Clorox Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 2, 2023

There are 15 speakers on the call.

Operator

And welcome to The Clorox Company Second Quarter Fiscal Year 2023 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. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Ms.

Operator

Lisa Berhan, Vice President of Investor Relations for The Clorox Company. Ms. Berhan, you may begin your conference.

Speaker 1

Thank you, Jen. Good afternoon and thank you for joining us. On the call with me today are Linda Rendell, our CEO and Kevin Jacobson, 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.

Speaker 1

During this call, We may make forward looking statements, including about our fiscal 2023 outlook. These statements are based on management's current expectations, but may differ from actual results or outcome. In addition, we may refer to certain non GAAP financial measures.

Operator

Please refer to the forward

Speaker 1

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 schedule 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.

Speaker 2

Hello, everyone, and thank you for joining us. As I mentioned in our prepared remarks, Despite persistent macroeconomic headwinds, we delivered better than expected Q2 results with organic sales growth in 3 of 4 segments, gross margin expansion and double digit earnings growth. Our performance reflects the strength and superior value of our brands, Strong execution across a broad set of actions and the benefit of some timing shifts. As a result, we've updated our full year outlook. During the quarter, we made good progress rebuilding margin, driving top line momentum and executing against our Ignite strategy to strengthen our advantages and accelerate profitable growth for the long term.

Speaker 2

This includes advancing our innovation pipeline, delivering cost savings and taking additional cost justified pricing actions, while maintaining record high consumer value superiority. Overall, we feel good about our progress, But we're relentlessly driving additional improvements as we continue to invest in our brands, categories and capabilities. Looking ahead, we expect the operating environment to remain volatile and challenging and we'll continue using all the levers under our control While protecting the value proposition of our products to recover margin and drive long term growth for our brands and categories. We are confident that our leading product portfolio essential categories, coupled with our proactive actions will enable us to navigate this environment and return to more consistent profitable growth over time. With that, Kevin and I will take your

Speaker 3

questions.

Operator

Thank you, Ms. And our first question today will come from Peter Grom with UBS.

Speaker 3

Thanks, operator, and good afternoon, everyone. So maybe just to start, when we think about the 2Q And I know you outlined a few things in the script, but just from our perspective, plus 4% organic versus the original guidance of down low single digits and kind of gross coming in 200 basis points or so above the midpoint of your outlook. It's a decent amount of upside versus what you were expecting. So can you maybe just help us understand where were the biggest surprises versus your forecast for those 2 items?

Speaker 2

Sure. Thanks, Peter. The first thing that I would just start with and I'll hand it over to Kevin to walk through the quarter in a bit more detail. We're doing exactly what we said we were going to do. We are maintaining top line momentum, which came in better than we expected and Kevin will walk you through those factors, while also Doing the hard work to improve margins.

Speaker 2

And so from that perspective, we're feeling good about that balance. We're going to continue to be focused on it for the year. Kevin, why don't you take them through the details of how the quarter shook out?

Speaker 4

Sure. Hey, Peter, I would say in terms of the strength of the quarter, if I think about the top line, As Linda said, really good strong fundamentals on the business. We saw consumption up 6%. We held share in tracked channels in the U. S.

Speaker 4

We continue to grow shares internationally. We delivered a record cost savings for the quarter. In fact, we had to go back and look. This is the strongest quarter we've had in the last 10 years. So really great execution by our team.

Speaker 4

Another area I'd highlight is we hit a record case fill rate since the pandemic's begun. And so our team continues to make very good progress improving our supply chain operations in spite of the ongoing disruptions we're dealing with. And so I'd say from A business fundamentals perspective, the team has done really good work this quarter. And then also say and you saw in our prepared remarks, we've had some benefit from some timing shifts. One we call out is cold and flu season.

Speaker 4

We saw the season start earlier than we anticipated and we think it's peaked in our Q2. Typically, you see cold and flu season peak in our in the January, February timeframe, which is our Q3. So we think that's pulled forward Into Q2, some of our shipments for cleaning, disinfecting products. We also had a little bit of merch timing shifts and that's pretty typical moving between quarters that won't have any impact on the year, but provided some benefit to the quarter. And then lastly, as I said, cost savings, while it was certainly a record quarter And we're on track for the full year to have a very strong year.

Speaker 4

The team was able to pull forward some of that benefit. And so collectively, the good strong fundamentals of the business a little bit of timing benefit was the primary drivers of the really strong performance in the quarter.

Speaker 3

Got it. That's helpful. And then maybe just like a bigger picture Question on the gross margin front and you've obviously have made some great strides here in the past this quarter specifically. But Kevin, I would just be curious if you could comment on how we should be really thinking about gross margin progression for the next 18 months or so in the context of what we're seeing today, given the 40% exit rate, it just would seem that you could have substantial margin expansion on top of the 37% that you're guiding to for this year, that we can we should expect sequential improvement from the 40% into the first half of next year. So just Any thoughts on kind of the margin recovery and how we should be kind of thinking about gross margin expansion over the next 18 months or so?

Speaker 3

Thanks.

Speaker 4

Yes, Peter. What I'd say is, I'm not going to provide an outlook for our fiscal year 2024 today. I'm going to resist doing that because there's so much volatility right now. We want to get a little further This year finish the plans. We're just starting to develop our plans for next year right now.

Speaker 4

So it's a little premature to talk about that. But what I would say is we feel very good about Progress we're making. As you folks know, we believe this quarter was an inflection point for us. We'll return to gross margin expansion. We've done that.

Speaker 4

Yes. You saw in our prepared remarks, we expect to build on that in Q3, looking to get to 200 to 300 basis points of additional expansion and then continue in Q4. And then as you think forward beyond fiscal year 'twenty three at a very high level, you should expect us to continue to prioritize what we're doing right now, which is Maintaining our top line momentum and making the investments necessary to do that, we're continuing to work to rebuild margins and we said that will take some time, but that work is underway. And we're going to continue to drive our strategic initiatives. Our digital transformations, our streamlined operating model, those will continue to be our priorities.

