Clorox Q1 2024 Earnings Call Transcript

Presentation

[Operator]

Good day, ladies and gentlemen, and welcome to the Clorox Company First Quarter Fiscal Year 2024 Earnings Release Conference Call. [Operator Instructions]

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, Vice President, Investor Relations at Clorox]

Thank you, Jen. Good afternoon, and thank you for joining us. On the call today with me are Linda Rendle, our 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 have 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 a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures.

Now I'll turn it over to Linda.

[Linda Rendle, Chief Executive Officer at Clorox]

Hello, everyone, and thank you for joining us. We entered fiscal year 2024 with momentum, supported by strong progress on our priorities over the past several quarters to maintain top line growth while rebuilding margins. Prior to the August cyber attack, our performance was on track with our expectations with solid consumption and market share trends, including improving volume consumption as we lapped year ago pricing actions. This is a testament to the strength and superior value of our brands and the role they play in our consumers' daily lives. In addition, we continue to realize benefits from our margin-enhancing initiatives, including pricing, cost savings and supply chain optimization.

However, the cyber attack caused wide-scale operational disruptions, which adversely impacted our first quarter financial performance. While we're not yet back to normal, we are now on a solid path to operational recovery, but this will take some time. We're laser-focused on our immediate priorities of rebuilding retailer inventories as quickly as possible, preserving merchandising activity and improving our distribution to return to the trajectory we were on prior to the cyber attack. We've proven that we can execute and rebuild inventories, earn back our shelf space and distribution and regain and ultimately drive share growth over time, just as we did coming out of the pandemic, when we restored supply following extraordinary demand for our products.

We're confident in our ability to do so again, given the strength and superior value of our brands, the relevance of our IGNITE strategy and the relentless focus of our teams on executing with excellence to win in the marketplace. As we navigate the near term, we remain committed to our long-term strategies for growing the top line and rebuilding margins. which includes investing in innovation and brand building, driving our hallmark cost savings program and advancing our digital transformation and streamlined operating model. Looking ahead, the disruption of the last few months does not change the Clorox story. As we exit our recovery efforts, we're confident that our portfolio of leading brands in essential categories and our IGNITE strategy will enable us to regain market share and deliver consistent profitable growth over time.

With that, Kevin and I will take your questions.

Questions and Answers

[Operator]

Thank you, Mr Rendle. [Operator Instructions] Our first question will come from Peter Grom with UBS.

[Peter Grom, Analyst at UBS Group]

Thanks, operator, and good afternoon, everyone. So Kevin, I was hoping to just get some color on the phasing implied in the guidance in the context of the 1Q performance in some of the 2Q commentary. Maybe just to start with gross margin up nicely in 1Q. Can you maybe walk us through the drivers that actually would push gross margin to be flat for the year? And then I know from a sales perspective, it's still a wide range, but it does seem to imply a decline in the back half of the year. Is that just some conservatism? Or are there key reasons behind that?

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

Yes, happy to, Peter. And thanks for the questions. 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 one 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 four rounds of pricing -- we've now lapped three 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.

And so as we get into the back half of the year, we'll no longer have the benefit of pricing. Now we're still taking pricing internationally. So there'll be some benefit, but not to the degree you're seeing. And as an example, if you look at our most recent quarter, pricing benefit to margin is worth about 470 basis points. So a nice contributor and you'll see that moderate as we go through the year. And then the other item I would highlight is we're going to see our belief is increased merchandising levels. And again, this is not a change in our assumptions. We continue to operate below pre-pandemic levels.

Typically, we merchandise about 25%, 27% of our business. And last year, we ended up about 20%. And so we continue to expect that to increase as we go forward. And so our assumption is in the back half of the year that we'll see increased levels of merchandising support that will put a low pressure on margin. And then lastly, we continue to believe that we're going to see a consumer that's under more pressure in the back half of the year. And for all the reasons you folks know is we talk about a return to paying student loan, payments, increasing interest rates and the pressure that will put on consumers. And typically, that puts a little bit of pressure on our categories.

Now based on the nature of our categories being everyday essential categories, it's not a significant impact. But usually, you could see consumption down one or two points as a result of that. And that's an assumption we've continued to assume since the beginning of the year, and that will pressure margins a little bit as well. Now on the sales, talk a little bit about the back half. Obviously, you folks saw we were down 20% in Q1. And if we deliver our expectation for Q2, which is sales to grow mid-single digits, that would project in the back half the year on a reported basis, sales being flat to down high single digits. And that's a fairly wide range. I think it's a function of both the macroeconomic uncertainty about how this plays out with the consumer. But then the additional variability we have is we're working to rebuild some of the distribution and share we've lost, we fully expect to rebuild that, but we recognize there will be some variability in the exact pace of that recovery and it's not totally in our control.

