The Clorox Company — 2024 Q1

Let me start with gross margin phasing and talk about what we're seeing in Q1 and sort of how we see that playing out as we go forward. The 1 thing to keep in mind is -- and these assumptions really have not changed since we talked last quarter in August, which is, as it relates to pricing, as you may know, we took 4 rounds of pricing. We've now lapped 3 rounds of pricing. So you're going to start to see the benefit of pricing continue to moderate as we move throughout the fiscal year, and we'll lap the fourth round by the end of this quarter.

We're really confident there's no structural issues related to this incident. It's short term in nature. And as Kevin highlighted, we have full confidence we'll be able to restore distribution and share over time. And what Kevin highlighted is exactly right. It's about pace. And what we're focused on this year is making progress as quickly as we can, and that starts in Q2 with rebuilding inventories. And we already are shipping well ahead of consumption now as we finished out the end of this month and we intend to continue to do that for the rest of the quarter with the goal of getting back to inventory in retailers as fast as we possibly can. We think we'll get through the bulk of that in Q2. We'll have some left to do in the back half of the year.

Yes. Thank you for the question and for the opportunity to once again thank my retailer partners for everything they have done during this time, they have been tremendous. And that is without exception, they have all gone above and beyond to ensure that we're getting as much product as possible to their shoppers. They partnered with us on manual operations, which is not easy for anyone to do. It wasn't easy for us and certainly not easy for retailers. They've been tremendous, and they continue to be tremendous.

Sure. Happy to, Filippo. We came into the year with an expectation we have about $200 million worth of supply chain inflation. Now that's broader than just commodities. That's inflation across the entire supply chain. And that is still an inflationary environment, but certainly moderating versus what we've seen over the last few years. As you look at that $200 million, about 1/3 of that we anticipate is commodity cost inflation, about 2/3 is in other areas of supply chain, primarily driven by wage inflation that shows up in a lot of different areas.

I just wanted to ask on regaining distribution. How much of the distribution recovery will need to be driven by innovation and do you already have this innovation in the pipeline? Anything in particular you had in the plan for fiscal '24?

Thanks for the question. So the first priority, of course, will be restoring the distribution of the everyday items we have on the shelf that performed really well from a retailer perspective and consumer perspective. So we want to make sure that we get those back on and because we're very choiceful in how we work with retailers on the distribution and shelving that we have, the items that we have on the shelf deserve to be on there, and we're going to work to get those back on.

And I wanted to ask around advertising and sales promotional spend. You mentioned it will be about 11% of sales. Is this enough given the disruption and potential loss in market share versus a similar percentage of sales that peers are spending on advertising and promotion.

Yes. As you know, we'll continue to spend about 11% of sales on advertising and sales promotion, which was up versus last year where we spent about 10%. And we continue to believe this is the right level of spending to support the brands as we get through this inventory recovery and growth phase as we head into the back half. And of course, we'll make any adjustments that we see necessary by brand, et cetera. And it's also supported, I would note, by continued very strong performance from an ROI perspective. So we're getting more and more for that spend. So not only are we spending at a higher rates but we're also getting more for every dollar that we invest. And we'll continue to monitor that closely. But between that and the increased promotional environment we expect to see, we think we have the right money in the market to ensure that retailers have the right plans and the consumers are seeing our brands from a marketing perspective.

Yes, I'd say there's a few items. So you're exactly right. We've always assumed increased merchandising support. That was true back in August and that continues to be the case. The 1 other area, though, that we should talk about is as we're working to rebuild distribution and we're working to rebuild share, we are expecting lower sales in the back half than we were anticipating back in August. So lower sales will have some lower volume deleveraging that will impact margin. And then the other assumptions are generally similar to what we thought back 3 months ago.

Well, I'd say merchandising levels overall will be as part of price mix, you'll see that show up.

So I can certainly talk about Q2 and our expectation as you mentioned, we're projecting mid-single-digit organic sales growth in Q2. And you're exactly right. We expect, as a result of shipping above consumption, that's certainly going to help the top line relative to Q1. There's 2 items that will partially offset that. The first is we're going to continue to lap the benefit of pricing. And so you'll see that offering a smaller benefit in Q2 sequentially versus Q1. So if you saw in Q1, we had about 8 points of favorable price mix. The quarter before that, we had 16 points. So you'll continue to see that step down in Q2, and that will be a smaller benefit.

Lauren, I'll add just 1 thing, which is a nuance to your point on shipping above consumption. When we say consumption, we mean what average consumption would have been being fully in inventory. So we're shipping well beyond that level, and that's how we rebuild inventories over time. So it is a meaningful overshipment versus what we normally would.

Yes, Lauren, this is primarily the nice work we've done on the streamlined operating model work we're doing. As you know, we're targeting to eliminate about $100 million in cost. And I'd say, keep in mind, while we talk quite a bit about the admin savings, this is really about making us a more competitive company by accelerating decision-making and getting decision-making closer to people know their consumer best. But it does generate nice savings for us, and we are very much on track by the end of this year to complete that 2-year program to generate about $100 million in reduced admin savings. And so we started that last year, and you should see us continue to drive admin savings this year as well as we complete the program.

Lauren, we had all of those debates to see and prioritize having the right level of spending. And that's exactly the exercise that we undertook. And we think what we have in combination with innovation, with the merchandising spend is the right level, if there's any change to that based off of what we see in the marketplace, we absolutely will make adjustments prioritizing the health of our brands and ensuring that we're in front of our consumer but we feel good about that 11%. It still is slightly higher than it was last year, if you just look at absolute dollars as well. And of course, we're driving our team to try to get as much efficiency impact as they possibly can on that spend as well. But we think it's the right level. And again, as we always do, we will prioritize that. And if there's any adjustment needed based off of the path forward as we rebuild, we will make that, but feel very confident where we are right now.

