Q2 2021 Clorox Co Earnings Call
Good day, ladies and gentlemen, and welcome to the Clorox company second quarter fiscal year 'twenty 'twenty One earnings release conference call. At this time all participants are in a listen only mode. At the conclusion of our prepared remarks, we will conduct a question and answer session. If you'd like to ask a question you made for.
Star one on your touched on Todd at any time, if anyone should require assistance during the conference. Please press star zero on your Touchtone Todd at any time as a reminder, this call is being recorded.
I would now like to introduce your host for today's conference call at least upper Hern, Vice President of Investor Relations for the Clorox Company is for head you may begin your conference.
Thank you Sharon and welcome everyone and thank you for joining US today, we hope you and your families are continuing to stay safe and well on the call with me today are Linda Randall, our CEO and Kevin Jacobsen our CFO.
Now a few reminders before we go into the results for broadcasting that's called over the Internet and a replay of the call will be available for seven days on our website the Clorox company dotcom.
Today's discussion contains forward looking statements, including statements related to the expected or potential impact of COVID-19. These.
These statements are based on management's current expectation, but may differ from actual results or outcomes.
In addition, we may refer to certain non-GAAP financial measures.
Please refer to the forward looking statements section, which identifies various factors that could affect such forward looking statements and the non-GAAP financial information section, including the tables that reconcile non-GAAP financial measures to the most directly comparable GAAP measures both of which are located at the end of today's earnings release, which has also been posted on our website and filed with the SEC.
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I'll start by covering our top line commentary with highlights from each of our segments.
Kevin will then address our total company results as well as our FY 'twenty one outlook.
Finally, Linda will offer her perspective, and we'll close with Q&A.
For the total company Q2 sales increased 27% with gross in every reportable segment.
It reflects about one point of net benefit from the July acquisition that gives us a majority share in our Saudi Arabia joint venture.
And unfavorable foreign currency exchange rates.
On an organic basis Q2 sales grew 26%.
I will now go through our results by segment.
Our health and wellness segment future sales were up 42%, reflecting double digit increases in two of three businesses.
Our cleaning business had double digit sales growth behind strong ongoing demand across our portfolio.
Consumption remains high and importantly, we're continuing to see increases in household penetration and repeat rates among existing and new users driven by new routines developed from the prolonged pandemic as well as strategic brand investments.
Well, we expect tough comparisons as we lap these very high growth rates will continue to work to retain a larger base of loyal consumers with built for our cleaning and disinfecting products. Even after a critical critical mass of the population has been vaccinated.
We're continuing to make progress on our supply expansion, including a new line of wipes plant coming online this quarter.
We're also continuing to identify new sources of supply for other products experiencing constraints, including our disinfecting spray products.
As we're able to better meet consumer demands for our base products, we're looking for to bringing back our clorox compostable wipes along with a stream of exciting innovation in the coming months.
Our professional products business had another quarter of double digit sales growth.
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It's worth, noting though that while demand from businesses such as health care facilities has remained high.
We've seen softer demand from business is negatively impacted by ongoing mobility restrictions.
Like commercial cleaning and foodservice institutions.
That's why we're leaning into other out of home spaces through strategic alliances and are encouraged by our progress.
Well not yet a meaningful contributor in Q2, our out of home partnerships are expanding.
We're excited to announce a new multiyear deal with the N b a an existing partner.
Lastly, within this segment.
Our sales in vitamins minerals and supplements business decrease in Q2.
This is a business where results have not been consistent and we clearly have more work to do.
As you remember, we relaunched renew life last fall.
Well, we've seen improvements in all outlet consumption. It has not yet delivering the consistent results we want.
With more than half of American consumers, saying, they intend to continue taking vitamins and supplements. We continue to believe in the attractiveness of this category.
Now turning to household segment quarterly sales were up 20% with growth in all three businesses for a third consecutive quarter.
Grilling sales were up double digits, driven by continued strong consumption, which reflects the dramatic rise in in home meal occasion as people continue to spend more time at home.
Behind our strategic collaboration with retailers.
We've been able to grow household penetration for a third consecutive quarter.
Including among millennials and low income consumers.
As we begin planning for the next grilling season.
We're building on our innovation.
Through expanded expanded distribution of our new Kingsford pellets.
And bringing new flavors to our kingsport product lineup.
With consumer spending more on their backyards and grills, we feel optimistic about the future of this business.
Cat litter sales were up by double digits in Q2.
Supported by innovation and continuous strong performance online.
Our fresh step with gain original scented littered with the par for brief as well as our fresh step clean paws litter continue to perform very well and we're supporting them through a new advertising campaign.
A record number of people have become pet parents since the onset of the pandemic in 2020, making this yet. Another example of how our diverse portfolio is particularly suited to the times.
Glad sales increase in Q2 behind strong demand across our portfolio of trash bags wraps and food bags as people continue to spend more time at home.
Our latest innovation glad for flex with Clorox trash bags launch in September and it's building distribution quickly earnings earning positive reviews.
In our lifestyle segment Q2 sales were up 9% with double digit growth in two of three businesses.
Brita sales were up by double digits for a fourth consecutive quarter behind continued strong shipments of pictures as well as filters.
Justice with wipes and sprays were co.
Continuing to work through supply chain constraints in our book of business, which has been impacting our shares.
We feel good about the long term prospects of this business, especially since once people buy our brita pitcher they tend to stay in our franchise with continued purchases of filters.
Importantly, as household penetration for Britta keeps growing we're building brand loyalty among these consumers.
The food business had double digit sales increase for a third straight quarter behind ongoing strong consumption of our hidden valley ranch products, particularly dry seasoning and bottle dressings.
With more and more people eating at home during the pandemic.
Household penetration has grown to an all time high including above average growth among millennials.
We're building on this momentum with a stream of innovation include.
Including hidden Valley Secret sauces, and most recently hidden Valley plant base ranch dressing, which is being supported by strong advertising investments.
First be sales decreased by double digits as the business continued to be impacted by mobility restrictions as well as changes to consumer shopping and usage habits as a result of the pandemic.
