The Clorox Company (CLX) Q2 2021 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Clorox Company Second Quarter Fiscal Year 2021 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Ms. Lisah Burhan, Vice President of Investor Relations for The Clorox Company. Ms. Burhan, you may begin your conference.

Thank you, Sharon. Welcome everyone and thank you for joining us today. We hope you and your families are continuing to stay safe and well. On the call with me today are Linda Rendle, our CEO; and Kevin Jacobsen, our CFO. Now a few reminders before we go into results. We're broadcasting this call over the internet and a replay of the call will be available for seven days at our website, thecloroxcompany.com. Today's discussion contains forward-looking statements, including statements related to the expected or potential impact of COVID-19. These statements are based on management's current expectation, 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, and the non-GAAP financial information section, including the tables that reconcile non-GAAP financial measures to the most directly comparable GAAP measures, both of which are located at the end of today's earnings release, which has also been posted on our website and filed with the SEC. I'll start by covering our usual top-line commentary with highlights from each of our segments. Kevin will then address our total company results, as well as our FY 2021 outlook. Finally, Linda will offer her perspective and we'll close with Q&A. For the total company, Q2 sales increased 27% with growth in every reportable segment. It reflects about 1 point of net benefit from the July acquisition that gives us a majority share in our Saudi Arabia joint venture and unfavorable foreign currency exchange rates. On an organic basis, Q2 sales grew 26%. I will now go through our results by segment. In our Health and Wellness segment, Q2 sales were up 42% reflecting double digits increases in two of three businesses. Our Cleaning business had double digit sales growth behind strong ongoing demand across our portfolio. Consumption remains high and importantly we're continuing to see increases in household penetration and repeat rates among existing and new users driven by new routines developed from the prolonged pandemic as well as strategic brand investments. While we expect tough comparisons as we let these very high growth rates, we'll continue to work to retain the larger base of loyal consumers we've built for our cleaning and disinfecting products even after a critical mass of the population has been vaccinated. We're continuing to make progress on our supply expansion, including a new line of wipes plant coming online this quarter. We're also continuing to identify new sources of supply for other products experiencing constraints, including our disinfecting spray products. As we're able to better meet consumer demands for our base products, we're looking forward to bringing back our Clorox compostable wipes along with a stream of exciting innovation in the coming months. Our professional products business had another quarter of double-digit sales growth behind continued high demand for our cleaning and disinfecting products. It's worth noting though that while demand from businesses such as healthcare facilities has remained high. We've seen softer demand from businesses negatively impacted by ongoing mobility restrictions like commercial cleaning and food service institutions. That's why we're leaning into other out-of-home spaces through strategic alliances and are encouraged by our progress. While not yet a meaningful contributor in Q2, our out-of-home partnerships are expanding. We're excited to announce a new multi-year deal with the NBA and existing partner. Lastly, within this segment, our sales in vitamins, minerals and supplements business decreased in Q2. This is a business where results have not been consistent and we clearly have more work to do. As you remember, we relaunched RenewLife last fall. While we've seen improvements in all outlet consumption, it is not yet delivering the consistent results we want. With more than half American consumers saying they intend to continue taking vitamins and supplements, we continue to believe in the attractiveness of this category. Now turning to Household segment. Quarterly sales were up 20% with growth in all three businesses for a third consecutive quarter. Grilling sales were up double digits driven by continued strong consumption, which reflects the dramatic rise in in-home meal occasion as people continue to spend more time at home. Behind our strategic collaboration with retailers, we've been able to grow household penetration for a third consecutive quarter including among millennials and low income consumers. As we begin planning for the next grilling season, we're building on our innovation through expanded distribution of our new Kingsford pellets and bringing new flavors to our Kingsford product lineup. With consumer spending more on their backyards and backyards and grills, we feel optimistic about the future of this business. Cat Litter sales were up by double digits in Q2 supported by innovation and continued strong performance online. Our Fresh Step with Gain Original Scented Litter with the power of Febreze as well as our Fresh Step Clean Paws Litter continued to perform very well and we're supporting them through a new advertising campaign. A record number of people have become pet parents since the onset of the pandemic in 2020. Making this yet another example of how our diverse portfolio is particularly suited to the times. Glad sales increased in Q2 behind strong demands across our portfolio of trash bags, wraps and food bags as people continue to spend more time at home. Our latest innovation Glad ForceFlex with Clorox trash bags launched in September and is building distribution quickly earning positive reviews. In our lifestyle segment, Q2 sales were up 9% with double digit growth in two of three businesses. Brita sales were up by double digits for a fourth consecutive quarter behind continued strong shipments of pitchers as well as filters. Just as with wipes and sprays, we're continuing to work through supply chain constraints in our Brita business, which has been impacting our shares. We feel good about the long-term prospects of this business especially since once people buy a Brita pitcher, they tend to stay in our franchise with continued purchases of filters. Importantly, as household penetration for Brita keeps growing, we're building brand loyalty among these consumers. The food business had double digit sales increase for a third straight quarter behind ongoing strong consumption of our Hidden Valley Ranch products, particularly dry seasoning and bottle dressings. With more and more people eating at home during the pandemic, household penetration has grown to an all-time high, including above average growth among millennials. We're building on this momentum with a stream of innovation, including Hidden Valley secret sauces, and most recently Hidden Valley Plant based Ranch dressing, which has been supported by strong advertising investments. Burt's Bees sales decreased by double digits as the business continued to be impacted by mobility restrictions as well as changes to consumer shopping and usage habits as a result of the pandemic. This quarter unseasonably warm weather also impacted lip balm sales. Despite these challenges, we're making progress in the fast-growing online channel where the brand had double digit growth in Q2, and we remain confident in the long-term trajectory of this business. Lastly, in international, Q2 sales grew 23% driven by double digit shipment growth in all major regions. The growth reflects about 9 points of benefit from the Saudi acquisition and about 4 points of unfavorable foreign currency headwinds. Organic sales grew 18%. The recent investment we made to create a dedicated international supply chain for Clorox disinfecting wipes is starting to pay off giving us the ability to not only meet ongoing elevated demand in existing markets, but also to expand to new countries. This is a strategic growth platform for the company and we're supporting it through additional advertising investments. Now, I'll turn it over to Kevin, who will discuss Q2 results as well as updated outlook for FY 2021.

