RBC.
Yeah. Good afternoon, everyone I hope everyone is doing well Benno I'm curious you know how you would think about answering this question because I I've been thinking about a lot. It's just so much trial and how much marketing.
You think.
<unk>.
Oh, sorry, do you how many marketing dollars do you think clorox would've had to spend in order to get the kind of top line.
That that you have right now and the reason why asked that question. You know this seems I hope like a once in a lifetime opportunity where.
So many consumers are trying these brands and some for the first time across a wide range of demographics, and how you can spend or lean into that to really engage them to quit the stickiness now I know everyone is more focused on disinfecting, but I'm talking also bought charcoal and and the onto your other products and salad dressings et cetera. So I don't know how you know how you went up.
With that question, but I'm just curious like how much do you think how much value was created by the situation across your portfolio.
So when we all know what's going to be a company that's going to cut advertising for us advertising is a long term investments.
And as you say, we have a unique opportunity you know to turn a trial into loyal users what about ignite strategies as you as you probably recall is to increase the number of people. We have a close personal relationship with United States from 20 to 100 million people over the next five years now would be.
Getting a lot of incremental people in and it's our opportunity to hold onto to add that volume. So in the back half of this fiscal year, we will spend $50 million five zero more than a in the previous here and that tells you the stance that we're taking we will play offense.
We think that.
Advertising investments at very good investments clearly the ROI is in theory, there little lower right now than they would be if we didnt have out of stocks, but the ROI is still very good and we're not spending to make quarter commitments, but we're spending to build the long term equity of our brands, how we spend is different.
For instance says you think about a disinfecting products were trying to be useful in People's lives. We're trying to lift the purpose that we have created for the clock sprint and in this particular case, we're spending a lot of money on consumer education in making sure that people use all brands the right way.
And in in helping them be safe that if I could raise investments because at this time brand brand.
I need to show up and at this time people make up that mines as to whether they trusted brands or not and for Clorox, We believe that it's a unique opportunity.
To continue to build trust in our brands to hold onto the increase trial that we're seeing and as a result, we vote, we will be very bullish without advertising spend a lot cut any single dollars like I said, we're spending $50 million more into back half and I would expect us to continue to spend a quite strongly in the next.
Fiscal year as well.
And then thank you for that very very helpful. And then if I could just just a quick question on the glad distribution loss I know you've already budgeted for it but can you just talk little bit what was driving the distribution losses like what happened.
No. We typically don't do that's it's a discussion that happens between a retailer in the manufacturer. So I prefer not to comment as in all cases, just to protect integrity of the conversations that we have with retailers, but it's a good retailer. It's a it's a good partner of ours.
Growing very strongly with and in auto parts hold a portfolio and you know we're also optimistic perhaps that at some point, we can have a different kind of conversation in this category with the same customer as we might have had in previous categories. So.
Respect that decision don't agree with the decision well have to see how it works for them and in the meantime, we're very comfortable with.
Where we all I'm glad and our plans on the business going forward.
Fair enough thanks to them.
Thanks, Nick [noise].
Your next question comes from line of Kevin Grundy from Jefferies.
Hey, good afternoon, everyone and I hope that you're doing well.
I wanted to pick up a better if we could on the topic of disinfectants and hygiene products, but but bring it to the company's long term guidance. So as you're well aware, there's a lot of pushback on on these calls I think for a number of years on your prior guidance to 3% to 5% organic sales growth in new cheap ability of it.
And so it was just this past October as you guys are well aware that you trended down to two to four and now it's just building on the discussion in terms of increased consumer demand and a in some of your big product categories like disinfectants. It seems like this is certainly going to be more last thing you're seeing an increase in household penetration you're increasing capacity. So clearly that's a view that you guys share as well.
But I was just hoping that you could comment maybe we could you know crude quantified this a bit in terms of what you see is is the appropriate long term algorithm bell for the company getting beyond this period of pantry loading and so forth, but you know over the next three to five years. You know is three to five again more relevant if so where do you think you sort of appropriate you guys. Your.
Planning within that range. So thanks for that.
So I think you'll understand how we're not going to give a any any numbers or any up doubted update it a few on out long term sales guidance like we said you know do we think that there's gonna be continue to heighten.
Consumer engagement.
And that that gives us an opportunity to serve more consumers in the U.S. and international at the same time at all so we expect that it's going to be a more competitive space.
You know as you know, we always worry about competition and a this is going to be an attractive category and we will have to see what happens to the competitive landscape in the future and then of course is auto puts and takes right sort of I think about burts bees right now.
Which as you all know has been an incredible success story for the.
The company for very long time, and we expect that to pick up at some point, but personal care businesses. In particular are are challenged so I think there's got to be puts and takes you know we're certainly thinking about.
What the rights or algorithm might be we're having to write conversations internally and at the right time. If we believe there's a change will communicate it now is not that time or we're comfortable with the two to four near term you know like like we said enough fiscal year outlook are we.