Speaker 4

But we'll give you a better feel for that as we get closer to fiscal year 2024.

Speaker 3

Got it. Thanks so much. I'll pass the line.

Operator

And our next question will come from Dara Mohsenian with Morgan Stanley.

Speaker 3

Hey, guys. Good afternoon. Good afternoon. So just a point

Speaker 5

of clarification on gross margins, You came in better than expected in both Q1 and Q2. Is there some offset in the back half of the year as we think about full year guidance not changing or is it more Conservatism just given the volatility out there. And then secondly, you took some pricing in December. Any initial thoughts on competitive response, if you're seeing any big pushbacks from retailers, probably too early to judge consumer demand, but any thoughts on that front would be helpful also just relative to the December increases. Thanks.

Speaker 6

Sure, Eric.

Speaker 4

And let me start on gross margin and then Linda can comment on pricing. As it relates to gross margin, as you said, we did over deliver our expectations For Q2, we came into the quarter targeting 100 basis point to 200 basis point improvement. We delivered a little over 300 basis point. If you look at the drivers of that over delivery, I'd point to 2 items. The first is less operating deleveraging.

Speaker 4

So because of the very strong top line performance and it exceeded our expectations, volume was only down percent for the quarter. We had anticipated to be down more and we're expecting more deleveraging. So we see the benefit of that item, which tends to be discrete in the quarter. And we did have some benefit of pulling cost savings forward. Now we remain on track to have a very good year.

Speaker 4

We're not changing our full year view of cost savings, But the team did some nice work pulling some of those projects in early and I'm always happy to get cost savings projects started early, but that was a benefit as well. It will have a bit of an impact on the back half of the year. And so I think this is a balanced forecast for gross margins where we continue to believe we'll get to about 38% on the full year. And Dara, you made this comment and I agree. It's still an environment with lower visibility and quite a bit of volatility.

Speaker 4

And so I want to see how this 4th round of pricing plays out. It's a little early for us to read. I want to get another quarter under a belt and see how that's playing out. And I think we'll have a better perspective on the full year. But with that, let me turn it over to Linda to talk a little bit more about pricing.

Speaker 2

Yes. Kevin just mentioned, we executed that 4th round of pricing in early December. And as Kevin noted, it's too early to From a consumer perspective, the reaction, I would say to date everything looks in line with our expectations from an elasticity perspective. But again, Too early. We haven't had a full purchase cycle yet and it's still being reflected in the market.

Speaker 2

As it relates to the competition, we did say in this price increase, we led for the most part on this round of Pricing. And while we've seen some category movement in pricing, there are other categories we have not seen competitors move in yet. And we're watching that really, really closely to see what that's going to look like and we're prepared to react. If our price gaps get out of line or if we're seeing a consumer reaction not in line with our Given the full category hasn't moved. So too early yet to judge that, but it is true that some categories we have not seen competition move subsequent to our pricing.

Speaker 3

Thank you.

Operator

And our next question will come from Andrea Teixeira with JPMorgan.

Speaker 7

Thank you. Good afternoon. So I wanted to go back So the top line outlook improvement, so I think that probably as you mentioned is a function of price elasticity or maybe the pull forward of Shipments at this point. And is that the reason why you also did not raise guidance as much as you could have given the beat? Is that something that Perhaps the retailers took more shipments ahead of the price increase in December and therefore you can see some of that You know, pull forward corrected in the Q3 fiscal.

Speaker 7

Is that how we should be thinking?

Speaker 4

Andrea, I would say overall I feel very good about where we're at from a top line perspective. And as you saw, we narrowed our range and we moved the top half of our range from an organic perspective, we're now targeting flat to up 3%. If you look at our performance in Through the first half of the year, organic sales growth is a little over 0.5%. So that suggests much stronger performance in the back half of the year. And so The outlook I think really reflects a good start to the year, but it would project acceleration in the back half of the year in terms of organic sales growth, Really driven by again good strength in the business plus the ongoing impact of the pricing actions we're taking.

Speaker 4

I think if you look at the range right now, you can do the math. It would suggest the back half Would be anywhere from flat to up 5% on an organic basis. And we've got still a fairly wide range in the back half of the year and I think that That's exactly what Linda was just talking about. There is some uncertainty about how this 4th round of pricing will go. And so we think it's appropriate to maintain a bit wider range until we see exactly How about the consumers react to this round of pricing as well as what we see from other manufacturers in terms of if they choose to follow or not?

Speaker 7

And with the Q4 price increase, just a fine point, I'm sorry, the December price increase, the 4th round. Can you remind us again how much would be the average pricing that you get into the beginning of the Q3 as we enter the Q3?

Speaker 2

Yes, this 4th round was a bit more moderate than we had taken in July. If you recall, July was the largest of the 4 price increases. This one was around mid single digits and fairly broad across the portfolio, but more moderate than we had taken in the past. And again, too early to judge on what the pricing looks like and What the impacts are, but this one was definitely more moderate than what we saw in July. And if you look at July, the elasticities are exactly in line with our expectations across categories.

Speaker 2

So we would expect our models to continue to hold in December, but it's dynamic out there and consumers are certainly facing a lot of Inflation and their broader basket, so we're watching it closely.

Speaker 7

That's helpful. So the mid single digits Plus a high single like in general like on average you're probably running around mid teens. And then so that implies in the midpoint The range is 0 to 5, you're looking at 2.5, you're probably looking at elasticity is running around 12:13. Is that the way your model now calls for the second half?