And so that will have some impact on our sales performance as well. But I think, Peter, what's most important is we are quite confident we will rebuild back that distribution share we lost as a result of Cyber Event. But trying to predict the exact pace of that recovery is a little difficult to do. And so we provide a range that we think reflects that variability.

[Peter Grom, Analyst at UBS Group]

Got it. And then maybe just a follow-up. I know this may be hard to answer as we're kind of only in the first quarter of this year. But do you have any perspective around whether you think the disruption could have some lasting impacts beyond this year? Maybe from a top line perspective, do you see any risk that there could be shelf-space losses or permanent share shifts, anything from a margin perspective. I guess what I'm really trying to understand is whether you think you can fully recapture the earnings loss from the incident as you think about fiscal '25.

[Linda Rendle, Chief Executive Officer at Clorox]

Thanks, Peter. 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.

And then, as Kevin said, rebuilding ensuring we have merchandising and distribution back to where it is. We are working as quickly as feasible to get as much of that done in '24 as we possibly can and that's what we're focused on. And we have a history of doing that. If you look back when, for example, Pine-Sol was out due to a product issue, we were able to get that distribution back quickly. If you look at post-COVID, the ramp-up on distribution was fast.

And then we had a couple of quarters after that initial ramp-up where we continue to make progress. But what I can say is we intend to do as much of it as we possibly can in fiscal year '24. There's no structural issues related to this in our business. And we have strong confidence that given the superior value of our brands, our investments, and innovation that we will get it back. And again, as Kevin said, it's a matter of timing.

[Peter Grom, Analyst at UBS Group]

Got it, thanks so much.

[Operator]

And our next question comes from Filippo Falorni with Citi.

[Filippo Falorni, Analyst at Smith Barney Citigroup]

Good afternoon, everyone. Linda, maybe just can you give us a little more color on the conversation with key retailers as you go and try to rebuild the shelf space -- is there a requirement of increasing merchandising? It seemed like part of your gross margin outlook as well? Just any color on how those conversations have been going so far.

[Linda Rendle, Chief Executive Officer at Clorox]

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. And now our focus is shifting from manual operations to rebuilding that inventory and then the same goal of building it as quickly as we do, and they are taking every measure on their side to ensure that we have the right appointments etc., to do that. And it's a busy season for them with holidays, etc., and they're still prioritizing that.

And then, of course, our joint focus is on ensuring that we get merchandising for things like cold and flu. We have Burt's holiday merchandising. We're focused and are focused on ensuring that we meet those deadlines and that we get those in front of consumers and shoppers at that time. And then ultimately, what our goal is, and this is really important to retailers, too, just like coming out of COVID, we had stronger relationships with our retailer partners than we did going in, and they were strong to start.

We very much intend to make this a moment to be even stronger with our retailers through transparency, through partnering, through ensuring that we're doing everything feasible to get them what they need. So I feel great about where we are. And again, my thank you to them for everything that they're doing. And we are well on our path to restore where we need to be from an inventory perspective, and then we'll get the hard work back of ensuring we have innovation and great plans with their shoppers, so we can continue to get focused on growing categories once we get past this initial recovery.

[Filippo Falorni, Analyst at Smith Barney Citigroup]

Got it. That's helpful. And then, Kevin, maybe a follow-up on your gross margin question. your commodity impact in the quarter and the gross margin bridge was one of the lowest in a very long time. So like can you give us a sense of whether your expectation on the commodity front for the balance of the year and maybe some help with the phasing.

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

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. As it relates to commodities, we still expect to see commodity cost inflation this year. It has evolved a little bit. We've seen some areas coming in lower than originally anticipated. Chemicals being one of those areas, substrate as well.

But then there are other items that we are seeing increases and primarily petroleum-based products. So some diesel solvents and even some of the ag products are a little higher, but mostly puts and takes. And so we still expect about $200 million worth of total supply chain inflation and that includes commodities. And in terms of phasing, it's pretty consistent through the year. I would think a little bit of increase in the back half of the year, to your point, is fairly modest in Q1, about 20 basis points. And so you'll see a little bit of that back loaded. But again, it's fairly modest relative to what we've been dealing with for the last several years.