We expect elevated demand, but it's way too early to say or how this will translate into long term value creation. The important thing to take away, though beyond the numbers is that we will aggressively invest into it we will play offense and we will put ourselves in the best.
Possible position in the retail and the professional business to serve as many consumers and institutional customers as we possibly can and then we'll see what comes out of that.
Okay. Thanks, Dennis I'll pass it on good luck guys.
Your next question comes from line of Jonathan Feeney from consumer edge.
Good morning, Thanks, very much and appreciate your leadership and all of this Kevin you gave US a couple of figures and just a simplistic question can you tell us what other global take away was or west take away was as far as you can I'm just trying understand what that will mean, when we come to model.
Next year, and you're trying to compare and see how this big surgery volumes through the smoothes out over a few quarters and secondly.
On the cost front.
It strikes me that your cost structure looking over the next year. So 12 months from now I'm not the rest of the fiscal year, which is probably pretty thick, he's pretty petro heavy and can you give me a sense how much that he is that right and how much you're sort of gross active look at your those sorts of input cost says.
Come down you know since say the past a say maybe January onest when some changes in the price of energy somebody's upstream component thanks very much.
Yeah. Thanks, Jonathan you know in the second question related to our cost inputs. You know you see the same data, we see which clearly there's a significant pull back in the price of oil. We're also seeing that in the resin market. What I'd tell you do a much lesser degree because I think there's some structural issues going on in oil, it's going to get to pull back much further.
You know I would say that's I think a lot of that's can be driven by global demand more so than input costs.
With GDP globally continue to decline or do you don't continue to put downward pressure on cost imports, particularly in the energy complex and for us that really played out in a couple Larry So obviously for US resins, a big component of our bi and that's most pronounced in are glad business keep in mind on glad as we see cost inputs coming down on.
Resin depict what that means heightened trade spending within the category, that's really how the categories manage that flows through to consumers that through the form of increased trade. So as resin prices come down I'd expect to see increased trade spending on on the bags and wraps business across the categories and then as it relates to oil you don't well usually takes six months or so to work through.
Supply chain, so if oil stays down it at these levels need $20 a barrel level that it looks like its projecting over next few months, that's certainly would be a tailwind for us going out for the foreseeable future now I think it's probably too early to know that for sure, but but certainly if you look at the environment today. It certainly suggest that's possible.
And then Jonathan say more on your your global take away tell me more what you're looking for that question.
Oh, I'm pretty simple whatever you told us we know what U.S. take away is or at least through measured channels. You told us that club and E com with something like double that rate I assume that's used to U.S. number I'm wondering if you give us if you think about global take away through retail <unk> as it compares to your total U.S. told.
It'll global sales number or the U.S. version of that just an actual number as opposed to double the rate et cetera.
Yeah, I mean, I'd say, a few things as we've talked our volume growth is about 18% as the company.
And international we had very strong volume growth as well very close to that so our international business is growing at a fairly comfortable rate to what we're seeing the U.S.
And again because of what we talked about this is a global health crisis, and we have an international portfolio, that's very lined up to address this and help consumers and so we're staying strong growth broadly as I think about tracked versus non track, we are seeing elevated growth and non tracked channels. It it's probably going 10 plus points higher than tractor.
Right now, but I think that's also brought not surprising we're seeing very strong growth in E com and we're seeing very strong golf club as consumers or even ordering from all other trying to order and larger quantities. So we're seeing those channels growing at an accelerated rate right now.
Okay that helps a lot. Thank you very much.
Thanks, Dan.
Your next question comes from line of Lauren Lieberman from Barclays.
Thanks, and good afternoon.
I guess, what that's a little bit commercial environment, 'cause I would expect and hope that you know there's been pulled back on promotional activity with demand can being so high.
Promotion with Gilman can didn't it in the release and the Nielsen data is sort of but they didn't make bag and I know the probably the best interest. So many get off on that promotional environment I guess it within the cleaning categories and then as you're out there.
Great. Thanks.
[noise] they learn as as you might expect given the supply shortages there aren't a lot of promotions and we expect that there won't be but for the rest of the fiscal year.
<unk> said that you know the way we accrue promotions is less off in voice, but most about promotional dollars are are reflected in everyday low pricing.
Most of our customers.
We also have a performance <unk> performance based annual probe program, where a lot of the promotional dollars all being spent so the fact that there isn't a lot of promotions given that or you know ERP is where it it's always been and given that retailers are more than me.
Adding or performance requirements or the trade dollars are continuing to be spent and are we don't expect that nor frankly do we necessarily want it to be a source of savings.
We have continued to spend against the right price caps on glad and as you can see from market share gains and also pricing developments were continuing to make him to make progress and we feel good about that so promotion environments, you know pretty benign.
Expect that to continue.
But it will not translate to cost savings.
Okay. So the.
Being done in the trade dollars.
Adjusting price points, that's something that is still ongoing we just don't manifest as like promotion in store, but ultimately all show up as like upon that list price change for example for glass.