Thank you, Lisah, and thank you everyone for joining us today. We hope you and your families are well. Our sales growth for the second quarter was broad-based resulting in double digit growth in each reporting segment for the first half of our fiscal year. Additionally, this led to profitable growth for the first half, which enables us to capitalize on momentum and continue investing behind our global portfolio to strengthen our competitive advantage. As you saw in our press release, we've raised our fiscal year 2021 outlook given the strength of our first half results and our expectation for continued strong demand across our global portfolio over the balance of the year. Turning to our second quarter results, second quarter sales were up 27%, driven by 23 points of organic volume growth, 3 points of favorable price mix and 1 point of net benefit from requiring majority control of our Saudi joint venture partially offset by FX headwinds. On an organic basis, sales grew 26%. Gross margin for the quarter increased 130 basis points to 45.4% compared to 44.1% in the year ago quarter. Second quarter gross margin included the benefit of strong volume growth, as well as 160 basis points of cost savings and 140 basis points of favorable mix. These factors were partially offset by 420 basis points of higher manufacturing and logistics costs, which were similar to last quarter, included temporary COVID-19 spending. Second quarter gross margin results also reflect about 50 basis points of negative impact from higher commodity costs, primarily from resin. Selling and administrative expenses as a percentage of sales came in at 14.6% compared to 14.5% in the year ago quarter. Advertising and sales promotion investment levels as a percentage of sales came in at about 10%. We're spending for our U.S. retail business coming in at 11% of sales. This reflect higher investments across our portfolio, strengthening our value proposition to support higher levels of household penetration and lasting brand loyalty among new and existing consumers. Our second quarter effective tax rate was 21%, which was equal to the year ago quarter. Net of these factors we delivered diluted net earnings per share of $2.03 versus $1.46 in the year ago quarter, increase of 39%. As you also saw in our press release year-to-date net cash provided by operations was $629 million versus $498 million in the year ago period, an increase of 26%. Turning to our fiscal year outlook; we now anticipate fiscal year sales to grow between 10% to 13%; reflecting the strength of our first half results and higher expectations for the back-half. With our overall demand for our products remaining quite strong, we now expect back-half sales to be about flat on top of 19% growth in a year ago period. We also anticipate about one point of contribution from our Saudi joint venture, offset by one point of foreign exchange headwinds. On an organic sales basis, our outlook assumes 10% to 13% growth. We now expect fiscal year gross margin to be down slightly, reflecting higher commodity and manufacturing logistics costs as well as temporary costs related to COVID-19. These factors are expected to be partially offset by higher sales. As a reminder, we expect gross margin contraction over the balance of the fiscal year. Primarily from two factors; first, we're lapping very strong operating leverage from robust shipment growth during the initial phase of the pandemic. And second we're facing commodity headwinds this year versus last year's commodity tailwinds. As reminder, our gross margin expanded 250 basis points in the back-half of this year 2020. We continue to expect fiscal year selling and administrative expenses to be about 14% of sales, reflecting ongoing aggressive investments and long-term profitable growth initiatives and incentive compensation costs consistent with our pay for performance philosophy. Additionally, we continue to anticipate fiscal year advertising spending to be about 11% of sales. We spent about 10% in the front half of the year and continue to anticipate about 12% in the back-half in support of our robust innovation program. We continue to expect our fiscal year tax rate to be between 21% to 22%. Net of these factors we now expect fiscal year 2021 diluted EPS to increase between $8.05 and $8.25 or 9% to 12% growth reflecting strong top line performance, partially offset by a rising cost environment. We now anticipate fiscal year diluted EPS outlook to include a contribution of $0.45 to $0.50 from our increased stake in our Saudi Arabia joint venture, primarily driven by a one-time non-cash gain. I'm pleased we've raised our fiscal year 2021 outlook. Of course, it's important to note we continue to operate in a highly dynamic environment and our monitoring headwinds that could result in impacts moving forward. In closing, I'm also pleased with our broad-based strong results in the first half, which enables us to continue investing in our brands, capabilities and new growth opportunities, all in support of our ambition to accelerate long-term profitable growth for our shareholders. And with that, I'll turn it over to Linda.