Over the long term, Chris, no. We feel confident across all of our categories that we'll be able to rebuild distribution, return to merchandising and, of course, return to the shares that we were before and grow from there. In the short term, though, there are some nuances, and you'll see recovery faster in some businesses than others. And that has to do with the rate of turn from a consumer perspective. So some of our items turn incredibly quickly, and they're heavy and bulky. And so we saw inventories depleted faster in those categories, for example, and those will take a bit longer to restore. And then some of our other categories where the turns are slower. We've had better inventory positions up into this point and the rebuild will be faster. And then some of it has to do with the complexity.

Sure, Chris. First, and clearly, we had incremental costs in Q1 associated with this as we dealt with the cyber-attack itself and the systems issues that we needed to overcome and build. So there was an incremental cost there. Second, on the marketplace piece, we felt like we put a plan in place that took into account what we thought was going to be a more challenging environment. And that plan works very well for us in this environment of rebuilding as well. So we think we have the right tools in place. We believe, again, we have the right level of advertising and sales promotion, promotional dollars invested in that -- on the recovery.

Sure. Let me -- I'll start with the first part of your question. So maybe if we step back and look at what happened over Q1 and what we anticipate is happening over Q2 and beyond. The big picture is that when this first happens and we move to manual operations, which meant there was a period of time we were shipping anything for a very short period of time. And then we began manual operations and we were shipping at a lower rate. We still had inventory in the system for a number of weeks that allow consumers to have no visibility to this whatsoever. They went to the shelf and they had, for the most part, a normal experience and they were buying Clorox products.

As you think about sort of rebuilding inventory and market share, how do you ensure that this doesn't impact your ability to stay on pace on innovation and then eventually, your ability to get back to the gross margin recovery path because there's obviously -- you're not quite back there yet. You're still working on that. How is it that you can stay on patient innovation with all the disruption that's happened in the business and potentially some need to rejigger the marketing, promotional dollars, et cetera, in the second half of the year?

Yes. Olivia, it comes back to what we've spoken about before and continues to be of critical importance to us. We are deeply committed to our strategy, and that includes continuing to drive our top line momentum while rebuilding margin and balancing the pace of those 2 things. And that continues to be the center of the focus as we make decisions recovering from the cyber-attack and all the choices that we'll have over the coming quarters to ensure that we're balancing that for consumers.

Got it. And then just secondly, given the cyber-attacks, and I imagine you took another look at your capabilities and IT infrastructure, obviously in the middle of a program right now. Have you revisited the plan? Do you think there are more needs to be done? And if so, could that potentially extend the project further out?

Yes. So 2 things. Prior to the cyber-attack, we had a number of particular cybersecurity measures in place, including endpoint detection and response tools across our enterprise. And as we experience this, we continue as we bring our systems online to enhance those and taking a series is to further strengthen our security controls. So that's 1 bucket.

I have a question, I guess, is a CFO question. And it has to do with the business planning, forecasting and reporting that you had. How often do you communicate with the segments reporting to you? Because this seems to be kind of like a very simple business, mostly U.S.-driven. And I was surprised by the fact that it took over a month to know that the incident was material.

Yes, Javier. What I would say is, I think you saw we communicated in 1 of our previous 8-K that we thought this was going to have a material impact on our results. And so we try to communicate that fairly quickly. But then the next step for us was to determine the actual financial impact and so that's what we communicated in our preannouncement because we thought it was important, given the last outlook we had was what has put out there in August prior to the event. We did not want to wait until our earnings call today to report results. So as soon as we had a fairly good handle on the financial impact we communicated that publicly. Yes, you have to keep in mind the reality is we're working in an environment that had limited systems capabilities. So it was more manual effort. So that takes a little bit longer. But importantly, we thought we want to get out there and provide that information as soon as we could.

Sorry, Javier, I was just going to build on Kevin's response to your question. The other thing I would just note is this is actually a fairly complex business. We compete in 13 categories in over 100 countries around the world. And we're aggregating all that information in a manual environment to understand the impacts. In addition to that, we are working with all of our retailers and supplier partners who then have to transition to a manual process with us and getting our arms around exactly the implications and timing. So I just wanted to note, it is actually a rather complex business and one where -- when we are in a manual environment, you could understand how difficult it would be to have full visibility to all parts of that. And as Kevin said, our commitment was to transparency and giving information as we had it, which you saw in those series of 8-Ks.

I appreciate that. Now my question was, I used to work for 1 corporation, a large 1 global. And I remember that they used to close the books every month and we re-forecast every month. So basically, that was the question I was asking. So how frequent does the CFO office re-forecast the business plan on a regular basis, understanding that there was a cyber event, which is very unfortunate.

Yes, Javier. Let me separate a normal environment versus the cyber environment because I was asked much different. So we -- similar to -- it sounds like the experience we close our books every month, we sell our results every month and we forecast on a regular basis. That's a cadence of anywhere from 5 to 8 forecasts a year. So we have very frequent updates in a normal environment. But as Linda mentioned, in this last period because of the limitation of automated systems, [ in vary ] manual environment. So it has less visibility to our financial performance while our systems were down. And then as we brought those systems back up, we actually communicated as soon as we had a handle on what we thought the financial impact was.

And right now you have full visibility over your P&L, all the legal entities, all that.

We do. We've started up our systems, we're back to an automated environment that includes our ERP system. So yes, we have full visibility as we move forward now.

Thank you, everyone. We look forward to speaking with you again on our next call. And until then, please stay well.