I'm, not saying that all I'm, saying is that we're continuing to spend a the dollars or we're not pulling back on on any dollars in any area.
In glad we're spending against a very specific objectives and that is to temporarily keep up pricing in line.
What happens with a that spend and whether it's going to.
At some point de converted to a different list price, we're very much a depend on what competition is doing and that's out of our control right now we're comfortable spend into dollars and trade ER and it's working.
Okay, great no treatment the professional products business, because that's obviously been an area of interest you know feedbacks for some time and I think there were some fits and starts can really getting.
That business to grow as it was sort of hub Toby, let's talk now, but five or seven years ago.
Well he was I'm not because that close is an opportunity in terms of you think but just in terms of Cowen account wins were killed sports conduct and things like that that you can do it maybe early to talk about but I was just curious about.
You no longer range and back to continue supporting the growth in that business in a more contractual level rather than just you know right now you know meeting that surge in absolute need.
Yeah, absolutely that's part of the broader disinfecting opportunity Lauren the professional business or P.D.S., we call. It ER has done very well for us for a prolonged period of time.
The core of the business switches to serve hospitals, so not a health care facilities with disinfecting products has always done well.
What we have Oh done and in the past was to look at whether we can enter additional categories. Some of it was successful in still is or some of it was not a mostly because of the regulatory environments.
It's changed quite significantly.
But the core off the professional business is serving health care facilities with disinfecting products and we have a number of a proprietary a unique technologies.
We have a German title wipes of course, which can help a great deal at this point, but also our total threesixty electrostatic sprayer system you see in.
An incredible uptick in demand.
That this fiscal year will be a up 500% from from last year that'd be continued to see an opportunity to drive distribution. So what you can expect is that.
We will continue to invest.
Very aggressively and.
Hi, this is strategic opportunities that are centered around areas, where are the clorox branded matters or which it does.
Where we have unique technology, a which is predominantly into health care space and where are our know how in the cleaning and disinfecting Oh protocols.
Can come into play importantly, we look at these auctions increasingly not just as options that are limited to the professional business, but where we can bring into full power off the total company or a into play and that will increasingly involved.
Ways to reassure consumers.
That.
Certain places our cleaned with a the clocks brand as a way to make them feel safe as at some point hopefully.
We will be all back to normal and enjoying the things outside our homes.
That we used to enjoy and look forward to.
Thank you.
Your next question comes from line of Olivia Tong from Bank of America.
Right. Thanks, good afternoon, and hope everyone as well we've covered a lot of grand cleaning and disinfecting already so maybe I can ask what about just private label and how to think about what potentially happened and in some of them or private label.
Expose categories outside of clean course, as we think about the recession cold what are you doing testing focusing this in these categories. It's we emerge out of.
P M pandemic. Thanks.
Yeah.
So you know right now I would say market share or it's driven by two things first of all just chair availability right and as you think about out disinfecting products for instance, one of the strategic choices as hard as it may be but you know what are your comp what are you doing the right thing isn't necessarily.
Just determined by your words, but it's determined by actions and one thing. We're doing is for prioritizing to health care section that leads to more out of stocks at retail and at least could lead to lower shares and that is okay. Because that or is the right thing to do that could mean, that's a private label you know.
And disinfecting could grow share said, that's what we're seeing also is that at the time of crisis people turn to brands that they trust and we have many of those brands that people Trust and if you look at tracked channels to date, what's been happening is that we grow share very strongly six out of nine.
Or categories and tracked channels, we're seeing one category also growing non tracked channels sorry, seven out of nine in non tracked channels and we're seeing private label and what we might casually call a secondary brands all out of brands.
Decline all other brands declined very heavily.
That is the fact that that's what we're seeing right now.
And for US as we have entered the recession or their number of things that are bullish about first of all the fact that brands do matter and we have many of the brands that people care about second or as I said earlier the percentage of our brands that is seen by consumers.
In the U.S. as superior and value is at an all time high and if you think about ER this recession and compare it to the 2008 nine recession.
That's a recession was prior to a focus on consumer value.
Our focus on consumer value started with our strategy to any 20, which was put in place in 2013 and since then the percentage of our volume Oh.
Yes, that's seen us better in value is up significantly.
If you add to that our commitment to play offense, if you add to that our ability to invest in the consumer.
If you add to that a portfolio that's relatively recession assistance.
Several categories typically do quite well doing a time of recession or if you. Then finally actually that's our commitment to keep innovating and are expected continued strong innovation plan, we feel like a before entering into recession with momentum and.
We expect that we will do quite well with consumers.
And we always take in private label seriously.
But we like where we stand at this point.
Great. Thanks Christian.
This concludes the question answer session I know I would now kind of the program back over to you.
Yes. Thank you all of you look forward to speaking with you again in August when we roll share our Q4 in fiscal year 2020 results and in the meantime, please stay safe and well thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].