Thanks, Kevin. Hello everyone, and thank you for being with us today. I hope you and your families are well. It's great to be here today sharing Clorox's results for the first half of our fiscal year. My messages this quarter are largely reinforced what we discussed in Q1 with the most important point being that our global portfolio of leading brands continues to play a critical role in people's everyday lives. My first message is that our first half results are rooted in purpose driven growth. Our purpose as a company is to champion people to be well and thrive every single day. And our portfolio of leading brands is the bedrock of our ability to deliver on that promise. Our first half results reinforce the important role our brands play in addressing people's everyday needs. We continue to see broad-based strength in our portfolio with double-digit sales growth for most of our businesses. Clorox disinfecting products continue to be in high demand among consumers, businesses, and healthcare settings. And as people spend more time at home, we're continuing to see strong performance in other parts of our portfolio. Kingsford is a great example. As Lisah mentioned, our Grilling business delivered double-digit sales growth in the quarter, and with a recharge strategy emphasizing innovation. I'm optimistic about the long-term prospects of this business. Before I move on to my second message, I want to thank the Clorox team around the world who shows up every day to live our purpose. They understand that more than ever people and communities need us. I'm so grateful for their passion and commitment. My second message is that Clorox will stay in the driver's seat, continuing our posture of 100% offense to make the most of the opportunities in front of us, while navigating an ongoing dynamic environment. There's no question Clorox has built significant momentum over the last year, and we have every intention of extending that longer term. Our brand portfolio is especially relevant for this environment and for the consumer trends I mentioned last quarter, which we expect to persist beyond the pandemic. Prioritizing hygiene and health and wellness, caring for pets and accelerating digital behaviors related to practically every aspect of their lives. More than ever as homes where the hardest, it's also where consumers are directing their investments. We are spending across many categories to support quality of in-home experiences. This certainly bodes well for our portfolio. We continue to see strong levels of household penetration. Importantly, what we mentioned last quarter about repeat rates across our portfolio is playing out. We're accelerating purchase frequency and repeat users are the source of most of our sales growth across our portfolio. In addition, our strategic investments are creating a virtuous cycle around engaging and retaining new and existing users resulting in a consumer retention rate of nearly 90%. As I mentioned, 100% offense will help us extend this momentum, which as a reminder includes investing more across our portfolio to retain the millions of people buying our brands. Expanding our public health support to more out of home spaces, increase in capital spending for immediate and future production capacity, including wipes expansion in the international, and partnering with our retailers to grow our category. Given the dynamic environment we continue to face, 100% offense also means actively planning for challenges and disruptions in the near and long-term, including an inflationary cost environment, elevated competition in light of category tailwinds and accelerating advancements in digital technology that we expect to impact all areas of our business. What's important is we'll continue to make strategic choices that position us to achieve our ambition to accelerate long-term profitable growth. And finally, my third message is this. As we continue to address immediate priorities related to unprecedented demand, we're also accelerating our progress against our strategy to deliver long-term shareholder value. Our IGNITE strategy continues to put people at the center of everything we do, and helps us make the most of our strategic advantage in the near and long-term. Addressing unprecedented consumer demand for much of our portfolio continues to be an immediate priority. We continue to make progress on a number of businesses. We're bringing in more third party supply sources and launching our new wipes line in our Atlanta facility in the third quarter. Importantly, simplification is our mantra and we're seeing the benefit of focusing on fewer skews, which we expect to continue beyond the pandemic. As I mentioned earlier, we're going Clorox's disinfecting wipes international supported by a dedicated supply chain. Our expansion plans are going very well, and we expect to double the number of countries where Clorox wipes are sold. Another immediate priority is to continue supporting people's safety when they're outside their homes through strategic alliances to support public health. We're expanding our programs with Uber Technologies and Enterprise Holdings. We recently established a multi-year deal with the NBA and look forward to pursuing similar opportunities with other organizations. And as the pandemic continues to take a toll on the economy, we know that far too many people feel financial pressure from unemployment and less discretionary spending. We're mindful of the role we can play to support those who are particularly value sensitive and we'll continue to deliver superior value through meaningful innovation. Importantly, we're also making progress in laying the foundation for long-term growth. We will continue to invest strongly in our global portfolio of leading brands, particularly behind robust innovation that differentiates our products and deliver superior value. We will continue to re-imagine how we work to ensure a strong culture with a highly engaged team that works simpler and faster on strategic priorities. I'm proud of how we've been operating during the pandemic, including accelerating our speed-to-market. And finally, as we said before we view ESG as a contributor to competitive advantage, which is why it's embedded in our business. Achievements this quarter include being included in the 2021 Bloomberg gender equality index, achieving 100% renewable electricity in the U.S. and Canada four years early. Signing on to the energy buyer, federal clean energy policy statement, which calls for a 100% clean energy power sector and donating $1 million to Cleveland Clinic to establish the Clorox public health research grant in support of science-based public health research. We are grateful to play a role in supporting people and communities as we continue to navigate the global pandemic. It only strengthens our resolve in pursuing purpose driven growth, ensuring a strategic link between our impact on the world and long-term value creation for our shareholders. Operator, you may now open the line for questions.