This quarter unseasonably warm weather also impacted lip balm sales.
Despite these challenges, we're making progress in the fast growing online channel, where the brand had double digit growth in Q2 and.
And we remain confident in the long term trajectory of this business.
Lastly in international.
Q2 sales grew 23% driven by double digit shipment growth in all major regions.
The growth reflects about nine points of benefit from the Saudi acquisition and about four points of unfavorable foreign currency headwinds.
Organic sales grew 18%.
The recent investment we made to create a dedicated international supply chain for Clorox Disinfecting wipes is starting to pay off.
Giving us the ability to not only meet ongoing elevated demand in existing markets, but also to expand to new countries.
This is a strategic growth platform for the company and we're supporting it through additional advertising investments.
Now I'll turn it over to Kevin who will discuss Q2 results as well as updated outlook for FY 'twenty one.
Thank you Lisa and thank you everyone for joining US today, we hope you and your families are well.
For sales growth for the second quarter was broad based resulting in double digit growth in each reporting segment for the first half of our fiscal year. Additionally, this led to profitable growth for the first half, which enables us to capitalize on our momentum and continue investing behind our global portfolio to strengthen our competitive advantage as.
As you saw in our press release, we've raised our fiscal year 'twenty, one outlook given the strength of our first half results and our expectation for continued strong demand across our global portfolio over the balance of the year.
Turning to our second quarter results.
Second quarter sales were up 27% driven by 23 points of organic volume growth.
Three points of favorable price mix and one points of net benefit from acquiring majority control of our Saudi joint venture, partially offset offset by FX headwinds.
On an organic basis sales grew 26%.
Gross margin for the quarter increased to 130 basis points to 45, 4% compared to 44, 1% in the year ago quarter.
Second quarter gross margin included the benefit of strong volume growth as.
As well as a 160 basis points of cost savings and 140 basis points of favorable price mix.
These factors were partially offset by 420 basis points of higher manufacturing and logistics costs, which similar to last quarter included temporary COVID-19 spending.
Second quarter gross margin results also reflect about 50 basis points of negative impact from higher commodity costs primarily from resin.
Selling and administrative expenses as a percentage of sales came in at 14, 6% comp.
Compared to 14, 5% in the year ago quarter.
Advertising and sales promotion investment levels as a percentage of sales came in at about 10% were.
We're spending for our U S retail business coming in at about 11% of sales.
This reflects higher investments across our portfolio strengthening our value proposition to support higher levels of household penetration and lasting brand loyalty among new and existing consumers.
Our second quarter effective tax rate was 21%, which was equal to the year ago quarter.
Net of these factors, we delivered diluted net earnings per share of $2 <unk>.
Versus $1 46 in the year ago quarter, an increase of 39%.
As you also saw on our press release year to date net cash provided by operations was $629 million versus $498 million in the year ago period, an increase of 26%.
Turning to our updated just your outlook.
We now anticipate fiscal year sales to grow between 10% to 13%.
Reflecting the strength of our first half results and higher expectations for the back half.
With our overall demand for products for remaining quite strong we now expect back half sales to be about flat.
19% growth in the year ago period.
We also anticipate about one point of contribution from our Saudi joint venture.
Offset by one point of foreign exchange headwinds.
On an organic sales basis, our outlook assumes 10% to 13% growth.
We now expect fiscal year gross margin to be down slightly.
Reflecting higher commodity and manufacturing and logistics costs as well as temporary costs related to COVID-19.
These factors are expected to be partially offset by higher sales.
As a reminder, we expect gross margin contraction over the balance of the fiscal year.
Primarily from two factors first we were lapping very strong operating leverage from robust shipment growth during the initial phase of the pandemic and.
And second we're facing commodity headwinds this year versus last year's commodity tailwind as a reminder, our gross margin expanded 250 basis points in the back half of fiscal year 'twenty.
We continue to expect fiscal year, selling and administrative expenses to be about 14% of sales reflecting ongoing.
Ongoing aggressive investments and long term profitable growth initiatives and incentive compensation costs consistent with our pay for performance philosophy.
Additionally, we continue to anticipate fiscal year advertising spending to be about 11% of sales we.
We spent about 10% in the front half of year and continue to anticipate about 12% for the back half in support of our robust innovation program.
We continue to expect our fiscal year tax rate to be between 21% to 22%.
Net of these factors, we now expect fiscal year 'twenty, one diluted EPS to increase between $8 five and $8 25.
Or 9% to 12% growth, reflecting strong topline performance, partially offset by a rising cost environment.
We now anticipate fiscal year diluted EPS outlook to include a contribution of 45 to 50 from our increased stake in or Saudi Arabia joint venture.
Primarily driven by a onetime non cash gain.
I am pleased we've raised our fiscal 'twenty one outlook.
Of course, it's important to note we continue to operate in a highly dynamic environment and are monitoring headwinds that could result in impacts moving forward.
In closing I'm also pleased with our broad based strong results for the first half, which enables us to continue investing in our brands capabilities and new growth opportunities all in support of our ambition to accelerate long term profitable growth for our shareholders and with that I'll turn it over to Linda.
Thanks, Kevin Hello, everyone and thank you for being with US today I Hope you and your families are well.
It's great to be here today sharing clorox <unk> results for the first half of our fiscal year.
My messages this quarter largely reinforce what we discussed in Q1 with the most important point being that our global portfolio of leading brands continues to play a critical role in People's everyday lives.
My first message is that our first half results are rooted in purpose driven growth.
Our purpose as a company is to champion people to be well and thrive every single day and our portfolio of leading brands is the bedrock of our ability to deliver on that promise.
Our first half results reinforced the important role our brands play in addressing people's everyday needs.
We continue to see broad based strength in our portfolio with double digit sales growth for most of our businesses.
Clorox disinfecting products continue to be in high demand among consumers businesses and health care settings.
And as people spend more time at home, we're continuing to see strong performance in other parts of our portfolio.
Kingsford is a great example.