Speaker 4

Yes, Andrea, what I'm saying in terms of elasticity, our expectation is elasticities for this December round of pricing will be very similar to what we saw in July, which is Consistent with our historical levels of elasticity. You might remember in the 1st few rounds, we were seeing lower elasticity than historical levels. Consumers were less price sensitive, but now that's really reverted back to a historical level of elasticity. And then I would say on the back half, be a little careful because do have some shifting as we talk about between quarters. I think maybe a better way to look at that, if you try to take out the noise of some volume shifting between Q2 and Q3, Q2, we had 4% organic sales growth.

Speaker 4

You saw in my prepared remarks, you may have seen we're projecting 2% to 3% growth organic sales growth in Q3. Over that 6 month period, we're looking at organic sales growth a little over 3%. And so clearly an acceleration of where we've been based on the fundamentals of the business we're talking about. But consumers continue to be resilient. Our categories have been shown to be resilient to date and I think that's reflected in raising our outlook.

Speaker 7

And the elasticity is about 0.7, right, if my math is it serves me right on average on all the categories?

Speaker 4

Yes. Andrea, we don't comment on specifically on elasticities. And as you can imagine, they're quite different by category, by geography. So it's something we don't comment publicly on the elasticity of the brands.

Speaker 7

Okay. Thank you. I'll pass it on.

Operator

And our next question will come from Kamil Gajrawala with Credit Suisse.

Speaker 3

Hey, everybody. Good afternoon, evening for us. Can we can you talk a bit about supply and about inventory? You mentioned the fill rates were great. Maybe just a little bit more on your ability to supply So your various maybe digging into the categories a little bit and then how do you feel about trade inventories as well as maybe inventories in the pantries?

Speaker 4

Sure. Thanks Camille for the question. On supply, I would say the supply chain, we're definitely seeing improvements from The disruptions we're dealing with over the last year or 2, it continues to normalize and that certainly helped benefit our inventory levels. So as you know, we have raised Safety stocks to try to help manage the supply chain disruptions we're dealing with and create less impact to our ability to ship product to our retailers. As the supply chain is normalizing, we are able to go back and reduce these safety stock levels.

Speaker 4

And so as an example in Q2, this is a 4th straight quarter that we've been able to reduce inventory levels. I think year over year we pulled another 4 days out of inventory on hand and that's really reflecting of improving supply chain. And you heard my earlier comment. One example of that is we've hit the highest case fill rate we've been able to deliver since the pandemic began. Now we've done that through some very good work by a team, but I would tell you we are still dealing with intermittent supply chain disruptions.

Speaker 4

And I'm sure you'll remember last quarter we talked about a few disruptions on Glad and our Burt's Bees business. So that continues to occur, but it's certainly starting to normalize and we're seeing less disruptions than we did a few years ago. And so that's allowed us to continue to work to optimize our supply chain and one of those elements is reducing inventory levels. And then from a retailer perspective, The only place we saw some change in retailer inventory levels was on our Brita business in Q2. So we did see a little bit of a Reduction in retail inventories on that business, nothing else to speak of.

Speaker 4

And I would tell you in our outlook, we're not anticipating any additional Material changes to retail inventories, that always goes on every quarter. You'll see some noise, but nothing that we think has any meaningful impact on our outlook and that's what's And then maybe I don't know Linda, if you want to talk about consumer pantry levels?

Speaker 2

Yes. We're seeing it very similar to what Kevin highlighted just in retail. We are not seeing Significant pantry loading by consumers or changes in behavior as it relates to the pantry. What we are seeing and I think We'll highlight it and hopefully some discussion around what's going on with pricing with the consumer. We are seeing consumers continue to drive value seeking behaviors given what they're facing.

Speaker 2

So we're seeing some purchase cycles extend as people try to make products work longer for them. They're purchasing different sizes. So that's changing the purchase cycle, but that's largely in line with what we would expect from the elasticity impact that's in line with our expectations and we're not seeing any other behavior that's abnormal outside of that normal elasticity impact.

Speaker 3

Okay, got it. So I guess if Supply chain is in more of a normal place. Inventories are in a normal place both at retail and consumer. You now have a higher Top line outlook, that's we're in more of a normalized zone then. Is that fair to say where some of those puts and takes over the last couple of years are behind us?

Speaker 4

I wouldn't say normalized, Camille. I think that's probably overstating it. We are still dealing with supply chain disruptions. I would just say the Frequency of those disruptions has definitely gone down. But I would not say we're I wouldn't describe it as a normal environment.

Speaker 4

We're still dealing with A number of challenges on a regular basis, but certainly it's a lower frequency. And we were just talking last quarter about several of those that we're still working to resolve, Mostly behind us. And I would expect we'll see more disruptions going forward. I don't believe we're in a position not to expect that. And so that's probably the way I would better describe it than we're in a normal environment.

Speaker 3

Got it. Better than before, but not normal.

Speaker 4

Certainly better than before.

Speaker 3

Got it. Well done. Thank you.

Speaker 4

Okay. Thank you.

Operator

And we'll hear next from Chris Carey with Wells Fargo.

Speaker 3

Hi, everyone.

Speaker 2

Hi, Chris.

Speaker 6

I want to follow-up The supply chain dynamic in the context of your gross margin outlook for Q3, And I guess it's similar to the volume outlook, but I'm struggling a little bit given the delivery in Q2 with You know why it shouldn't be potentially a lot better, right? Unless productivity gets worse, you have pricing, which is going to remain strong. Raw materials probably get sequentially better. You just were talking about manufacturing and logistics, which sounds like it should get better. And then from a volume standpoint, you're going to be tracking similar to what you just did in Q2.

Speaker 6

And so why is the maybe like the other why is the operating deleverage So much worse in Q3 or maybe like what am I missing? What gets worse sequentially?