Thank you. [Operator Instructions] First question comes from Andrea Teixeira with J.P. Morgan.

Thank you. And I hope you and your families are doing well. So I was hoping if you can give us an idea of the shipments, I guess consumption into the second half [indiscernible] to replenishing the trade or if the fuel rates have normalized at this point. I've remember Linda you mentioned that in the last call. And asking a different way, how much more capacity including third parties you mentioned in the call, have you added in the second half against the second half of the last fiscal? So it seems around 25% by my math in the U.S. which implies that you could still grow volumes in the low-single digits in this upcoming second half of fiscal, if demand remained strong. I understand that obviously you're giving us a flat top line for the second half because you're embedding some deceleration. So how we should be thinking of that and conversely, if you're regaining share, because you lost some share, given the stockouts how we should be thinking of your capacity and fulfillment into the second half? Thank you.

Andrea, this is Kevin. I can start and Linda can jump in as well. Maybe I'll start with the question on retail inventory levels, and I might broaden it to talk about both inventory levels and the extent of supply chain, both in our warehouse as well as retailers. What I'd tell you is we think we've made pretty good progress over the first half of this fiscal year. And I'd say by and large, we feel pretty good about retail inventory levels with some notable exceptions, there's still portions of our home care portfolio particularly our disinfecting wipes and portions of our disinfecting spray trigger products that we're still not at a point where we can fully meet demand. And in the other area, we still have work to do to catch-up as an Brita. That business continues to perform quite well. We've had four straight quarters of double digit growth, and so we're still not in a position where we can fully support demand on that product. But with the exception of those businesses, I think generally I feel pretty good about retail inventory levels and additionally feel pretty good about inventory levels in our facilities. I would say on Brita, I think we've got a couple more quarters before we think we can catch up. I think by the end of this fiscal year, we'll be in a better position in terms of meeting retail demand. And then I think particularly on our wipes business, it's going to take a while, likely the end of this calendar year we'll be in a position to fully service demand. And then on capacity, you had a question on capacity, Andrea? As Linda said in her prepared remarks, we are starting up our second line at our Georgia wipes facility and that's happening this quarter. And you'll see that start to ramp-up over the next several quarters. Our expectation is by the end of the fiscal year, we'll have more than doubled our wipes capacity from where we were before the pandemic started. And that's a combination of bringing on our facility that's happening now, as well as we continue to bring on additional contract manufacturers. And in Q2, we added more contract manufacturers as well. So we're working both with self manufacturing, as well as third-party manufacturing. That work will continue, well past this fiscal year.

Andrea, I'll just add on the shared question, which I think you were connecting this to, which is exactly what we're watching closely. You started to see our share improvement in quarter two. So we're up as a total company, eight-tenths of a point that's up from 52 weeks share of being up a half a point, but what's really encouraging to us as if we dive deeper into the businesses that we have gotten back to an in-stock position on. So starting outside of cleaning, if you look at our Hidden Valley ranch business, cat litter and Kingsford all of them growing share, as we've gotten supplied back up to a place where we can meet demand. And then really encouragingly, if you look at our cleaning business, although we have a ways to go until we can fully meet demand in places where we've been able to improve, we're seeing significant share gains to our Clorox clean-up business, which is a spray, is up eight share points in the spray business in Q2. Clorox Manual Toilet Bowl Cleaner up four points, our Pine-Sol business up 2.5 points, and that corresponds with strong plans we have in place, but also our ability to supply.

Very helpful. Thank you.

Next question comes from Wendy Nicholson with Citi.

Hi. My first question is regarding gross margin. The 420 basis points pressure that you called out for manufacturing and logistics costs. How much of that specifically was related to COVID and how much longer do you think that will be with us? What I'm trying to get a handle on is kind of gross margin as we look into 2022, what's the right run rate? And is there opportunity for margins to recover as we go into the next fiscal year?

Hi, Wendy. Yes, as it relates to the impact of COVID in Q2 was about 90 basis points. What we believe is on a full year basis, it's probably 50 basis point to 75 basis point hit to gross margin. It was higher going forward. We think over time we'll be able to step out of these costs. They're really in two buckets, we continue to expedite transportation and that comes at a higher cost as we're trying to fulfill retail orders as quickly as we can in our supply challenge environment. So there's some increased costs there, as well as the increased spending we're doing with our production team to make sure we're keeping folks safe with increased hygiene activity, as well as enhanced benefits. I think over time as we get through the pandemic and that may push you into fiscal year 2022 for us, but as we move through the pandemic, we'll be able to step out of a good portion of those charges going forward.

Got it. And this – the shipments of wipes into the international markets, I assume that's going to be great over the long-term and there's probably even lower household penetration of wipes overseas than there is in the U.S. But I assume you're sourcing that – are you sourcing that from a third parties? I'm wondering if I know it's a small number, but is that accretive or dilutive to margins over the next 12 months to 18 months?

