The Clorox Company (NYSE:CLX) Q2 2024 Earnings Call Transcript

The Clorox Company (NYSE:CLX) Q2 2024 Earnings Call Transcript February 1, 2024

The Clorox Company beats earnings expectations. Reported EPS is $2.16, expectations were $1.08. The Clorox Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, ladies and gentlemen, and welcome to The Clorox Company Second Quarter Fiscal Year 2024 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. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference call, Ms. Lisah Burhan, Vice President of Investor Relations for The Clorox Company. Ms. Burhan, you may begin your conference.

Lisah Burhan: Thank you, Jen. Good afternoon, and thank you for joining us. On the call with me today are Linda Rendle, our Chair and CEO, and Kevin Jacobsen, our CFO. I hope everyone has had a chance to review our earnings release and prepared remarks, both of which are available on our website. In just a moment, Linda will share a few opening comments and then we’ll take your questions. During this call, we may make forward-looking statements including about our fiscal 2024 outlook. These statements are based on management’s current expectations, 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, which has been filed with the SEC.

In addition, please refer to the non-GAAP financial information section of our earnings release and the supplemental financial schedules in the Investor Relations section of our website for reconciliation of non-GAAP financial measures to the most directly-comparable GAAP measures. Now, I’ll turn it over to Linda.

Linda Rendle: Hello, everyone, and thank you for joining us today. We delivered financial results above our expectations in the second quarter, thanks to very strong progress on our recovery from the August cyberattack, continued advancement of our strategies to drive top-line growth and rebuild margin, as well as the swift and effective management of currency headwinds in Argentina. We are rebuilding retailer inventories ahead of schedule, enabling us to return to merchandising and restore distribution. As a result, we made great strides rebuilding market shares. Importantly, throughout our out-of-stock period and recovery, we’ve maintained our strong brand superiority results as measured by our consumer value metric. This speaks to the power of our advantaged portfolio, the superior value of our brands and their role in consumers’ daily lives.

While there is still more work to do, we’re on the right path to return our business to the trajectory it was on before the cyberattack. Looking ahead, we expect the operating environment to remain challenging, as consumers remain under pressure and their value-seeking behaviors continue. Nevertheless, we remain committed to growing the top line and rebuilding margins and expect volume to play a stronger role in our top line performance as we lap pricing. We’re well-positioned to make further progress in rebuilding distribution and market shares, as well as drive volume and household penetration growth over time through strong demand creation plans. Given the progress we’ve made in the second quarter, we are also updating our full year 2024 outlook.

We have a strong diverse portfolio of trusted brands, we play in essential categories and we’re making the right investments guided by our IGNITE strategy to create long-term value for stakeholders. I’m confident that we’re taking the appropriate actions to build a stronger, more resilient Company that is positioned to win in the marketplace, and deliver consistent, profitable growth over time. With that, Kevin and I will take your questions.

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Q&A Session

Operator: Thank you, Ms. Rendle. [Operator Instructions] And our first question today will come from Andrea Teixeira with JPMorgan Chase.

Andrea Teixeira: Thank you. Good afternoon there . Linda and Kevin, I just wanted to go back, obviously, an amazing performance you caught up with I think with the second quarter fiscal you caught up with kind of according to my math a minus 2%, pretty much first half against first half of the prior year. And then what are you implying given the Argentine peso depreciation is underlying beta as you put in prepared remarks and your commented it just now but then you have a greater FX headwind. But when you go and flow through everything and according to the new guidance the plus 200 basis points improvement in gross margin. It implies that your gross margin in the back end declines vis-a-vis what you had in the back end of last year.

And so I was just trying to reconcile, because your numbers kind of imply profitability going down, the way I understand the transactional FX. But it seems a bit high. If you can kind of walk us through why would that happen given the beats the magnitude of the beats?

Kevin Jacobsen: Yeah, Andrea. And maybe let me take a stab at answering some of those questions, and let me know if we missed anything. But as it relates, maybe I’ll just start with Argentina might be a good place to start. Because you’ve heard from many of our peers that’s an incredibly difficult environment right now. I think if you just step back and think about our business in Argentina, we’ve been in there for a very long time, we have very capable leaders managing very strong brands. While there are some negative impact in Argentina flowing through our outlook we provided today, both on the top line in terms of higher FX as well as higher inflation and FX exposure and margin. What you should know is, based on the actions we’ve taken in Argentina, including incremental pricing, we think we fully cover the negative impacts of Argentina within this outlook with the one exception of the remeasurement loss and I’m happy to talk about that, but setting that remeasurement loss aside, we think we fully contain the Argentina impact in this P&L.