Speaker 4

Yes. Chris, thank you for the question. And I agree, we do expect gross margin will get better in Q3. If you look at what we provided in Prepared remarks, we're looking at a gross margin of 38% to 39%. So I think a very nice improvement for where we land in Q2 at just a little over 36%.

Speaker 4

You may also recall, we don't use spot rates when we develop our outlooks. We use forward curve. So our Outlook is always anticipated declining commodity costs as we move through the year. That's not a change in assumption for us. The only other item I would highlight is We will likely see more volume deleveraging in Q3 versus Q2 because keep in mind now we have the 4th round of pricing that went into effect in December had no meaningful impact on the Q2.

Speaker 4

You'll start to see the impact of that in the Q3, which means I would expect a bit more volume decline in Q3 than versus what saw in Q2, as you now have one more round in pricing and the elasticities associated with that rounder pricing. So a little bit more volume deleveraging, But in spite of that, we're going to continue to drive nice benefits from pricing, cost savings. And as a result, I expect to continue to make very nice sequential progress. It will be, we believe, up 200 to 300 basis points versus Q2. And that keeps us very much on track for getting back to about 40% by the 4th quarter.

Speaker 6

Okay, got it. And then just to confirm that volume that you're talking about, that's a lot of that's in the Health and Wellness Segment, just given timing of cold and flu?

Speaker 4

No, the volume deleveraging will be based on the pricing. And as Linda mentioned, Pricing is pretty broad based across our portfolio. So as we take our 4th round of pricing, there will be an element of volume deleveraging because of the elasticities on those price increases. That will impact the Q3. But I think the other point you're making also keep in mind we're lapping the Omicron variant from Q3 of last year, so that will have an impact on our cleaning and disinfecting business as we've got a more difficult comp on that business.

Speaker 4

So I think really a combination of both those items, You'll see that play out in our volume projections for Q3. Okay.

Speaker 6

All right, great. Just one quick follow-up still on the gross margin front, this was a nice sequential improvement in the manufacturing logistics line, certainly relative to Where we were, right? And so have we reached the end of this headwind? Can we start thinking about manufacturing, logistics, normalization and Maybe even it turns to a tailwind for your gross margins at some point in the back half of next year and certainly as we get into fiscal 2024, It does seem like some easing in this line item could be an unlock, something which you don't necessarily have control over, but we're looking at freight rates rolling over. And again, just a normalization in this line item, it seems like a good development.

Speaker 6

So I wonder how sticky you think this is? And candidly, whether this line item will ever Become a tailwind for you or is it just costs are higher and it's likely to remain inflationary over the medium term horizon? So thanks so much for all that.

Speaker 4

Yes, sure, Chris. I would say as it relates to Manufacturing and Logistics, our expectation is it will continue to be a headwind this entire year. So We think it's as you saw in our remarks $400,000,000 of supply chain inflation, about half of that is in commodities, the other half is in manufacturing logistics. Now we do think it moderates as we move through the year. And so we think each quarter it will be less of a hit than the previous quarter, but it will be inflationary for the entire year.

Speaker 4

And that's factored into our outlook. And as it relates to the medium to longer term, as I mentioned, we're going to hold off on making any comments on fiscal year 2024. It's just a little too early for us to do that. But at least this year, you should assume they'll continue to be inflationary, but moderating as we move through the quarters.

Speaker 8

Okay. Thank you.

Speaker 4

Thanks, Chris.

Operator

And our next question will come from Jason English with Goldman Sachs.

Speaker 3

Hey, good afternoon folks. Thank you

Speaker 9

for slotting me in. Two quick questions, I guess logistics manufacturing is now off the table. But in cleaning, you guys mentioned that professional is still lagging. And I think you cited in there one driver is office occupancy, It seems odd. It seems like we're deep enough into COVID where office occupancy is actually going the other way.

Speaker 9

So can you unpack a bit more of the headwinds on the Professional Business and Cleaning?

Speaker 2

Sure. Hey, Jason. There was really 2 factors in Professional. 1, which is a more Midterm issue and then one that was a very short term issue that affected Professional last quarter. And I'll start with that one, which was our Pine Sol recall and that impacted Professional.

Speaker 2

We have a fairly large business in Pine Sol in Professional and we'd expect as we bring that distribution back that just to be a short term impact. As you look at the medium term though, office occupancy is still down significantly as return to office has been delayed and we've all seen The press on how hard it's been to get people to come back into the office to the degree that we thought we would. So that continues to be a headwind to the business. We're looking at other avenues to grow the business beyond just that. I'm looking at our portfolio broadly and innovation and we continue to have conviction that Our professional business will be a growth driver for us in the future and it's good to see it start to be a bit more normalized than it was in the past, but we are still dealing with that office occupancy headwind.

Speaker 9

Okay. Okay. And Kevin, I've had a lot of debate with investors recently around sort of normalized earnings and probably everyone's having that debate. But one key point of it really does rest at gross profit. And I know you aspire to get back to historical gross margins in time.

Speaker 9

But one way we're looking at it is around unit economics with the notion that gross profit per unit is probably a more reasonable near term target of what a normalized gross Profit would look like. What if any holes do you see in that thought process? And if you think gross profit per unit should be a lot higher than it was in Can you give us an understanding of or better explanation of kind of why and maybe where you might be able

Speaker 6

to achieve that? Thank you.

Speaker 4

Sure. Jason, I would say we aspire to do both. I mean you start by rebuilding gross profit then ultimately rebuild gross margin over time. For us, it will be the same drivers we've talked about. We're going to continue to execute the pricing actions that we've taken.