As Lisa mentioned, our grilling business delivered double digit sales growth in the quarter and with our recharged strategy emphasizing innovation I'm optimistic about the long term prospects of this business.
Before I move on to my second message I want to thank for Clorox team around the world who shows up every day to live our purpose they.
They understand that more than ever people and communities need us I'm, so grateful for their passion and commitment.
My second message is of course will stay in the driver's seat continuing our posture of 100% offense to make the most of the opportunities in front of us while navigating an ongoing dynamic environment.
Theres No question Clorox has built significant momentum over the last year and we have every intention of extending that longer term.
Our brand portfolio is especially relevant for this environment and for the consumer trends I mentioned last quarter, which we expect to persist beyond the pandemic.
Prioritizing hygiene and health and wellness.
Carrying for pets.
And accelerating digital behaviors related to practically every aspect of their lives.
More than ever at homes, where the hardest. It's also where consumers are directing their investments with spending across many categories to support quality of in home experiences.
Certainly bodes well for our portfolio.
We continue to see strong levels of household penetration.
Importantly, what we mentioned last quarter about repeat rates across our portfolio is playing out.
We're accelerating purchase frequency and repeat users are the source of most of our sales growth across our portfolio.
In addition, our strategic investments are creating a virtuous cycle around engaging and retaining new and existing users.
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As I mentioned, 100% offense will help us extend this momentum.
Which as a reminder includes investing more across our portfolio to retain the millions of people buying our brands.
Expanding our public health support to more out of home spaces.
Increase in capital spending for immediate and future production capacity, including wipes expansion in international and partnering with our retailers to grow our categories.
Given the dynamic environment, we continue to face 100% offense also means actively planning for challenges and disruptions in the near and long term.
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Elevated competition in light of category tailwind and.
And accelerating advancements in digital technology that we expect to impact all areas of our business.
What's important is we will continue to make strategic choices that position us to achieve our ambition to accelerate long term profitable growth.
And finally my third message is this as we can send Daniel.
Address immediate priorities related to unprecedented demand. We're also accelerating our progress against our strategy to deliver long term shareholder value.
Our ignite strategy continues to put people at the center of everything we do.
And helps us make the most of our strategic advantage in the near and long term.
Addressing unprecedented consumer demand for much of our portfolio continues to be an immediate priority.
We continue to make progress on a number of businesses.
We're bringing in more third party supply sources and launching our new white fine in our Atlanta facility in the third quarter.
Importantly, simplification is our mantra and we're seeing the benefit of focusing on fewer skus, which we expect to continue beyond the pandemic.
As I mentioned earlier, we're growing Clorox disinfecting wipes international supported by a dedicated supply chain.
Our expansion plans are going very well and we expect to double the number of countries, where clorox wipes are sold.
Another immediate priority is to continue supporting people safety when they're outside their homes through strategic alliances to support public health.
We're expanding our programs with Uber technologies and Enterprise Holdings.
We recently established a multi year deal with the MBA and look forward to pursuing similar opportunities with other organizations.
And as the pandemic continues to take a toll on the economy, we know that far too many people still financial pressure from unemployment and less discretionary spending.
We're mindful of the role we can play to support those who are particularly value sensitive and will continue to deliver superior value through meaningful innovation.
Importantly, we're also making progress in laying the foundation for long term growth.
We will continue to invest strongly in our global portfolio of leading brands, particularly behind robust innovation that differentiates our products and deliver superior value.
We will continue to re imagine how we work to ensure a strong culture with a highly engaged team that work simpler and faster on strategic priorities.
I'm proud of how we've been operating during the pandemic, including including accelerating our speed to market.
And finally, as we've said before we view ESG as a contributor to competitive advantage, which is why it's embedded in our business.
Cheapness this quarter include.
Being included in the 'twenty 'twenty, one Bloomberg gender equality index.
Treating 100% renewable electricity in the U S and Canada for years early.
Signing onto the energy buyer federal clean energy policy statements, which calls for a 100% clean energy power sector.
And donating $1 million to Cleveland clinic to establish the Clorox public Health Research Grant in support of Science based public Health research.
We are grateful to play a role in supporting people and communities as we continue to navigate the global pandemic. It only strengthens our resolve and pursuing purpose driven growth ensuring a strategic link between our impact on the world and long term value creation for our shareholders.
Operator, you May now open the line for questions.
Thank you.
Brendan ladies and gentlemen, if you have a question. Please press star one on your Touchtone telephone.
First question comes from Andrea Teixeira with Jpmorgan.
Thank you and I hope you and your families are doing well. So I was hoping if you can give us an idea of the shipments against consumption needs for the sarcoma.
And here's to replenishing the trade or if the fuel rates have normalized at this point I remember you mentioned that in the last call and asking in a different way how much more capacity, including third parties. You mentioned in the call have you added in the second half against the second half of all from them.
Last fiscal.
So it seems around 25% by my math in the U S, which implies that you could share grow volumes in the low single digits.
In this upcoming second half of fiscal if demand does remain remains strong, but I understand that obviously youre, giving us a flat top line for the second half because you're embedding some deceleration. So how we should be thinking of that and Conversely, if you're gaining share because you lost some share given the store.
Accounts, how we should be thinking of your capacity and and fulfillment into the second half. Thank you.
Hey, Andrea this is Kevin I can start and Linda can jump in as well maybe I'll start with the question on retail inventory levels and I might broaden it to talk about both.
Inventory levels in the extended supply chain, both in our warehouses as well as retailers.
What I would tell you is we think we've made pretty good progress over the first half of this fiscal year and.
And I'd say by and large we feel pretty good about retail inventory levels with some notable exceptions. There are still portions of our home care portfolio, particularly our disinfecting wipes and portions of our our disinfecting spray trigger products that were still not at a point, where we could fully meet demand.
And then the other area, we still have work to do to catch up isn't Britta that business continues to perform quite well we've had four straight quarters of double digit growth and so we're still not in a position where we can fully support demand on that product, but with the exception of those businesses I'd say generally we feel pretty good about retail inventory levels and additionally feel pretty good.