As it relates to the back half, you were asking about gross margin, and as you saw, we delivered about 41.5% gross margin in the front half. And if you look at the back half, based on the outlook, it suggests will be fairly similar 41.5% as well. And so we’re looking at sequentially fairly consistent trends. If I think about what’s changing from the front half to the back half, there’s a few items I’d point out. In terms of increased headwinds, we continue to expect higher trade spending in the back half of the year, as we get to a more normalized environment. We also now have lapped all our US pricing. We lapped the last round of pricing in December. So you’ll see less benefit from pricing in the US. And then we’re expecting more inflation and more FX headwinds coming out of Argentina.

We are offsetting that with incremental pricing, we’re executing in Argentina, so you’ll see international price mix benefits in the back half of the year to a greater degree than the front half of the year, as well as we’re projecting improving volumes trend. And so collectively that’s offsetting those headwinds, and we’re getting to a margin fairly consistent front half versus back half and that puts us in a position to improve margins by 200 basis points on a full year basis. Now, I think maybe the last question you talked about versus prior year, I think you have to be a little careful looking at the comps. If you look at our gross margins in the back half of last year, I think they’re up almost 600 basis points. And so we’re relatively flat, but on a very strong performance in the prior year.

Well, let me stop there. Andrea, let me know if that answered your question.

Andrea Teixeira: Yeah, that did Kevin. Thank you. And I think one of the kind of like a fine point on that commentary. When you say, in the prepared remarks, I think Linda had mentioned you’re confident to regain shelf space and you’re looking obviously regained service levels. It sounds to and even in our meeting recently in New York, you kind of alluded to initially that guidance and I think we all in this call appreciated there was a lot of moving pieces and you’re conservative. It seems like you’re embedding some potential risk at that point of not being able to recover the service levels, now you did recover. So I’m more in the side of like thinking of the strength of what you achieved in six months. I’m thinking more, why not expecting that momentum to continue now, that you potentially could recover some of the shelf space losses that you had, especially now coming up on the spring reset.

Linda Rendle: Sure, I’ll take that and maybe I’ll just start with your first important point, which was our expectations in Q2, and what drove the significant over delivery. If you recall, you got it exactly right. At the point where we provided an outlook for Q2, we were at a point where we had just turned back to automated order processing and we knew there’d be a transition time going from manual to automated and that would take us a bit of time to ramp up. We’re also heading into key holiday time for retailers, which is a challenging time to ensure that we get the ability to have appointments and ensure that we could deliver what we needed to, in order to deliver what we ended up doing for the quarter, which was every single day shipping significantly above an average day that we would normally ship.

And we I think were appropriately cautious given all of those potential headwinds on what we could accomplish. And again, the goal was to restore inventories by the end, the majority by the end of Q2, knowing some of that would flow into Q3 and Q4. So what happened in Q2, we were able to get all of that ramp up and we really leaned into our operating model. We designated a General Manager, who is in-charge of solely getting inventories rebuilt and retailers. And she had a multi-functional team around her to do that. And we were able to quickly ramp up from manual to automated and ship nearly every single day significantly above an average shipping day pre-cyber event, and our retailers were extraordinary. So we were able to get in, we were able to get appointments and the result of that, if you look at distribution, we were down over 30% of our TDP.

If you look at average weekly TDPs down over 30% at the height of our out-of-stocks. We’ve gotten back to mid-single-digits, some business is slightly better than that, some slightly worse, and I can cover that. Market shares at the height of this, we were down over five points. If you look at the four, five weeks ending December, we were down a point. Look at the latest four, five weeks ending January 21st down 0.7, so all that flowed in the right direction, which gives us confidence. But that speaks to with the work we have remaining and we talked about this last quarter. We spoke about the fact that a lot of this was under our control and we were going to maximize that I felt good about what we did in Q2. But we’re also dealing with the fact that in order to fully restore distribution, we need to have retailer resets, and those happen mainly in the spring and they vary through the back half of our year.

And we intend to finish the job, then. And in addition to that we have to fully restore merchandising. So as we get our business up to the service levels we expect, and to be clear, our service levels are still depressed. They are significantly better. But we need to fully restore those. We’ll return to merchandising in the back half and full as well. And with that, we feel good about our plans, we feel like we have the right investment levels. Our brands have maintained their superior value as I said in my opening comments, so feel good about it. But I just want to be clear, we didn’t — the job not done in Q2, tremendous progress, but we have more work to do in the back half.