[Filippo Falorni, Analyst at Smith Barney Citigroup]

Great. Thank you. Thank you guys.

[Operator]

And we'll hear next from Anna Lizzul with Bank of America.

[Anna Lizzul, Analyst at Bank of America]

Hi, good afternoon. Thanks very much for the question. 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?

[Linda Rendle, Chief Executive Officer at Clorox]

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. But your point on innovation is exactly right. How we continue to delight consumers and shoppers and drive growth in the category is on innovation.

And we had a team of people that we walled off as we were dealing with the initial impacts of this cyber attack to ensure that we were able to ship the innovation that we have in the back half. And we're happy to report that innovation in the back half will go with plans. And all of our major brands will continue to have innovation that ships at that time, and we're working with retailers to ensure we get that on shelf as quickly as possible and that we get that in front of their shoppers. So we feel very confident about the base distribution that we will rebuild back as well as the strong innovation plans we have on all major brands in the back half and getting that on shelf with retailers.

[Anna Lizzul, Analyst at Bank of America]

Okay. 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.

[Linda Rendle, Chief Executive Officer at Clorox]

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, etc. 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.

[Operator]

And we'll take our next question from Lauren Lieberman with Barclays.

[Lauren Lieberman, Analyst at Barclays]

Great, thanks. Hi, everyone. I just want to follow up on that -- the gross margin conversation. You had an answer to the first question. Because one spot where I was a little bit confused is, Kevin, you talked about pricing and merchandising dynamics, most notably for the second half and discussed them as being the same as prior assumptions and most notably to me on the merchandising side.

But I'm not I feel like there's a disconnect because the prior gross margin pre cyber, which you know is like a different time and world, I don't think it would have supported the idea of gross margins kind of flattish or flat to down in the back half. So I feel like there's a piece maybe missing outside -- I think you mentioned logistics costs for 2Q. But it does really something else is pressure in gross margins in the second half. So I just wanted to follow up on that point first.

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

Yes, I'd say there's a few items on -- 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 one 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 three months ago.

[Lauren Lieberman, Analyst at Barclays]

Okay. Okay. And then pricing, I guess, just to follow on also because if we're assuming that higher merchandising in the second half, that means I'm guessing that price promotion should be a headwind to sales in the back half. Is that right?

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

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

[Lauren Lieberman, Analyst at Barclays]

Okay. And then is that also -- and then in the second quarter, shipping ahead of consumption but with total net sales being up mid- to high single digits. I guess, the shipping ahead of consumption is like if we use Nielsen as a gauge for consumption, I would hope you're shipping above that, right, but sort of sadly informed by the out-of-stock situation. So I'm just trying to get a handle on I guess, the rate -- it feels like the rate at which you need to ship to make up for the drawdown in 1Q would be stronger than that.

So again, it feels like shipments should actually be higher than what you're talking about to kind of rebuild assuming there isn't significant, even if temporary shelf loss. I mean, the shipments are down 30% this quarter. Hello.

[Operator]

So this is the operator. We do have the speaker line still established. Are you able to hear us on this end?

[Lauren Lieberman, Analyst at Barclays]

I'm on the question and I can hear, but we can't hear.

[Operator]

Ms. Lieberman, I can hear you loud and clear. I just want to check with the host, perhaps did you mute the line inadvertently.

[Lisah Burhan, Vice President, Investor Relations at Clorox]

Yes, we can hear you. Sorry. We got dropped.

[Operator]

Your line is re-established, please go ahead.

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

Lauren, this is Kevin. Are you still on the line?

[Lauren Lieberman, Analyst at Barclays]

I am still here. So I don't know where we lost -- what do we do? What did you hear last? I didn't hear you guys -- okay, as far as I'm concerned, and I think everybody -- because people are messaging me, that we heard -- if you guys answered, we heard none of the answer.

[Linda Rendle, Chief Executive Officer at Clorox]

All right. I'm going to go back to your question again. All right.

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

You want to reask your question? I apologize to make sure everybody is clear on the question.

[Lauren Lieberman, Analyst at Barclays]

I feel like you're testing me now. I'm just kidding. I do remember what I asked. So yes, I was just struggling with the shipments, right? So that shipments this quarter roughly right or down the high 20, call it, 30% for rounding sake. Having your net sales only up in the mid- to high single digits in and saying you're shipping above consumption. It just feels like shipments frankly should be higher than that, right? I feel like the saying we're shipping above consumption is almost like a circular logic because Nielsen is informed by what's on the shelf, not necessarily consumer demand.