Speaker 4

And as we've said, we don't have any additional Plans to take further pricing this fiscal year based on our cost forecast, but we'll continue to drive pricing. We'll continue to drive cost savings and supply chain optimization. That's the way that we think puts us in a position to first recover gross profit and then ultimately keep going to recover gross margin. Typically, I'd say in a normal environment, the work we do on cost savings is enough to offset a normalized level of inflation And allow us to build margins over time and that allows us to continue to invest in our brands and continue to set the company up to deliver value over the long term. Obviously, we're Dealing with a very unique environment right now with the unprecedented level of cost inflation and so that's why we're leaning into pricing.

Speaker 4

I'd like to believe over time as we get to a normalized environment as you described, we get back to more of our consistent model where we're really driving cost savings and that's allowing us to offset inflation and build margin over time. But we're not in that environment right now. So we're leaning more aggressively into pricing. But I think ultimately, it's always both. We start by rebuilding gross profit and then you ultimately work rebuild gross margin over time.

Speaker 3

Okay. Thank you. I'll pass it on.

Operator

And our next question will come from Kevin Grundy with Jefferies.

Speaker 8

Great. Good afternoon, guys. Question for both of you really on investment spending. There's I guess sort of what I'm trying to connect the dots here. So you're still targeting 10% of sales for the year, you've got 9% in the first half.

Speaker 8

Kevin, I think you mentioned, so that implies naturally an acceleration in the back half of the year. Can you guys comment for a moment, I guess, on destinations for the spend? Number 2, why we would not expect to see a little bit more of an acceleration? That's the case, why not more of sort of an immediate top line payback and understanding that some of this is sort of more longer term in nature? It would be great to get your thoughts on that.

Speaker 8

And then the 3rd piece, because I think kind of coming away from the call, there's going to be, I suspect, a view that the gross margin guidance may be a little bit Given the strong performance in the front half of the fiscal year, what's your feeling on potential reinvestment? Understanding it's a long still There's still ways to get back to where you'd like to on the from a gross margin perspective, but how are you feeling about potential reinvestment this year? Could you exceed on your gross margin guidance? What's the likelihood that you would sort of lean in here and reinvest given some of the promising signs you've seen on the top line? So thanks for all that.

Speaker 2

Hey, Kevin. On the investment spending piece, incredibly important. We're seeing good consumer and category resilience. We're happy that we are maintaining share in an environment where we are aggressively going after rebuilding margin and you all know that's exactly what we've targeted. We want to keep our top line momentum while rebuilding margins at the same time and that's how we're approaching investments.

Speaker 2

We're making the right short term investments to do that, But we're also not taking our eye off the long term and continuing to invest in those things that are going to make us a stronger company, like our digital transformation and like our op model. So that's what we're focused on. It just happens to be the shape of spending to have less in the front half of our year versus the back half given our plans, but that's just the shape of the investment and we still are targeting From an advertising and sales promotion perspective, still continuing to invest in innovation that's been going well for us, and overall going to continue to focus that investment on our brands. What I will say though is we are watching our categories incredibly closely right now. The most important thing that we do is continue to deliver superior value to our consumers.

Speaker 2

And right now, we're really happy to say among all that pricing that we took, strong double digits, We've maintained our record high superiority rating of 76%. We were in the 50% range a few years ago. And that combination gives us the confidence to continue to invest. But if we see a change in that where consumers are reacting in a different way or if we don't see Competition follow on price increases, we are ready with backup plans that we can activate very, very quickly to make adjustments to that. And if we need to make additional investments, we will to support the value security of our brands.

Speaker 2

But we feel we have that balance right now that played out in Q2 behind the good balance we had in top line and bottom line. But that's how we're thinking about it overall and we'll continue to take a proactive approach of adjusting if we need to.

Speaker 8

Thanks, Lynn. I appreciate the color. If I could just One very quick follow-up, and I think you kind of touched on this a little bit. Are you starting to hear from retailers at all just given some of the moderation in commodities That they'd like to see more on deal here, more trade promotion, because it hasn't moved up looking at the scanner data on the 4 to 12 week basis, haven't seen it move up a lot. And we know that some of the categories you play in historically have been heavily promoted categories.

Speaker 8

I don't want to assess it as a risk. Is that sort of coming up that some of this pricing you're going to take is going to have to go back on deal? And then I'll pass it on. Thank you.

Speaker 2

Yes. Kevin, what you're seeing in the latest data is what we see from a Q2 perspective and that promotion is still below where it was pre pandemic across our categories. It's higher than it was a year ago in our categories, but definitely lower than pre pandemic. And what we're hearing from retailers, which you would expect, is how do we continue to keep our categories healthy. So it's not a discussion on promotion necessarily.

Speaker 2

It's a discussion on how we have The right set for with the right distribution for our products, how we can lean into innovation and drive value from a market That's a perspective from a retailer perspective, but we are not hearing in a normal amount of level of interest in promotion because they know that's Not usually the right way to drive the category, we want to use promotion very strategically in times of the year where we can ensure that consumers like back to school, for example, or cold and flu, where we know people are looking for our products, and we can introduce them to innovation or remind them to buy. So those conversations continue to be really constructive and we're mutually focused on ensuring the categories are healthy and doing it the right way.

Speaker 8

Thank you very much. Congrats on a good set of results.

Speaker 2

Thanks, Kevin.

Operator

And our next question will come from Lauren Lieberman with Barclays Capital.

Speaker 3

Great. Thanks. First thing I

Speaker 10

wanted to ask about was the performance in Household, because the volume growth was pretty striking. So Just curious if you could tell us a little bit more about which of the businesses had volumes up and if there was any of the merchandising attached to that or kind of what was going on there because again to see volume up with pricing as strong as it is pretty notable?

Speaker 4

Hi, Lauren. Yes, happy to answer the question, Hansel. As you saw, we had 9% growth in the segment. From a volume perspective, really litter was The star of that group. We had double digit growth in that business and we continue to see very strong category growth.