Inventory levels in our facilities.
I would say I'm Brenda I think we've got a couple more quarters before we think we can catch up I think by the end of this fiscal year will be in a better position in terms of meeting retail demand.
And then I think particularly on our wipes business, it's going to take well likely the end of this calendar year, we'll be in a position to fully service demand.
And then on capacity you had a question on capacity Andrea.
As Linda said in our prepared remarks, we are starting up our second line at our Georgia wipes facility and that's happening this quarter and Youll see that start to ramp up over the next several quarters.
Our expectation is by the end of this fiscal year, we will have more than doubled our wipes capacity from where we were before the pandemic started and.
And that's a combination of bringing on our our facility that's happening now as well as we continue to bring on additional contract manufacturers and in Q2, we added more contract manufacturers as well. So we're working both with self manufacturing as well as third party manufacturing that work will continue well past this fiscal year.
Andrea I'll just add.
On the share question, which I think you were connecting us to which is exactly what we're watching closely you started to see our share improvement in quarter. Two were up as a total company eight tenths of a point that's up from 52 week share of it being up a half a point, but what's really encouraging to us is if we dive deeper into the businesses that we have gotten back to an in stock position on so.
Outside of cleaning if you look at our hidden Valley Ranch business cat litter and Kingsford all of them growing share as we've gotten supply backup to a place where you can meet demand and then really encouragingly. If you look at our cleaning business. Although we have a ways to go until we can fully meet demand in places, where we've been able to improve were seeing significant share gains so our car.
Clean up business, which is a spray is up two eight share points in the spray business in Q2 cost manual trouble cleaner up four points are painful business up two and a half points and that corresponds with strong plans, we have in place, but also our ability to supply.
Very helpful. Thank you.
Next question comes from Wendy Nicholson with Citi.
420 basis points pressure that you've called out for manufacturing and logistics costs, how much of that specifically was related to COVID-19 and how much longer do you think that will be with US you know what I'm trying to get a handle on is kind of gross margin as we look into 2022, what's the right.
Run rate run rate and is there opportunity for margin to recover as we go into the next fiscal year.
Hi, Wendy yeah as it relates to the impact of Covid in Q2 was about 90 basis points.
What we believe is on a full year basis, it's probably 50 to 75 basis point hit to gross margin.
It was higher going forward, we think over time, we'll be able to step out of these costs.
They are really in two buckets, we continue to expedite transportation and that comes at a higher cost as we're trying to fulfill retail orders as quickly as we can in our supply challenged environment. So theres some increased costs there as well as the increased spending we're doing with our production team to make sure. We're keeping folks safe with include increased hygiene activity.
As well as enhanced benefits I think over time as we get through the pandemic and that may push into fiscal year 'twenty two for us, but as we move through the pandemic, we'll be able to step out of a good portion of those charges going forward.
Got it in this day.
Shipments of wipes into the international markets I assume that is going to be great over the long term and there's probably even lower household penetration of wipes overseas than there is in the U S. But I assume you're sourcing are you sourcing that from third parties and I'm wondering if I know, it's a small number but is that accretive or dilutive to margins.
You know over the next 12 to 18 months.
Yes.
Wipes as we've mentioned we've stood up a dedicated supply chain internationally, we used to supply our international wiped out of the U S. So it had a very long supply chain and that came at an increased cost. We've now stood up the supply chain, but much closer to our markets we're serving.
Over time, that's going to be a nice addition to that international portfolio as we build out that business. It really just started in Q2, we saw some really nice performance in the second quarter. I think this is a long term growth runway for us. So you'll see that continue to build through the balance of this year and frankly that'll continue to build for the next several years.
And then I don't mean to be a hot but I just wanted to sneak in one for Linda.
EMS business I get why it fits in with sort of the strategy and mission of the company health and wellness focused.
I get that the category itself is attractive, but I'm still not totally convinced that it belongs in your portfolio that debt Clorox has the core competencies to make the Vms business. A success. So can you talk about that maybe your willingness to throwing the towel and.
You know not focus on that business anymore.
Hi, Wendy Thanks for the question I'll, just start with and you you said it our results have been inconsistent and I'm not satisfied with that and that is full stop.
But if you look at the thesis.
And you started to talk about this we really do see these categories being a long term growth runway for us and that's why we got into these businesses to start because we see it a nice fit in our overall journey to help people.
Be well and thrive.
What we've learned over the last few years as we've operated these is we've made the choice to buy some small brands in a very large $12 billion space I mean, it's certainly been a hotbed for competition and the lesson. We learned is the ramp up for the brands is just longer than we thought it was going to be we see pockets of encouraging results.
And our renew life relaunch for example.
And our magnesium supplement business, but there are other places where we're not as satisfied so if I take a long term view of this we still think these categories are attractive we still see our ability to innovate brand build really meaningful and a slew of a lot of things that are going on with their good claims good science.
But I think the perspective is the EMS still only represents about 4% of our business and it's going to take a while before it's a meaningful contributor and we're gonna be patience.
But I still feel conviction that these are attractive categories to compete in.
Fair enough. Thank you very much.
Next question comes from Nik Modi with RBC capital markets.
Yes, good afternoon, everyone. So I just wanted to touch on the trash bag business.
If you could just kind of give us a state of the union in terms of what's going on in terms of shelf space and I understand there's been some pricing taken in the category and Linda last quarter. You. You indicated you were hesitant to take pricing during a pandemic, but just wanted to get a sense of how youre thinking about it now given you're starting to see inflation happened all that much more meaningful rate. Thank you.
Hey, Nick Thanks for the question so our.
Q2 was another strong quarter for glad it grew nicely behind continued strong demand from consumers.
Really good signs of brand health, So our household penetration up almost a point and a half.
Increased by a retention rate.
We're growing repeat rates on the glad business. So the fundamentals of that business continue to be very strong in.
You're seeing price gaps, where we'd want them to be and I think what continues to be the differentiator for glad is innovation, it's working really well in the market for us whether that be our experiential trash bags.