Yes. Wendy, on wipes it's as we've mentioned, we've stood up a dedicated supply chain internationally. We used to supply our international wipes out of the U.S. so it had a very long supply chain and that came at an increased cost. We've now stood up a supply chain much closer to our markets we're serving. And so I think over time, that's going to be a nice addition to that international portfolio as we build out that, that business. It really just started in Q2. We saw some really nice performance in the second quarter. I think this is a long-term growth runway for us. So you'll see that continue to build through the balance of this year and frankly, that'll continue to build for the next several years.

Fantastic. And then I don't mean to be a hog, but I just want to sneak in one for Linda. The VMS business, I get why it fits in with sort of the strategy and mission of the company health and wellness focus. And I get that the category itself is attractive, but I'm still not totally convinced that it belongs in your portfolio, that Clorox has the core competencies to make the VMS business a success? So can you talk about that, maybe your willingness to throw in the towel and not focus on that business anymore?

Hi, Wendy. Thanks for the question. I'll just start with, and you said it, our results have been inconsistent and I'm not satisfied with that, and that is full stop. But if you look at the thesis and you started to talk about this, we really do see these categories being a long-term growth runway for us. And that's why we got into these businesses to start because we see it a nice fit in our overall journey to help people be well and thrive. What we've learned over the last few years as we've operated these is, we made the choice to buy some small brands in a very large $12 billion space. And it's certainly been a hotbed for competition and the lesson we've learned is the ramp-up for the brands is just longer than we thought it was going to be. We see pockets of encouraging results in our renew life relaunch for example in our magnesium supplement business, but there are other places where we're not as satisfied. So, if I take a long-term view to this, we still think these categories are attractive. We still see our ability to innovate, brand build really meaningful in a slew of a lot of things that are going on in therapy. Good claims, good science, but I think the perspective is VMS still only represents about 4% of our business and it's going to take a while before it's a meaningful contributor and we're going to be patients. But I still feel conviction that these are attractive categories too compete.

Fair enough. Thank you very much.

Next question comes from Nik Modi of RBC Capital Markets.

Yes. Good afternoon, everyone. So I just wanted to touch on the trash bag business. If you could just kind of give us a state of the union in terms of what's going on in terms of shelf space. I understand there's been some pricing taken on the category. And Linda, last quarter you indicated, you were hesitant to take pricing during a pandemic, but just wanted to get a sense of how you're thinking about it now, given you're starting to see inflation happen at a much more meaningful rate? Thank you.

Nik, thanks for the question. So Q2 was another strong quarter for Glad. It grew nicely behind continued strong demand from consumers. We're seeing really good signs of brand health. So our household penetration, up almost a point and a half increased by our retention rates. We're growing repeat rates on the Glad business. So the fundamentals of that business continue to be very strong. You're seeing price gaps where we'd want them to be. And I think what continues to be the differentiator for glad is innovation. It's working really well in the market for us, whether that be our experiential trash bag or if that is our new skew Glad or selects with Clorox are all doing really well. And so as we've said, this is a business where you have to innovate, where you have to bring new benefits to the category and that continues to work well for us. I think if you take a step back and maybe this is a comment agnostic of Glad if you just take your pricing comment and total you're right, we had said we would not take pricing in the height of a pandemic and I still believe that was the right call as we got through the height of it. But as we look forward and as we see the pressure from the cost environment and we see pressure on gross margin, we're going to look to the broad toolbox that we have against our long-term goal of growing EBIT margin. And that toolbox includes things like on the revenue side, managing promotions and ensuring that we can add value through innovation and premiumization, but we will also consider pricing as part of that. And as we look forward, we will see what the right mix is by brands. And we feel given the fact that our portfolio has very high consumer value, the highest we have on record that we're in a position if we need to take pricing to do just that.

Super helpful. Thank you, Linda.

Thanks, Nik.

Next question comes from Chris Carey with Wells Fargo.

Hi. So just one question on the wipes business. So right, like you've lost about 1,200 basis points of market share there since, over the past year and all of that has effectively come from Lysol and other manufacturers who have seen big increases in market share. And I guess the question is you've obviously been underperforming a category that has delivered really significant growth and shelf is now occupied by a litany of other brands. And so, how sticky do you think that shelf space is in wipes from those new entrance? Maybe said another way, do you think you can get back this share that you've lost in the business, because if so, if you have manufacturing capacity coming online, that would imply that you might, but maybe – maybe these shelf gains from other competitors are going to last indefinitely? So I wonder if you could just comment on that.

