The Clorox Company (CLX) 2024 Q4 Earnings Call Summary

Optimistic Highlights

• Operational Strength and Market Share Recovery: Clorox ended fiscal year 2024 in a strong operational position, having fully restored supply and distribution and recovered most of the market share lost due to a cyber-attack.

• Margin Expansion and EPS Growth: The company delivered its seventh consecutive quarter of margin expansion and achieved double-digit adjusted EPS growth.

• Strong Brand Portfolio: Clorox highlighted the resilience of its brand portfolio in essential categories, which have shown strength during challenging times.

Pessimistic Highlights

• Consumer Pressure and Competitive Activity: The outlook for fiscal year 2025 anticipates continued consumer pressure, which may temporarily increase competitive activity and impact category growth.

• Cyber-Attack Impact: The significant disruption caused by a cyber-attack led to an 18% organic sales decline in the first quarter of fiscal year 2024.

Company Outlook

• Fiscal Year 2025 Expectations: Clorox is focused on returning to volume-driven sales growth, pre-pandemic gross margin levels, and free cash flow in line with long-term goals, despite expecting consumers to remain under pressure.

Q & A Highlights

• Q: Can you provide more color on the top-line outlook, especially considering the consumer environment and promotional intensity? (Filippo Falorni, Citi)

  A: We expect the consumer environment to continue as we've seen, with low-single-digit category growth. Our focus is on executing spending plans, investing in ANFP, and innovation to support category and share growth. (Linda Rendle)

• Q: What surprised you to the upside in the quarter regarding gross margin, and what are your expectations for next year? (Filippo Falorni, Citi)

  A: The over delivery in Q4 was mainly due to business unit mix, with household segment performing below expectations and health and wellness above. For fiscal year 2025, we expect another good year of cost savings and modest cost inflation. (Kevin Jacobsen)

• Q: Could you discuss the household segment's performance and expectations moving forward? (Peter Grom, UBS)

  A: The household segment underperformed in Q4 due to weather impacts on grilling and delayed distribution recovery in Glad. We expect improvement as distribution has been fully restored and are focused on regaining consumers in Litter. (Linda Rendle)

• Q: Can you elaborate more on category health and the role of RGM in achieving the 3% to 5% organic sales growth for fiscal '25? (Andrea Teixeira, JPMorgan)

  A: Categories are generally healthy, with consumers focused on value. We're using RGM to ensure we deliver value, with activities like always-on pricing and initial price pack architecture work contributing to growth. (Linda Rendle)

• Q: Regarding the fiscal Q1 organic sales guidance, can you clarify the assumptions behind it and the expected gross margin trend? (Chris Carey, Wells Fargo)

  A: We expect 20%-25% growth in Q1, driven by recovery from cyber and demand plans, offset by increased trade spending. Gross margin in Q1 will be lower than Q4 due to business unit mix and trade spending. (Kevin Jacobsen)

• Q: Could you touch on the innovation and increased spend levels needed for Litter and the overall risk for spend levels going beyond guidance? (Bonnie Herzog, Goldman Sachs)

  A: We have strong innovation plans for Litter and have accounted for increased spending in our outlook. The promotional environment has been rational, and we're prepared to adjust if necessary. (Linda Rendle)

• Q: How does the EBIT margin outlook compare to historical levels, and what's the path to recovery? (Bonnie Herzog, Goldman Sachs)

  A: We're making good progress on EBIT margin recovery, targeting about 17% to 17.5% this year, close to historical levels. Our streamlined operating model and portfolio work will contribute to this improvement. (Kevin Jacobsen)

• Q: Can you clarify the volume versus pricing mix embedded in the 3% to 5% organic sales growth outlook for fiscal '25? (Dara Mohsenian, Morgan Stanley)

  A: The growth will primarily come from volume growing slightly above 3% to 5%, with price mix modestly negative due to increased trade spending. (Kevin Jacobsen)

• Q: With the divestiture of Argentina and VMS, does the 3% to 5% long-term organic sales growth outlook still hold? (Dara Mohsenian, Morgan Stanley)

  A: Yes, the divestitures support a more stable and consistent sales growth and margin expansion, allowing us to focus on growth opportunities in our remaining portfolio. (Linda Rendle)

• Q: Regarding advertising spending, was the increase in Q4 a step-up to set up for next year? (Kaumil Gajrawala, Jefferies)

  A: The 14% spending in Q4 was to support strong consumer momentum as we fully restored distribution and supply. We're returning to 11%-11.5% spending for fiscal '25. (Linda Rendle)

• Q: Can you discuss the assumptions around promotional activity and its impact on gross margins for fiscal '25? (Kaumil Gajrawala, Jefferies)

  A: We expect increased trade spending in the front half of fiscal '25 due to normalized merchandising support, with no significant year-over-year increase in the back half. (Kevin Jacobsen)

• Q: Considering the current environment, was there any consideration to reinvest more of the gross margin improvement into advertising and marketing? (Kevin Grundy, BNP Paribas)

  A: We considered various scenarios and feel the current investment level is balanced. We're focused on growth and are prepared to increase spending if necessary to support our brands. (Linda Rendle)

• Q: How did cash flow end for the year, and what are the expectations for fiscal '25? (Robert Moskow, TD Cowen)

  A: We're targeting about 12% free cash flow as percent of sales for fiscal '25, in line with our long-term goals, and have restarted our share repurchase program. (Kevin Jacobsen)

• Q: Can you provide more clarity on the 3% to 5% top-line goal for fiscal '25, particularly the assumed rate of consumption growth? (Steve Powers, Deutsche Bank)

  A: The goal includes lapping the cyber-attack impact and modest share growth. We expect low single-digit category growth with higher growth in international and professional segments. (Linda Rendle)

• Q: Could you quantify the structural benefits to margins from the portfolio reshaping? (Steve Powers, Deutsche Bank)

  A: Exiting Argentina and VMS will structurally improve top-line growth rates and gross margins by about 50 bps to 70 bps. (Kevin Jacobsen)

• Q: Regarding the household business, to what extent do negative pricing and volume indicate overpricing? (Javier Escalante, Evercore ISI)

  A: The household segment's performance was impacted by specific factors like weather and delayed distribution recovery. Our pricing is holding up well, and we're focused on delivering value. (Linda Rendle)

• Q: Considering Burt's Bees' performance and competitive spending, are there plans to adjust the portfolio or increase marketing spend? (Javier Escalante, Evercore ISI)

  A: Burt's Bees has been a strong acquisition, and we're focused on recovering from supply issues and the cyber-attack. We compete in a segment where our pricing and product offerings are competitive. (Linda Rendle)

• Q: Can you discuss the digital transformation progress and expected benefits? (Unidentified Analyst, Bank of America Global Research)

  A: The digital transformation is on track to finish in fiscal year '26, with early benefits seen in marketing efficiencies. The bulk of the value will come in '26 and beyond as we complete the ERP implementation. (Linda Rendle)