Or if that is our new SKU glad for select with Clorox are all doing really well and so you know as we've said this is a business where you have to innovate where you have to bring new benefits for the category and that continues to work well for us.
I think if you take a step back and maybe this is a comment agnostic of glad if you just take the pricing comment in total you're right.
We had said we would not take pricing in them and the height of the pandemic and I still believe that was the right call as we got through the height of it.
But as we look forward and whereas we see the pressure from the cost environment and we see pressure on gross margin, we're going to look to the broad toolbox that we have against our long term goal of growing EBIT margin and that toolbox includes things like on.
On the revenue side, managing promotions I'm, ensuring that we can add value through innovation.
And premium amortization, but we will also consider pricing as part of that and.
And as we look forward, we will see what the right mixes by brands.
And we feel given the fact that our portfolio has very high consumer value. The highest for you have on record that we're in a good position if we need to take pricing to do just that.
Super helpful. Thank you Linda.
Thanks, Nick.
Next question comes from Chris Carey with Wells Fargo.
Hi.
So just.
One question on the wipes business.
So right like you've lost about.
About 200 basis points of market share there since.
Over the past year.
And all of that has effectively come from Whitehall and other manufacturers, who have seen big increases in market share and I guess the question is.
You've obviously been underperforming the category that has delivered really significant growth and.
And shelf is now occupied by a litany of other brands and so like how sticky do you think that shelf spaces and wipes from those new entrants.
Maybe said another way do you think you can get back.
The share that you've lost in the business because if so if you have the manufacturing capacity coming online that would imply that you might but maybe maybe these shelf gains from other competitors are going to last indefinitely. So I wonder if you could just comment on that.
Sure. Chris You know works is obviously, a very important strategic business for US one category that we created 20 years ago.
And we will continue to be aggressive as we think about expanding this business and helping to serve consumers.
I think maybe it would be good to take a broader view of wipes because we're looking at a net a universe of track channel, but if you look more broadly.
The share loss that youre seeing in tracked channels is not reflective of the fact that we've prioritized our health care.
Business to ensure that we have the right supply there.
And that our professional business has always had a strong wipes business as well as untracked channels that are very strong. So the broader perspective to be clear, we don't like total share anywhere anywhere and our goal is to always be growing it over the long term, but the broader perspective would say our watch business is in better shape than you might see and track data, but then even if you will.
Look at track data the only people growing share right now are non branded or new entrant competitors that are very small there was no major manufacturer as we all try to ramp up the support and I think what's going to happen is we're already seeing retailers think about simplification as we move forward and theres going to be no desire on their part.
Add 10, 12, whatever our brands sit on the shelf right now that are filling the need they're going to want to make sure that they're with leading brands who are innovating.
And we know that will be with Clorox, we felt great about the innovation pipeline, we have on the business feel great about the fact that our supply is ramping up and we're getting for the place where we will have double the supply by the end of the year. So I think youre going to start to see as we bring supply back on share will go in the other direction similar to how I highlighted in other businesses Clorox clean up eight share points once we brought them.
Back on from a supply perspective, titanfall up two and a half share points. So this is very much correlated to supply. We think the long term trends are behind us and I think the most important part is we have not let up on me innovation and investments so that as we bring net supply up we'll be in a terrific place to get back to grow share.
Okay. Thanks, that's very helpful. And then just one follow up maybe for Kevin just on the phasing.
For gross margins in the back half conscious that manufacturing and logistics.
Impacted gross margin really ramped up in the June quarter last year.
Would imply that youre going to start lapping that in the June quarter of this year.
But obviously, we see manufacturing and logistics inflation accelerated in recent months so.
Do you expect that to remain.
Significant an impact as we get through the entire year or or is there any phasing that we should be keeping in mind. There. Thanks. So much.
Yeah, Chris as it relates to phasing as we update our expectations for gross margin as you heard we now think we're gonna be down slightly.
One of the biggest changes, we're seeing as our expectations for commodities and we've talked about it where we're clearly in an inflationary cycle.
If you go back to November we'd anticipate about 100 basis points of cost headwinds throughout the back half of this fiscal year. We've updated that expectation now we are going to be closer to 150 basis points hit primarily driven by increasing cost of resin and I expect that to be pretty consistent through the back half for the year.
Thank you.
Sure.
Next question comes from Lauren Lieberman with Barclays.
Great. Thanks, good morning, or good afternoon, sorry.
I was curious a little bit about the international plans.
I was just hoping one to maybe get a little bit more specificity on countries of course, maybe you can't discuss countries, who have not yet entered but.
Those where you've already started to invest in and establish the supply chain and then secondly, I think just historically clorox has kind of been.
Yes.
In and out of co international was sort of you know some some changes and this is going back over 20 plus years.
Of making a go forward in Brazil, as an example, or.
Debating should we really go try.
Try to do something in China, or not and the impediment has often been the question of how do you establish the clorox brand to mean something with consumers that just may not be familiar with it.
The way that it dominates here in the U S. So.
Can you just talk about how you perceive your perspective on that part of the question because the white form is something that others can do.
Under different brand names in international markets and so I'm just curious why you know what youre going to do to really drive that Clorox brand in particular to make this a more successful endeavor than it's kind of been the case in the past. Thanks.
Sure. Thanks, Lauren Yeah in the case of international we were pleased to see the <unk>.
<unk> volume driven organic sales growth, which was really broad based across the portfolio.
Including cleaning and disinfecting, our glad bread and butter.
And what was encouraging is the early contribution from our wipes expansion is about 20% of the growth we experienced in the quarter. So good early signals that it's working if.
If we think about the countries we compete in over 100 countries around the world today broadly with our portfolio and the very first priority. We have is to expand our presence and our cleaning and disinfecting portfolio in more of those countries. So true you're a good point not having to introduce them to the brand in a brand new fashion, but actually just expanding the portfolio.
With those consumers to the offer them the benefit that a white brings them.
And we've seen that successful so far and early consumption looks good in those markets.
And then as we think about more broadly the avenues that we have to introduce our brands to consumers have expanded E. Com is now a way that you can enter into a market learn more about the consumer and a low cost way that allows us to get early insights and decide if we want to build more of an infrastructure behind an international business too.