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

Yes. Thank you, Lan. 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 two 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 eight 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. And then the other item is we are still in a position, particularly in October, we were losing consumption. We were losing sales. While we are shipping above consumption we have not rebuilt retailer inventory levels yet. We still have auto stocks occurring. And so we are still losing sales, particularly in the month of October, probably bleed a bit into November as well. And so that's still providing a drag on sales in Q1 as well. So when you look at all that together, we will have that mid-single-digit growth as a result.

[Linda Rendle, Chief Executive Officer at Clorox]

Lauren, I'll add just one 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.

[Lauren Lieberman, Analyst at Barclays]

Okay. Perfect. That definitely helps a lot. Okay. All right. And then just the other thing is that it feels like, as I'm trying to piece through the model that selling in admin dollars, and I'm looking at everything versus my like model as of August 3. That you're actually able to take a good amount of cost out of selling and admin. And I was curious, and I'm just looking at straight dollars, not percentage of sales. I'm just curious how much of that you say is related to the operating model changes that were already a slight -- is it -- some of this is maybe more variable? Or has there been some belt tightening that goes with this, given the unfortunate cyber situation?

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

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 two-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. But even in absolute dollars, you're seeing the dollars start to go down year-over-year in spite of the increased costs we're incurring because of the cyber event.

[Lauren Lieberman, Analyst at Barclays]

Okay, for sure. And why not raise advertising dollars? I would have thought you want to send -- you'd want to spend more. I get the percent of sales math, but sales are down so much. So I would just would have thought like trying to stay in front of the consumer when, frankly, this year's earnings "doesn't matter" all that much because it's a rebuild. Why not flex the advertising higher in the second half once you're back in stock?

[Linda Rendle, Chief Executive Officer at Clorox]

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 need based off of the path forward as we rebuild, we will make that, but feel very confident where we are right now.

[Lauren Lieberman, Analyst at Barclays]

Okay, thanks so much. Thanks for the new.

[Operator]

And our next question will come from Chris Carey with Wells Fargo.

[Chris Carey, Analyst at Wells Fargo & Company]

Hi, everyone. So a couple of quick questions. Number one, are there specific categories where you feel like it will be more challenging to rebuild your shelf than others, should we be thinking about this on a total portfolio basis? Or are there nuances between your various businesses?

[Linda Rendle, Chief Executive Officer at Clorox]

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.

So for example, Burt's Bees was more significantly impacted because those orders are highly complex. And in a manual environment that took more touches for us to get Burt shipments out. And so that's one we're focused on rebuilding as quickly as we can given that was more impacted than some of our other businesses. And that's exactly the work we're doing right now and prioritizing that with retailers so that we have Burt's holiday merchandising, cold and flu, and we restore inventories in the most critical items that we have. and we're prioritizing that by retailer, by part of the country, by merchandising events. But over the long term, we have full confidence across all of our categories that we'll be able to restore inventory and distribution.

[Chris Carey, Analyst at Wells Fargo & Company]

Okay. One quick follow-up. I think there are some questions around trying to understand if there's any incremental costs associated with this maybe over the medium term, whether there's a step-up in merchandising in the back half or any other costs on top of that. I guess what I'm hearing is there are not, right? So you don't feel the need to invest more into digital infrastructure to protect against such things, you don't feel like you need to accelerate merchandising spending in the back half of the year to perhaps manage the retailers to give you more shelf space. Am I reading that correctly? It's more you lost the shelf now you're going to come back on, but there's no kind of incremental cost that are going to take time to fade away?

[Linda Rendle, Chief Executive Officer at Clorox]

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.

I would note one of the things that we're looking at because we remain deeply committed to our strategic priorities over the long term, including our digital transformation but we are so laser-focused on the inventory rebuild. We have work to do to see how we sequence that out over the future. And if there are any implications or shifts in timing in that. but we're not prepared to talk about that in detail today. Just know that continues to be of the highest importance to our strategy. We're deeply committed to it, and we'll be working out what that means in terms of timing and any implications over the coming quarters.

[Chris Carey, Analyst at Wells Fargo & Company]

Okay, thanks a lot. Appreciate it.