Sure, Chris. Wipes is obviously a very important and strategic business for us. One category that we created 20 years ago and we'll continue to be aggressive as we think about expanding this business and helping to serve consumers. I think maybe it'd be good to take a broader view of wipes because we're looking at a narrow universe of track channels, but if you look more broadly, the share loss that you're seeing in track channels is not reflective of the fact that we've prioritized our healthcare business to ensure that we have the right supply there. And that our professional business has always had a strong wipes business as well as untracked channels that are very strong. So the broader perspective to be clear; we don't like to lose share anywhere – anywhere and our goal is to always be growing it over the long-term. But the broader perspective with wipes business is in better shape than you might see in track data. But then even if you look at track data, the only people growing share right now are non-branded or new entrant competitors that are very small. There is no major manufacturer as we all try to ramp up the support. And I think what's going to happen is we're already seeing retailers think about simplification as we move forward, and there's going to be no desire on their part to add 10, 12 whatever a brand sit on the shelf right now that are filling the need. They're going to want to make sure that they're with leading brands, who are innovating and we know that we'll be with Clorox. We feel great about the innovation pipeline we have on the business. We feel great about the fact that our supply is ramping up and we're getting to the place where we'll have double the supply by the end of the year. So I think you're going to start to see as we bring supply back on, share will go in the other direction. Similar to how I highlighted in other businesses, Clorox clean-up eight share points once we brought that back on from a supply perspective; Pine-Sol up 2.5 share points. So this is very much correlated to supply. We think the long-term trends are behind us. And I think the most important part is we have not let up on the innovation and investments, so that as we bring that supply up, we'll be in a terrific place to get back to growing share.

Okay. Thanks. That's very helpful. And then just one follow-up, maybe for Kevin, just on phasing for gross margins in the back half [indiscernible] that manufacturing and logistics impacted gross margin really ramped up in the June quarter last year. It would imply that you're going to start lapping that in the June quarter of this year. But obviously we've seen manufacturing and logistics inflation accelerate in recent months. So do you expect that to remain as significant an impact as we get through the entire year or is there any phasing that we should be keeping in mind there? Thanks so much.

Yes, Chris. As it relates to phasing, as we've updated our expectations for gross margin, as you heard, we now think we're going to be down slightly. One of the biggest changes we're seeing as our expectations for commodities, and we've talked about it, we're clearly an inflationary cycle. If you go back to November, we'd anticipated about 100 basis points of cost headwinds throughout the back half of this fiscal year. We've updated that expectation now where they're going to be closer to 150 basis points hit primarily driven by increasing costs of resin, and I expect that to be pretty consistent through the back half of the year.

Thank you.

Sure.

Next question comes from Lauren Lieberman with Barclays.

Great. Thanks. Good morning or good afternoon; sorry. I was curious a little bit about the international plans. And I was just hoping one to maybe get a little bit more specificity on countries, of course, maybe you can discuss countries you have not yet entered, but those where you've already started to invest in and establish the supply chain? And then secondly, I think just historically Clorox has kind of been, I guess maybe I can say in and out of quote international was sort of some changes and is going back over 20 plus years of making a go-forward in Brazil as an example, or debating, should we really go, try to do something in China or not. And the impediment has often been the question of how do you establish the Clorox brand to mean something with consumers that just may not be familiar with it; the way that it dominates here in the U.S. So can you just talk about how your perspective on that part of the question. Because the wipes form is something that others can do under different brand names in international markets. And so I'm just curious why – what you're going to do to really drive that Clorox brand in particular, to make this a more successful endeavor than it was kind of in the case in the past? Thanks.

Sure. Thanks Lauren. In the case of international, we were pleased to see the strong volume driven organic sales growth, which was really broad based across the portfolio including cleaning and disinfecting Glad, Brita, Litter. And what was encouraging is the early contribution from our wipes expansion is about 20% of the growth we experienced in the quarter. So good early signals that it's working. If we think about the countries, we compete in over 100 countries around the world today, broadly with our portfolio. And the very first priority we have is to expand our presence in our cleaning and disinfecting portfolio in more of those countries. So to your good point, not having to introduce them to the brand in a brand new fashion, but actually just expanding the portfolio we have with those consumers to the offer them the benefit that a wipe brings them. And we've seen that successful so far and, early consumption looks good in those markets. And then, as we think about more broadly, the avenues that we have to introduce our brands to consumers have expanded. E-comm is now away that you can enter into a market, learn more about the consumer in a low cost way that allows us to get early insights and decide if we want to build more of an infrastructure behind in the international business to expand. So I think, what Lauren you're going to see from us is a very disciplined approach in this. We want to be fast, which is why we stood up dedicated supply chain, but we want to continue to be disciplined. And we want to see a strong return on the markets that we enter, and the very first proof points are the fact that we're entering markets. We are already in with an expanded portfolio.

Okay. That's super helpful. And then I was also curious about A&P spend; your spending is already back towards historic levels. Obviously talking about increasing in the second half of the year further? As you look further out, Linda and arguably with competitive dynamics in your categories only getting more intense, right, is there's more attention being paid to them particularly core cleaning. How do you think about the right level of A&P be it in dollars or percentage of sales, kind of versus where you're targeted to spend in 2021? Does the competitive dynamics change with the elevated attention to the categories that you're anticipating not just now, but on the other side of the pandemic?

Yes. I think on average over the long-term 10% to 11% is in the right ballpark. And what will vary of course, and you bring up a good point of competition is exactly what a quarter or a year looks like. Well, depend on the level of competitive activity. We see the amount of innovation we have. And as you know the 12% we plan to spend in the back half is really dedicated to the fact that we have a great innovation lineup. Two thirds of our innovation will be launched then. And we really see the opportunity to introduce consumers to that innovation to drive trial and then to benefit from the fact that we have very strong repeats right now – repeat rates right now across the portfolio. So we think about as you know A&SP as a strategic long-term investment. We're always looking at whether we think the right level is, but we are not hesitant to invest when we see strong returns and we're seeing that right now on the base business and strong returns as we start to spend behind innovation. So we'll continue to keep you updated, Lauren, if we have any change to that thinking, but very consistent with what we've said in the past.