Expand so they want more and youre going to see from US is a very disciplined approach and thus we wanna be fast, which is why we stood up that dedicated supply chain, but we want to continue to be disciplined and we want to see a strong return on the markets that we enter and the very first proof points for the fact that we're entering markets. We're already in with an expanded portfolio.
Okay. That's super helpful. And then I was also curious about A&P spend.
Youre spending is already back towards historic levels, obviously talking about increasing it in the second half of the year further.
As you look further out Linda.
And arguably with competitive dynamics in your categories only getting more intense right as there is more attention being paid to them, particularly core cleaning.
How do you think about the right level of A&P.
Be it in dollars or percentage of sales versus where you're targeting to spend in 'twenty. One you know does the.
The competitive dynamics change with the <unk>.
Elevated attention to the categories that youre anticipating not just now but on the other side of the pandemic.
Yeah, I think on average over the long term, 10% to 11% is in the right ballpark.
And what will vary of course, and you bring up a good point of competition is exactly what a quarter or a year. It looks like will depend on the level of competitive activity. We see the amount of innovation, we have and as you know the 12% we plan to spend in the back half is really dedicated to the fact that we have a great innovation lineup.
Two thirds of our innovation will be launched them and we really see the opportunity to introduce consumers to that innovation to drive trial and then to benefit from the fact that we have very strong repeats right now repeat rates right now across the portfolio. So we think about as you know a N S. P. As a strategic long term investment.
We're always looking at what the rethink the right level is but we are not hesitant shoe invest when we see strong returns and we're seeing that right now on the base business.
And strong returns as we start to spend behind innovation. So we'll continue to keep you updated Lauren if we have any change to that thinking very consistent with what we've said in the past.
Great. Thanks, so much.
Next question comes from Steve powers with Deutsche Bank.
Hey, great. Thanks.
So as you as.
As you start to lap the outsized growth.
Late last year next few quarters can you talk a little bit of just a little bit more.
Nuance as to how you expect your various segments to hold up relative to one other I guess.
My question is do you expect more resiliency in the health and wellness business just given lingering.
Demand for disinfecting.
Kind of Conversely, a fall off in the other segments or do you think the performance will be will be more even across the across the entire portfolio.
Yeah, Hey, Steve I I can answer that one and what I can share with you is our perspective on the back half and Steve you'll recall back in November our expectation was in the back half we'd see our sales declined mid single digits.
With our update outlook today, it implies our expectations for the back half will be flattish.
And if I think about our portfolio in three buckets. So you can kind of talk about how we see this playing out if you think about our U S cleaning business.
Which includes both our retail and our <unk> business.
We now think that this is going to continue to grow in the back half for this fiscal year low single digits back in November our expectation was it would be about flat and keep in mind, we're lapping about 40% gross in the back half of last year. So a really strong prior period, and we think that business will continue to grow for all the reasons, we've been talking about today.
Our international business.
Back in November we thought that business would grow low single digits. We're now taking that expectation up we now think of grow high single digits in the back half of the year.
We're seeing really good results for some of the work we're doing on extending our wipes business and that'll continue to add value over the back half year.
And then what we call our home essentials business, which is a little less than 50% of our total sales.
We've updated our assumption there as well originally we thought that business would declined high single digits. We now think it will grow or excuse me all declined mid single digits.
In all cases, those three segments all grew double digits from the prior period and so that if you do that math that gets us to about flat year over year in the back half I'd say importantly, though if you take a longer term perspective, and you look at our performance versus fiscal year 19, a pre pandemic environment that would suggest will grow somewhere in that 15% to 20% range in the back half.
For this year.
And so I think the takeaway Steve I'd just I'd offer is this is not just about increasing strength within our disinfecting portfolio. We're seeing performance broadly across our portfolio. We saw that in Q1, and Q2 and it's our expectation going forward, we'll continue to see broad strength across the portfolio.
Okay. Okay. Thank you.
I guess.
And I don't know Linda or Kevin maybe both went away on this but just as you talked about.
Pricing as a potential lever specifically I think specifically on glad just given the resin inflation that you pointed out.
In the past that's been a point of volatility for Clorox.
You've got the pricing true, but it's often come with with volatility.
And market share and volume as competitors.
Respond or don't respond to various degrees I guess can you just frame your relative confidence going into this.
<unk> cycle.
Around how just around your confidence taking that pricing and avoiding that volatility.
This time around.
Sure.
Sure Steve.
If I think about what pricing does and how we approach this and it's really about managing over the long mid to long term, we don't want to take pricing over short term inflationary and we use trade funds and we have for glad in particular over a number of years to manage through those short term impacts, but as we see it progressing cost environment coming up here.
Pricing is something we absolutely will consider across our portfolio, where it makes sense.
And I think it's safe to say pricing is it something that.
It's an easy thing to go execute it takes a lot to.
To do with excellence and it comes with ensuring that we partner with retailers to have.
Plants that grow their categories and I feel like we are better positioned than we have been in a very long time on that we have a terrific slate of innovation across our portfolio and particularly for glad.
We are spending against our brands, which retailers.
Appreciate in an incredible way right now because we're bringing people to the physical or digital shelf.
And our our portfolio is at the best place its ever been in from a consumer value measure perspective from more people deem our portfolio a percentage of our portfolio of superior than ever before so I think it was all of that we're well positioned to do it and but I wouldn't but I wouldn't say, it's I don't have a perfect crystal ball pricing is always something that we have to go out and what that's dedicated to.
Hitting with excellence, but we would expect there are little bumps here and there, but well manage through them and over the long term, we know that it's a good thing for us to do and it's right for the category. So again no plans at this point on any of our brands, but we'll look at it as we head into the remainder of the year and next year as an option for us to expand margins.
Great. Thank you, Kevin if I could sneak in one more at the risk of being greedy.
On an burkes.
No clearly there is there are challenges.
With the Covid backdrop.
On that business.