[Linda Rendle, Chief Executive Officer at Clorox]

Thanks, Chris.

[Operator]

[Operator Instructions] Our next question will come from Andrea Teixeira with JPMorgan.

[Andrea Teixeira, Analyst at JP Morgan Cazenove]

Hi, good afternoon and thank you for taking my questions. So I wanted to go back, sorry, the shipment consumption but tackle it in a different way. So you think that like if you think about units, right, the categories that you compete in, would you say a positive in volumes like in the low single digits, if you -- if my math is correct, and if that's the case, what you're saying is that, yes, the mid- to high single digit given pricing is phasing off a bit and run off. You're saying it might take not one quarter, it might take one or two quarters and some unfortunate like losses that you had in market share or the volume that, that consumer went and couldn't find your product it's not that they are going to buy two of them when they got into the store, right? Those lost sales are the lost sales. So is that the way we should be thinking?

And then related to that, in a way, a second part of the question is that, is there any way you can quantify like if there is any -- how you -- as you get back to shelf, are you getting back that consumer that may have experimented because they couldn't find your product and regaining that consumer back? And what are the tactics that you're using to regain that consumer?

[Linda Rendle, Chief Executive Officer at Clorox]

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. And then over time, depending on the item and category and depending on the inventory that a retailer had and how much we could get to a particular category or a retailer in the manual operations, consumers began to see out-of-stocks. And there's a number of behaviors that happen when they experience that. One can be they delay their purchase. They don't find their Clorox product and they -- the second thing is they really need the item in that category, and so they purchase a competitive product. And that varies across, again, different categories and depending on where consumer inventories were.

What that led to, though, is if you look at kind of what we had in Q1, about half of that downside was more than half was the bleed down of customer inventories. And then the rest of that we look at is lost sales. And then as we're rebuilding that inventory back up, you still have lost sales in Q2 at the beginning because we are not fully back. And so that same dynamic happens with the consumer when they go to the shelf. And as we rebuild inventories, we would expect as people who have delayed that purchase cycle or, frankly, haven't even had a purchase cycle yet come back that they'll see our items and continue to buy.

And those that have switched to a competitive product, we have strong confidence given the superior value and the trust people have in our brands that once we bring those items back, they will return to that. And of course, we'll support that. with all of the things that we know how to do really well. merchandising that reminds them of the benefits of our products at key pulse periods. It is why we are absolutely laser-focused on things like getting cold and flu merchandising, which we begin to ship later this month and ensuring that we have that and people that are looking for Clorox disinfecting products at that time, we want to make sure that we're not disappointing them.

We will do that through innovation and giving them new and increased benefits and of course, speaking to them in our strong marketing communications, where we talk about the benefits of our product and the value they offer to consumers. And we have strong confidence based off of a number of things in the past, COVID being one, where there was unprecedented demand and we couldn't fully need it. And we were able to, as we restore supply, consumers came back to our items even though they didn't find us on shelf in previous shopping trips that they had.

So we're going to employ the regular tactics that we have under our tool back. We're laser-focused on doing that. And then as you think about that consumer coming back, if you look at past history, just like I said with COVID or for example, when we were out of the market in Pine-Sol for a while, as we came back, those tactics worked very well to restore share maybe Wipes is maybe the best example, we lost 20 share points during the time of the height of the pandemic due to inability to meet that extraordinary demand.

And once we got our distribution back, which we did, we were able to regain that and then even more. People trusted our brand, and it's what they wanted. And so we have full confidence we'll be able to do that given the strength of our portfolio, the superior value of our brands and our continued focus on investments. What I would say is it's all about the pace. We can't completely cool the pace of getting back in full distribution, but that's what we are absolutely laser-focused on.

Our retailers have the same goal to get us fully back in and that's how we're really thinking about it. It is ensuring we get products back on the shelf, we get back to in market fundamentals and then, of course, doing everything we can to support consumers and what we think is going to be a tougher back half for them just as you look, as Kevin talked about from an economic perspective.

[Andrea Teixeira, Analyst at JP Morgan Cazenove]

Thank you.

[Operator]

Your next question will come from Olivia Tong with Raymond James.

[Olivia Tong, Analyst at Raymond James]

Great. Thank you. Good afternoon. 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, etc., in the second half of the year?

[Linda Rendle, Chief Executive Officer at Clorox]

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 two 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.