Okay, great. Thanks so much.

Next question comes from Steve Powers with Deutsche Bank.

Hi. Great, thanks. So as you start to lap the outsized growth of late last year next few quarters, can you talk a little bit of – just a little bit more nuances to how you expect your various segments to hold up relative to one another? I guess my question is, do you expect more resiliency in the Health and Wellness business just given lingering demand for disinfecting and it could conversely be far from the other segments, or do you think that performance will be more even across the entire portfolio?

Yes. Hi, Steve. I can answer that one. And what I can share with you is our perspective on the back half. And Steve you'll recall back in November, our expectation was in the back half. We'd see our sales declined mid-single digits. With our updated outlook today, it implies our expectation that the back half will be flattish. And if I think about our portfolio in three buckets, I can kind of talk about how we see this playing out. If you think about our U.S. Cleaning business, which includes both our retail and our B2B business, we now think that this is going to continue to grow in the back half of this fiscal year in low single digits. Back in November, our expectation was it would be about flat and keep in mind we're lapping about 40% growth in the back half of last year, so a really strong prior period and we think that business will continue to grow for all the reasons we've been talking about today. On our International business, back in November, we thought that business would grow low single digits. We're now taking that expectation up. We now think we'll grow high single digits in the back half of the year. We're seeing really good results for some of the work we're doing on extending our wipes business. And that will continue to add value over the back half of the year. And then what we call our home essentials business, which is a little less than 50% of our total sales. We've updated our assumption there as well. Originally, we thought that business would decline high single digits. We now think it will grow or – excuse me, will decline mid single digits. And in all cases, those three segments, all grew double digits in the prior period. And so that – if you do that math, that gets us to about flat year-over-year in the back half. I'd say importantly though if you take a longer-term perspective and you look at our performance say versus fiscal year 2019, a pre-pandemic environment that would suggest we'll grow somewhere in the 15% to 20% range in the back half of this year. And so I think that the takeaway Steve I just – I'd offer is this is not just about increasing strength within our disinfecting portfolio. We're seeing performance broadly across our portfolio. We saw that in Q1 and Q2. And it's our expectation going forward what could you see broad strength across the portfolio.

Okay. Okay, thank you. I guess – and I don't know Linda or Kevin, if you maybe both want to weigh on this, but just as Linda you talked about pricing as a potential lever specifically – I think specifically on Glad, just given the rise in inflation that you've pointed out. In the past that's been a point of volatility for Clorox. You've gotten the pricing through, but it's often come with volatility in market share and volume as competitors respond or don't respond to various degrees. I guess can you just frame your relative confidence going into this inflationary cycle around how – just around your confidence taking that pricing and avoiding that volatility this time around. Thank you.

Sure, Steve. If I think about what pricing does and how we approach this, it's really about managing over the mid to long-term. We don't want to take pricing over short term inflationary and we use trade bonds and we have for Glad in particular over a number of years to manage through those short-term impacts. But as we see a progressing cost environment coming up here, pricing is something we absolutely will consider across our portfolio where it makes sense. And, I think, it's safe to say pricing isn't something that is an easy thing to go execute. It takes a lot to do with excellence. And it comes with ensuring that we partner with retailers to have plans that grow their categories. And I feel like we are better positioned than we have been in a very long time on that. We have a terrific slate of innovation across our portfolio and particularly for Glad. We are spending against our brands, which retailers can appreciate in an incredible way right now because we're bringing people to the physical or digital shelf. And our portfolio is at the best place it's ever been from a consumer value measure perspective. So more people deem our portfolio, a percentage of our portfolio is superior than ever before. So I think with all of that, we're well positioned to do it. And what I wouldn't say is, I don't have a perfect crystal ball. Pricing is always something that we have to go out and we're dedicated to executing with excellence, but we would expect there are little bumps here and there, but we'll manage through them. And over the long-term we know that it's a good thing for us to do and it's right for the category. So again, no plans at this point on any of our brands, but we'll look at it as we head into the remainder of the year and next year as an option for us to expand margins.

Great. Thank you. If I could sneak in one more at the risk of being greedy just on Burt's, clearly there are challenges associated with the COVID backdrop on that business. I guess I'm just curious a little bit as to if this moment has changed at all, how you think about managing that business over time. Clearly, I'm sure you're investing, doubling down, tripling down on e-commerce and digital. But I'm thinking more about some like the portfolio of products that reside underneath the Burt's Bees brand umbrella as there's any shift in – into where within that Burt's portfolio you might be leading in and investing further versus maybe pulling back versus how you're thinking about going into the COVID situation? Thank you.