I guess I'm, just curious a little bit as to it.
At.
At this moment has changed at all how you think about managing that business.
Over time, clearly I'm sure, you're investing and doubling down tripling down on <unk>.
Commerce digital.
But I'm thinking more about from like the portfolio of products.
Resolved underneath the birds burts bees brand umbrella, if there's any any shift in into where within the portfolio.
B.
We began investing further versus maybe pulling back versus how you're thinking about it going into going into the COVID-19.
Situations. Thank you.
Sure absolutely environment has been bumpy for businesses in this space and that's absolutely the case for Berg fees, but we have very strong conviction in the long term.
Yeah.
Portfolio as it stands today and I think a couple of things jump out Stephen and you've touched on a couple of them. The first is accelerating our progress in E Commerce, and we have done that and leaned in over the last couple of quarters with very good results from the burts bees business.
The second is innovation and innovating in spaces, where the consumer.
Is particularly apt to be transitioning today, so we're seeing that in skincare.
We're seeing that in the self care space in general and with that we have launched a new line of naturally cleaning hand products that help meet that need.
And then obviously very strong conviction and continued conviction in our lip care business, we're still the market share leader in lip balm.
Although we've had some weather issues that have impacted the overall category still felt really good about that business and our ability to innovate there. So overall from a <unk> perspective, we will continue to make tweaks as we learn from the consumer but I think this is a brand where more than ever people are going to want things that they feel a care for them and care for them using the <unk>.
From nature.
I appreciate it thank you.
Next question comes from Jason English with Goldman Sachs.
Hey folks.
Hope all is well thank you very much for spotting me in.
Two questions. Kevin This time last year I know you were providing into your 8-K breakout the GM bridges to the headwind from higher trade spend.
Can you give us what if any magnitude of tailwind you've had to do the first and then the second quarter from lower trade spend.
Yes, Jason as it relates to trade spend particularly in Q2, if you look at our price mix was favorable three points from the second quarter about half of that was favorable price.
About half of that was favorable mix on the price side, a little bit of pricing international but the bulk of that was reduced trade spending because of the reduced promotional environment. So we've seen that pretty consistently for the front half of this year.
And would you expect that to turn the other way on the other side of this so this time next year.
Would you expect that to be a net headwind or do you think the industry and you can settle out at a lower trade level than pre COVID-19.
Yeah, Mike separate my answer Jason in terms of the industry and what the impact would be for us.
Do expect the industry will move back to a more normalized level of promotional spending as everyone gets more back in supply.
I think that's to be expected.
And then it's the same issue for us our promotional spending is down specific clorox not necessarily industry because many products. We just can't promote right now because of the limited.
Supply capacity, we have so I expect to see increased promotional spending for clorox when we get back to promoting some of these products that we just haven't been able to promote for the last six months.
It makes sense and.
And I'm going to stretch on that so I'm not sure what you'd be able to answer what you can't.
You referenced fiscal 19.
And looking at the back half of the year, you said back half you expect to grow 15%, 20% off of the same period of fiscal 19, clearly in the back half for this year, we're still deep in the midst of a pandemic.
What would be if at all.
How if at all could you hazard a guess as to on the other side of the pandemic what that growth may look like all francisco might be.
Yeah. Thanks for that for your question, Jason and I'm sure. You can appreciate we're not ready to talk about plans beyond fiscal year 'twenty, one where we're in the process of developing those plans right now.
But maybe just big picture, what I'd leave you what to think about it is our intent is to accelerate profitable growth rate for this company as a result of the pandemic. We've talked we have millions of new consumers coming into our franchise using our products. We're investing behind that we have a number of new growth runways, we've talked about both in and out of home as well as international expansion.
And so we see these as long term opportunities for the company that we're clearly investing in this year that we think generate long term value. So again, we won't talk about our specific growth rates going forward, but we believe that sets us up nicely to be able to accelerate the long term gross rate of the company.
But in the near term there will be lots of noise as you compare quarters pre or post pandemic just give me a lot of noise for a number of quarters I think when you get past all that there's long term opportunity for the company and we're investing behind that.
For sure lots of noise from lots of debate. Thanks, a lot I'll pass it on.
Thanks, Jason.
Next question comes from Kevin Grundy with Jefferies.
Great. Thanks, good afternoon, everyone.
A couple from me I'll try to be brief here because I know we're late in the call. The first one is gonna be for Linda on pricing I wanted to revisit that second one for Kevin on capital deployment and share buyback. So first one Linda just give given the importance of pricing here not just for Clorox and of course more broadly for consumer staples with commodity inflation. So the willingness to take pricing I think.
There's going to be well received and welcome given past commentary that the company was not going to do that during a pandemic. So I think that folks would generally agree that thats certainly a good thing, but a couple of questions. Here can you give us a sense of retailers' receptivity to price increases at this point based on current commodity environment and state of the consumer I mean from a clorox perspective one.
Could take the view that some of your categories of arguably never been more important to them than they are right now.
And then secondarily you touched on this but I wanted to see if we can get a little bit more specific how quickly can you put through the price increases.
It is.
I guess, what would be the Hasnt hesitancy excuse me to doing that or are you looking for more permanence and commodity cost inflation.
Or is it just to an earlier question, maybe a little bit of uncertainty in terms of what what the competition is going to do I guess, what would be the hesitancy now based on what Youre staring down which is pretty significant commodity cost inflation to taking pricing and then I have a follow up for Kevin on buybacks. Thanks.
Sure. Thanks, Kevin.
No.
Again, let's maybe step back and talk about pricing as a strategic lever and really what we're trying to do overall and as you know we're trying to expand our EBIT margin 25 to 50 basis points over the long run.
And what we always look at is the broad set of tools that we have in our toolbox to manage cost wherever they may be and you know one critical element of how we've done that over the short term as cost savings for example, and we had another robust savings this quarter and we expect to continue that and I think you know as part of our ignite strategy, we put additional levers in play.
<unk> thinking about the role of technology and the role sustainability could play in helping us do that over the long term. So we're very much focused on managing as many of the short term cost inflation.