Speaker 4

As you know, we've talked about it before, Strong pet adoption during the pandemic that's continued to fuel that category. And then we've continued to see very strong performance in that business. And so we are seeing in spite of the Pricing we've taken, we are still growing volume in that business, more than offsetting the elasticity impact.

Speaker 3

Okay, great. And then Also just on the

Speaker 10

pricing, I can't remember which of you had mentioned that pricing really had very little impact on the Q2 given the timing that went into the market and some of it's still showing up on shelves. So as we think about modeling forward, you spoke to seeing more volume pressure, but should we also see pricing accelerating versus what's already in the financials in the Q2?

Speaker 4

Yes, Lauren. So I think you'll have 2 impacts. Now we're starting to lap the 1st round of pricing we took last year. So you're starting to see some of that first round of pricing drop off as we get into the back half of our fiscal year And it's being replaced with this 4th round. So it's not as clean as another round of pricing being added.

Speaker 4

I think in aggregate, this 4th round was larger than our 1st round. So in aggregate, you'll see a little bit more benefit from pricing and you see a little larger hit in terms of the impact to volume from elasticities.

Speaker 3

Okay. All right. That's great. And yes, and then just

Speaker 10

a final question, which we have the it was So knowing that you don't typically expect a lot of revenue growth when you take pricing and everything is kind of going according to plan. But I was curious what categories kind of warrant that extra attention with specifically with regard to rebuilding household penetration? And what if anything you can tell us about plans to do that?

Speaker 2

Yes, Lauren, this is a fundamental thing we're really focused on. And one of the trade offs you do when you take the level of pricing that we're taking in the categories As you know, you trade off some household penetration in the short term in order to do that. And while we're still in 9 out of 10 households and have very strong household penetrations across our category and in most cases are performing better than the category is in household penetration. This is one of the trade offs that we're making. And I think it's the right trade off given the fact that we need to both maintain top line momentum and rebuild margins.

Speaker 2

But that being said, household penetration is incredibly important to us and the health of our business over the long term, and we are committed to regrowing that over time. And typically what we see in price increases, you see some volume loss initially as consumers adjust their behavior, you begin to rebuild that over time. So our first focus in household penetration will be rebuilding volume, over the mid to long term. And we will do that by continuing to invest in innovation, Having strong levels of investment in our brands as we're going to have 10% spending in ANSP this year, and continuing to make the right long term digital investments to support brand building, etcetera. One note, we were really proud of, we had our highest ROI marketing in this last period due to the personalization efforts that we've taken out.

Speaker 2

So we haven't talked a lot about that, but that's working. And it's allowing our money to work harder will allow us to help us focus on growing household penetration over time. So what I would just again to say is this is a wide I'd open trade off that we are making in household penetration, but it's something that as we rebuild volumes, we would expect to rebound over time. And what's key to that is continuing to invest Our branch.

Speaker 3

Okay, great. Thank you so much.

Speaker 4

Thanks, Lauren.

Operator

And our next question will come from Olivia Tong with Raymond James Financial. Great. Thank you. I wanted to

Speaker 11

ask you about Glad and Burt's, where things stand there, Particularly with Glad given the particularly strong performance in household, how much that contributed, if Glad continues to be an issue? And then with Burt's, where do we stand with respect to some of the supply chain challenges there?

Operator

Thank you.

Speaker 2

Sure. Glad was a business We were up in sales this quarter, and we actually grew share from a trash perspective. So we're really pleased with the performance of Glad through multiple rounds of pricing. We're seeing strong performance in the market and that's really behind our innovation program that we've spent a lot of time talking about, Whether it be the addition of Colors and Scents, our focus on value there, our work on distribution across the retailer base is paying off, And we feel good about where that business is from a trash perspective. And then from a burst perspective, we did share that we had a supply disruption that happened, And we believe we'd be able to work through it through Q3 and that continues to be the case.

Speaker 2

We made good progress on it in Q2 when we're able to support some strong holiday promotions and sales that led to growth on that business. But we still have some work to do and we intend to be through that by the end of this quarter.

Speaker 11

Great. And then just following up, I know you mentioned a couple of times too early to read too much into the December pricing. But just overall, Are you seeing any bifurcation as far as pack sizes or willingness to stay with branded versus private label with high end consumers versus low end? And I imagine that as the year progress so I don't think you have so far, but as the year progresses, how much of that is embedded into sort of some conservatism on the outlook? It seems like the consumer is still sticking with you, but just curious if you see anything that would give you a reason for some caution as the year presses.

Speaker 2

Sure. As we've said, it really is too early to judge December's price increase at this point. But maybe I'll speak, Olivia, to the broader sets of Price increases and just what we're seeing on average and what we continue to expect to happen as December gets fully reflected in the marketplace. We are seeing consumers and our categories remain resilient. And you can see that just in the strong consumption that you see in MULO right now.

Speaker 2

Consumers are reacting favorably. And I think this is really due to the fact that we're in essential categories. These brands play a role in consumers' everyday routines and we're continuing to see them favor value. That's what we've always focused on With our brands, they're looking for superior value, not necessarily the lowest price. And with our superiority rating, I mentioned earlier of 76%, Consumers continue to feel that our brands are the best value and they're voting for them in store.

Speaker 2

And with that, we are seeing value seeking behavior though within our own brand. So people want to stay with a Clorox company branded product and so they're trading within our portfolio and we've seen that over the last number of price increases. Some consumers are choosing to buy opening price points because perhaps that day their wallet they have a limited amount of money they can spend in the category Or they're looking for the very, very best value on a price per use basis and so they're trading up to larger sizes. Or maybe they're trading within our cleaning portfolio between a dilutable and a spray cleaner in order to get the value equation right for them. And the good news is we have offerings to meet their needs there and that's what we're really focused on with retailers, ensuring we have the right distribution to meet those needs as consumers continue to look for the best value within our portfolio.