So when this first happened, of course, job number one was to ensure that we had contained the incident, we believe we have. Job number two was to ensure that we could return operationally, which we did. And of course, we transitioned back to automated and now laser-focused on restoring supply. But at the same time, we knew it was critically important that we could not let go of the long term.

And so I mentioned just a little bit earlier that we had taken a group of resources that did not need to be focused on the immediate issue at hand and we ask them to do everything in their power to preserve innovation in the back half. And that was while systems were down. And so they put together a set of plans to do that. And the good news is -- we do have the ability to continue with our innovation plans in the back half because we did that. And what we believe is we just have to continue to balance those two things.

We have to balance the short term and laser focus on restoring but we have to make sure that we have that innovation. And that's how we're approaching this internally. We are trying very hard to ensure that the resources focused on the short term are not distracted and the same with the resources on the long term. And if you recall, Olivia, we did this during COVID when the same issue occurred. Demand was so high. We had to ramp up supply. We were dealing with shortages on all raw materials but we also did the same thing where we put resources aside for innovation to ensure that we preserve that long term.

So that's what we're going to continue to do as we make choices moving forward is we want to balance short and long term. We want to balance top line momentum with rebuilding margin, and we have every confidence that we can do both of those based off of the plans that we've outlined for fiscal year '24 and beyond.

[Olivia Tong, Analyst at Raymond James]

Got it. And then just secondly, because the given the Cyber, 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 more needs to be done? And if so, could that potentially extend the project further out?

[Linda Rendle, Chief Executive Officer at Clorox]

Yes. So two 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 one bucket.

Second, of course, is we are in the middle of our digital transformation, as you note, and we continue to be deeply committed to that digital transformation. We think we have taken into account the broad set of tools and capabilities that we need to put in place to be more effective and efficient as part of that digital transformation. And we think more strongly than ever that is important to our business and a critical priority to do that. What we are doing now is going through that program and ensuring any learnings we have over the last couple of months we're integrating into it.

And then we're taking that into account as we bring the ERP online in the future and as we bring the rest of the tools in place. But what I would say at this point is it's too early to say if there will be any tactical changes that we'll make and how we'll sequence and time that. But what I can reaffirm is our deep commitment to it, how critical we think it is to the company. And it is just more reaffirmed given what we've experienced over the last few months as we've restarted our systems.

[Olivia Tong, Analyst at Raymond James]

Great. Thank you.

[Linda Rendle, Chief Executive Officer at Clorox]

Thanks.

[Operator]

Your next question will come from Javier Escalante with Evercore ISI.

[Javier Escalante, Analyst at Evercore ISI]

Hi, good evening, everyone. I have a question, I guess, is a CFO question. 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.

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

Yes, Javier. What I would say is, I think you saw we communicated in one of our previous 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 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 is it 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. But you have to really work through this, Javier, because what you're really trying to figure out is when you can restructure systems, when you can start rebuilding inventory. And depending on that time line, that will impact the financial performance. So you have to let this play out a bit as we're going through the evaluation of the cyber event itself, developing recovery plan and then determining the financial indications of that recovery plan. So that was all the work that went on. And then as a result of that, we came out with a pre-announcement about a month ago.

[Javier Escalante, Analyst at Evercore ISI]

Linda, go ahead. Sorry for that.

[Linda Rendle, Chief Executive Officer at Clorox]

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 8Ks.

[Javier Escalante, Analyst at Evercore ISI]

I appreciate that. Now my question was I used to work for one corporation, a large one 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.

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

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 five to eight 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 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.

[Javier Escalante, Analyst at Evercore ISI]

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

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

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

[Javier Escalante, Analyst at Evercore ISI]

Thank you very much.

[Linda Rendle, Chief Executive Officer at Clorox]

Thanks, Javier.

[Operator]

This concludes our question-and-answer session. Ms. Lindle, I would now like to turn the program back to you.

[Linda Rendle, Chief Executive Officer at Clorox]

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

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Lisah Burhan, Vice President, Investor Relations
• Linda Rendle, Chief Executive Officer
• Kevin Jacobsen, Executive Vice President and Chief Financial Officer

Analysts

• Peter Grom, UBS Group AG
• Filippo Falorni, Smith Barney Citigroup
• Anna Lizzul, Bank of America Co.
• Lauren Lieberman, Barclays PLC
• Chris Carey, Wells Fargo & Company
• Andrea Teixeira, JP Morgan Cazenove
• Olivia Tong, Raymond James
• Javier Escalante, Evercore ISI