Increases that we see through those types of levers what we're looking at right now is over the mid to long term based off of the outlook what role could pricing play.
That has to play a broader role in the category plans that we have it it's not something in isolation.
What we're focused on right now is strong innovation strong brand investment ensuring that we have the right assortment on shelves with retailers to to match. The fact, the consumers' behaviors and needs have changed and that is really the single highest priority. We've had in addition to supply over the last many months and continues to be over the next.
Few months, so that would that would be why would answer.
We're not ready to announce any type of pricing action at this moment because what we're focused on is serving consumers well. We're focused on is growing our categories getting back to supply and.
And we're focused on a terrific innovation agenda, we have for the back half and if we can do that with excellence.
We will get to a place where as Kevin said, it's a very nice back half as you look back.
And take a broader view compared to fiscal year 19.
What gives us conviction, though in the strategic our strategic ability to take pricing again is the health of our brands and the fact that we have been investing the fact that we do have an innovation portfolio that strong. The fact that we have been partnering openly and transparently with retailers on how we get through the.
The last nine to 10 months together, so as we make those decisions we feel confident in that overall suite of activity that we have that can help the categories will continue to evaluate when the right time might be to do that but for now we're really focused on investing in those brands getting capacity back to a 100% and innovation.
Got it thanks for the comments Linda quickly Kevin just one just on capital deployment.
As you know our company is cash.
Having a higher than usual cash balance the debt leverage looks pretty low relative to historically, what you've carried about one two times net debt to EBITDA roughly so understanding that you look at addressing some capacity needs for the business, but given.
Given the cash balance given the pretty pretty strong balance sheet and the fact that your stock's off again today on what was pretty strong quarter.
And the group is trading at relative lows versus the market that we haven't seen since the global financial crisis really and you have about one 5 billion.
Board authorization, what would be the argument against leaning in a little bit more heavily on share repurchases at this point in time.
I'll pass it on thank you Dan.
Thanks, Kevin.
For us as it relates to our capital deployment priorities as you know Kevin no changes in priorities, we've talked about for quite a while now will continue to prioritize investing in our base business and you folks. He is doing it this year, Kevin as you mentioned, we're increasing capital spending to increase our production capacity.
So increasing investments in our brands in terms of advertising R&D and technology. So that'll continue to be job. One will also continue to pursue strategic M&A, we want to expand our portfolio, particularly in health and wellness space. We have a number of areas. We're interested in so we'll continue to evaluate those and look for opportunities to do that.
And as you mentioned, we have a very strong balance sheet right now, where we're carrying a little under $800 million on the balance sheet that is elevated and so as we've said if we don't have a need for that cash we will look for ways to get it back to our shareholders.
Do you think about this year I expect over the balance of the year, we're going to return about $1 billion to our shareholders about half of that through our dividend and the other half through share repurchases.
That's up pretty significantly we were somewhere around $780 million or so we'd return last year. So we've stepped it up this year and then as we develop our plans for fiscal year 'twenty, two and beyond we will continue to evaluate them.
The best opportunity to invest that cash in and as I said again, if we don't have a good use for it we're not going to keep on the balance sheet will look for ways to get that back to folks.
Got it. Thank you both I appreciate it good luck.
Thanks, Kevin Thanks, Kevin.
Once again to ask a question. Please press star one on your telephone keypad question from Olivia Tong with Bank of America.
Great. Thanks, most of my questions have been asked but just one for you is just around your conversations with your retailers.
And just thinking about the categories that you participate in going forward not necessarily just now.
Salary, even six to 12 months from now, but how they are thinking about shelf space allocation level promotion necessary.
To drive the category and cleaning interest not only just in cleaning and disinfecting, but also your other big categories and again this is sort of thinking two to three years down the line.
You know with allocations to shelf space and how how to think about running the categories.
Post pandemic. Thanks.
Thanks Olivia.
You're hitting on exactly what we're talking to retailers about right now and we're partnering with them on is what is the long term for these categories as we get through with.
It's been an incredibly unprecedented I think we can never underestimate our an overuse that word unprecedented and we're really turning to what does the future look like what will the habits and behaviors that have started today that we believe will be very sticky and the future mean for.
For the assortment that's needed for the type of promotion that's needed for the shelf space and what I would say is that varies depending on the category.
And our categories have always been different at shelf, what's required from an assortment perspective.
How much is merchandise et cetera. So we are working with them on those individual plans, we're bringing them consumer insights and what we're seeing in the changing behaviors.
So for example, the fact that people are cleaning and disinfecting more and we expect that to continue their cleaning different surfaces, they're thinking about the fact that when they leave their house. They are thinking about those surfaces around them in a different way and we're helping them to plan for that and then I think really importantly, what we've talked to them about is the innovation needed in order to address those needs and how we ensure.
We introduced that innovation in a quick manner debt.
Debt, we get it on the physical or digital shelf and that we get the right trial behind that and retailers are really receptive to hearing that right now and in fact are loving. The fact that we're coming with so much innovation.
Despite all of the Crazy.
Craziness over the last nine months, so without getting into specific category details.
Details that's exactly what we're doing.
And retailers will begin to make those first moves.
As supply gets to the place, where we're able to fully meet it and youll start to see what it looks like online I think a couple of themes. The first day simplification, we've taken the opportunity to simplify our portfolio to help us run faster than many of our businesses and that's turned out really well for us I'm actually really well for retailers and so they're going to continue to drive simplification.
We win in that environment being a number one and number two share brand.
And then the second thing is omni channel, making sure that our consumer has access to the right products, depending on where they are and where they're shopping.
We're focused on that with retailers and ensuring that they have all of those right levers in place depending on where consumers are entering into their store.
Great. Thank you.
Thanks for Libya.
And this concludes our question and answer session Ms. Randall I would now like to turn the program back over to you.
Thank you everyone I'm happy with our first half results and look forward to strong execution of our plans in the back half will speak again on our next call in May Please stay well.
This concludes today's conference call you may now disconnect.
Okay.
Yes.
Sure.
Gross.
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