Speaker 2

And I think we're going to continue to see that happen. As it relates to private label, we're not seeing any meaningful trade down in our categories to private label. And again, we maintain And share amid floor price increases, so that is playing out. But I'll tell you, we're watching it really closely. This It looks like it's going to continue to get tougher for the consumer in aggregate.

Speaker 2

And so we're looking particularly as 4th round is implemented and particularly in categories where we have higher private label penetration, to ensure that we have that right value. I also mentioned earlier, we haven't seen some competitors reflect an additional price increase as we did in December. And so we're watching our gaps really in those categories as well to ensure that we are continuing to offer superior value and we will make adjustments. We are ready to if we need to, to protect the value of those brands. But at the moment, category and consumer is resilient.

Speaker 2

Our brands are very resilient maintaining share, and we're going to continue to activate our plans on innovation and investment to keep them healthy.

Operator

And our next question will come from Javier Escalante with Evercore ISI. Sir, your line is open.

Speaker 12

Hello. Can you hear me? Sorry for that. Wanted to double click good afternoon, everyone. Wanted to double click on the timing factors and the household volume growth of 3%.

Speaker 12

If you look at this current data, it shows a double digit decline. So if you can help us understand how much Stronger this pet food, pet litter business was in the quarter and whether there was a channel shift there. And then I have a question more philosophically to Linda when it comes to the Health and Wellness business. Thank you.

Speaker 4

Javier, let me see if I answer your question on shifting. So as we mentioned in Q2, we had some benefit of shifting of some merch activity. And as I said, that's pretty typical that you'll see some merch events shift between quarters out of Q3 into Q2 and that was across a number of businesses. And then more specifically, we're seeing the benefit of an early start to cold and flu season in Q2 as it relates to our health and wellness portfolio. But maybe say a little bit more on what your question is.

Speaker 4

I'm not sure that gets to the question you're answering.

Speaker 12

No, it's a little bit more of a follow-up on Lauren's question when it comes To the job in household and the categories that you've referred to, to being the shifting Was Health and Wellness and they were down 19%. The real jump was in household and we don't see that in retail. So if you can help us If you can give color there and help us understand the disconnect between what we see in retail and what you just reported?

Speaker 2

Yes, I'll jump in on that one, Javier. So you are noting a few categories that have Very strong on track channel performance. And particularly in litter, our business in club, that was due to some strong merchandising activity we had and actually some of the shift that we experienced from Q3 into Q2. So that's what you're seeing the difference between the tracked channels and what we're talking about from a volume and sales performance in household.

Speaker 12

Very helpful Linda. And then basically curious How you go about answering this question with consumer research? You have health and wellness down 19%, is lapping down 18% from a year ago volumes. How do you see normalization play now? Do you see people Cleaning more as they were during the pandemic, cleaning less and if they're cleaning less, how much many other quarters You feel that volumes are going to be down in health and wellness?

Speaker 12

Thank you.

Speaker 2

Yes. This is a category that certainly has had the biggest swings as consumers change their behavior as we went through the height of the pandemic, and we're still lapping. We're still normalizing given Omicron happened last Q3 and we're in the process of lapping that right now. What I would say is if you look at this last Q2 versus pre pandemic, our volumes are still higher. So in aggregate, people are still cleaning more.

Speaker 2

And certainly, we're still normalizing consumer behavior. And then we had a very abnormal cold and flu season this year. It happened earlier, it happened in December from a peak perspective, it usually happens in January February. So there's a lot of dynamics in play here around normalization. But what we see is still a business that has great opportunity to grow and be an outsized contributor to the company given people They care about cleaning and disinfecting as part of keeping them well, but we're going to be normalizing as we get through this and consumers continue to adjust their behavior.

Speaker 2

And hopefully, we'll get into a more normalized cycle where COVID flu normalizes and we're seeing a more normalized impact from COVID, but we're not quite there yet. And as we look at the volume loss, that's really due to that factor around normalization, but also the pricing that we have and it's in line with our expectations. So as we look at that, that just gives us conviction because it's about what we expected it to be. And then as we move forward, we'll continue to adjust as consumers adjust, but it's the same thing. We're focusing on innovation in those categories where we can make the job easier for them.

Speaker 2

We're continuing to invest to help people to understand different ways to keep themselves well, whether that be in a professional setting or at home. But we feel really good about the health and wellness business overall. It's just going to be bumpy until we get back to a normalized environment.

Speaker 12

Thank you very much. Very helpful.

Speaker 2

Thanks, Javier.

Operator

And our next question will come from Ana Luzuel with BofA Global Research.

Speaker 13

I just wanted to follow-up on the cost side. You're still seeing cost inflation, but you noted in your prepared Remarks that cost inflation has moderated slightly on a sequential basis, even though it's still higher year over year. I was wondering if you can give some more color on which inputs are moderating and how quickly those are coming down versus the ones that are still headwinds? And then could you also remind us how quickly you expect some of your raw materials to come down in your P and L relative to when we see spot prices for those raw materials decline? Thank you.

Speaker 4

Sure. As it relates to the cost environment And you said it correctly, we are seeing moderating cost increase. Now as I said, we anticipate it's going to be inflationary all year long, but that year over year I appreciate you'll moderate as we move through the year. As I look at specific commodities, we have anticipated resin would be a cost tailwind, so a lower Year over year cost for resin, that's something we assumed at the beginning of the year and that continues to play out that we are seeing resin prices favorable year over year. But that is being offset by we're seeing increases in most of our other buys outside of resin.

Speaker 4

So soybean oil, linerboard, chemicals, solvents, Substrate, most of the other key buys that we are purchasing, we are seeing cost increases on a year over year basis and we expect that to continue throughout the year. So that's generally how it's playing out. What I would tell you when you talk about what that moderation is, I think you can see it when you look at just the first half results. If I look at Q1, Commodities were a 3 30 basis point hit to gross margin. In Q2, they were 2 40 basis point hit.

Speaker 4

So that's exactly what we're describing. Still a headwind, But a lower hit each quarter. I would expect that to continue to play out that we'll see a declining impact from commodity costs as we move through the year. But again, we're looking at $400,000,000 worth of total inflation, resin being favorable. Most of our other buys continue to be unfavorable on a year over year basis.

Speaker 13

Okay. Thank you. And just could you remind us how quickly you would expect the costs to come down in Urcan all just relative to when we see those spot prices coming down?

Speaker 4

Yes, I'm sorry, you had asked that question. Well, it really varies by commodities. In some cases, we hedge. And so in those cases, you may have 9 to 18 months before we'd see the impact of a changing commodity environment play through our cost structure. In other cases, we have contractual relationships with our suppliers that delays those changes.

Speaker 4

So it's really hard to give you an enterprise answer how quickly that plays through. It is a Commodity by commodity discussion based on how we set up those relationships with our suppliers.

Speaker 13

Great. Thanks very much.

Speaker 3

Thank you.

Operator

And our next question will come from Steve Powers with Deutsche Bank.

Speaker 14

Hey, thanks. Good evening. On the household penetration topic, I guess Question is, how much recovery at this point is anticipated sort of within the remainder of Your outlook for fiscal 2023, is that something you expect to see some sequential progress rebuilding the next Few months quarters or is that more of a fiscal 2024 and beyond objective?

Speaker 2

Yes, Steve. On household penetration that is definitely a more mid to long term goal for us to Get back to household penetration. Given the fact that the December price increase is just starting to take a hold now, we would expect have to go through an entire cycle of that and we haven't even lapped the July price increase, which was our big one coming up here. So that will be something that we're focused on now to Ensure that we are investing and that we're keeping as many consumers in as We can, but that work will be rebuilding over 'twenty four and beyond.

Speaker 3

Yes. Okay.

Speaker 14

Is there an assumption you may go backwards Sort of as we get into calendar 'twenty three before you go forward again? Or is it does it more hold the line?

Speaker 2

Yes. I think that's very possible, Steve. Based on the fact that we just took that pricing, we could see a bit more of a reduction in And again, we think that is the right trade off to make, to get that balance right between top line and bottom line. But yes, it's possible as we go through, we could see some additional household penetration erosion.

Speaker 14

Okay. Okay. And then, we talked about promotional Intensity in the category, right now, it seems pretty rational, benign, constructive. I guess, is there at all in the base plan an element of increased promotion As you go through the next couple of quarters or is that also more steady state as a base case?

Speaker 2

The base case is more steady state, Steve. As we talk about promotions being a more strategic part of our portfolio than something that we just do to drive volume on a quarterly basis, that's The approach that we're taking for the back half of the year, we have good innovation plans. We want to make sure that we hit consumers on key pulse periods to remind them about category and the value that we drive, so that's our approach. Again, being what it is, we will look to ensure that we have the right value and that we are And so if there were to be a change in what we're seeing in the category today, which is slightly higher, like I said earlier, promotion than last year, but still less than in pandemic, we could potentially adjust our plans and we're ready to do that. But we would expect just a more normalized promo environment.

Speaker 2

That's how we're treating For the back half and that's what we've seen so far in Q2.

Speaker 3

Okay. Okay.

Speaker 14

And the last question, on the one hand, there's definitely A really good news story here in terms of the pricing momentum you've gotten and the sort of the gap between pricing that's building relative to The cost trend and the gross margin rebuild. On the other hand, you've mentioned a couple of times tonight, just the price gaps that you're watching, With a private label or branded price gaps and just sort of consumer resiliency Post this 4th wave of pricing.

Speaker 3

I guess, can you give us a

Speaker 14

better sense of what the mile markers are for you in terms of is it just the gaps that you're seeing That year has widened out. Is there a time period where you just don't want to see those gaps that wide for that long? Is it value share? Is Volume share? Is it those household penetration metrics?

Speaker 14

I mean, I'm sure it's a mosaic of all those things and probably some others, but Just give us a little sense of kind of the if there are more important indicators in there that would be helpful, just the way you're thinking about it.

Speaker 2

Yes. You got it right on Mosaic, Steve. That's exactly it, which is we're taking a combination of all of those factors as we're deciding if we need to adjust our plans or not. And really, primarily, what we're looking at is consumer reaction to our brands, and we're looking very closely at any changes that would be outside of what we given the elasticities that we have in market. And then we would make corresponding plans.

Speaker 2

And we're looking at competitors to see Are they doing something different? Are they promoting more heavily? Are they looking at a certain pack size that would make us adjust our plans? Those are the two primary factors we're looking at Very, very short term. And then of course, as we look over months quarters, we're looking at share and we're really happy that we maintained share this quarter, given the 4th round of pricing.

Speaker 2

But that's the other thing we're watching. Is there too much of a slide in share? Is that trade off not worth it, etcetera. So we're looking at all of it. But to start, we're looking at that gap.

Speaker 2

We're looking at consumer behavior by category to say is it different than our expectations and then adjusting from there.

Speaker 14

Okay. Very clear. I appreciate it. Thank you very much.

Operator

Thanks, Steve. And this concludes the question and answer session. Ms. Rendell, I'd like to now turn the conference back to you.

Speaker 2

Thank you, everyone. We'll see you at CAGNY later this month and look forward to updating you on our progress in May. Please stay well.

Operator

And this concludes today's conference call. Thank you for attending.

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Earnings Conference Call
Clorox Q2 2023
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