Sure. And absolutely the environment has been bumpy for businesses in this space, and that's absolutely the case for Burt's Bees, but we have very strong conviction in the long-term portfolio as it stands today. And I think a couple of things jump out Steve and you've touched on a couple of them. The first is accelerating our progress in e-commerce and we have done that and leaned in over the last couple of quarters with very good results on the Burt's Bees business. The second is innovation and innovating in spaces where the consumer is particularly apt to be transitioning today as we're seeing that in skincare, we're seeing that in the healthcare space in general, and with that we have launched a new line of naturally clean hand products that helped to meet that need. And then obviously very strong conviction and continued conviction in our lip care business. We're still the market share leader in lip balm. And although we've had some weather issues that have impacted the overall category still feel really good about that business and our ability to innovate there. So overall, from a Burt's perspective, we'll continue to make tweaks as we learn from the consumer. But I think this is a brand where more than ever people are going to want things that they feel care for them and care for them using the power of nature.

Appreciate it. Thank you.

Next question comes from Jason English with Goldman Sachs.

Hi, folks. Hope all is well, thank you very much for spotting me in, two questions. Kevin, this time last year, I know you were providing insight your 8-K breakout [indiscernible] bridges, so the headwind from higher trade spend. Can you give us what if any magnitude of tailwind you've had through the first and then the second quarter from lower trade spend?

Yes. Jason, as it relates to trade spend particularly in Q2, if you look at our price mixes favorable three points in the second quarter, about half of that was favorable price, but half of that was favorable mix. On the price side, a little bit of pricing international, but the bulk of that was reduced trade spending because of the reduced promotional environment. So we've seen that pretty consistently for the front half of this year.

Would you expect that to turn the other way on the other side of this? So this time next year, would you expect that to be in a headwind? Or do you think the industry and you can settle out at a lower trade level than pre-COVID?

Yes, I might separate my answer, Jason, in terms of the industry and what the impact will be for us. I do expect the industry will move back to a more normalized level of promotional spending as everyone gets more back in supply, I think that's to be expected. And then at the same issue for us our promotional spending is down specifically as a Clorox, not necessarily industry because many products we just can't promote right now because of the limited supply capacity we have. So I expect to see increased promotional spending for Clorox when we get back to promoting some of these products that we just haven't been able to promote for the last six months.

Yes, that makes sense. And I'm going to stretch on this. I'm not sure what you'd be able to answer and what you can't. But you referenced fiscal 2019 in looking at the back half of year and you said back half expect to grow 15% to 20% off of the same period of fiscal 2019. Clearly in the back half of this year, we're still deep in the midst of a pandemic. What would be, if at all – how if at all could you hazard a guess as to on the other side of the pandemic what that growth may look like off from fiscal 2019?

Yes. That's thanks for asking the question, Jason, I'm sure you can appreciate, we're not ready to talk about plans beyond fiscal year 2021. We're in the process of developing those plans right now, but maybe just big picture what I leave you with to think about is our intent has accelerated the profitable growth rate of this company. As a result of the pandemic, we've talked – we have millions of new consumers coming into our franchise using our products. We're investing behind that. We have a number of new growth runways we've talked about both in out-of-home, as well as international expansion. And so we see these as long-term opportunities for the company that we're clearly investing in this year that we think generate long-term value. So again, we want to talk about our specific growth rates going forward, but we believe that sets us up nicely to be able to accelerate the long-term growth rate of the company. But in the near term there is going to be lots of noise as you compare quarters, pre- or post-pandemic. There's going to be a lot of noise for a number of quarters. I think when you get past all that, there's long-term opportunity for the company and we're investing behind that.

For sure. Lots of noise and lots of debate, thanks a lot. I will pass it on.

Thanks, Jason.

Next question comes from Kevin Grundy with Jefferies.

Great. Thanks. Good afternoon, everyone. A couple for me. I'll try to be brief here, because I know we're late in the call. The first one is going to be for Linda on pricing I wanted to revisit that. Second one for Kevin on capital deployment and share buyback. So, first one, Linda, just given the importance of pricing here, not just for Clorox, but of course more broadly for consumer staples with commodity inflation, so the willingness to take pricing I think is going to be well received and welcome given past commentary that the company was not going to do that during a pandemic. So I think that folks would generally agree that. That's certainly a good thing, but a couple of questions here. A, can you give us a sense of retailer's receptivity to price increases at this point, based on the current commodity environment and state of consumer? I mean, from a Clorox perspective, one could take the view that some of your categories have arguably never been more important to them than they are right now. And then secondarily, you touched on this, but I want to see if we can get a little bit more specific. How quickly can you put through the price increases? I guess what would be the hesitancy – excuse me, to doing that? Are you looking for more permanence in commodity costs inflation? Just to an earlier question, maybe a little bit of uncertainty in terms of what the competition is going to do. I guess what would be the hesitancy now based on what you're staring down, which is pretty significant commodity costs inflation to taking pricing? And then I have a follow-up for Kevin on buybacks. Thanks.

Sure. Thanks, Kevin. Again, let's maybe step back and talk about pricing as a strategic lever and really what we're trying to do overall. And as you know, we're trying to expand our EBIT margins 25 to 50 basis points over the long run. And what we always look at is the broad set of tools that we have in our toolbox to manage cost wherever they may be. And one critical element of how we've done that over the short-term is cost savings, for example, and we had another robust savings this quarter and we expect to continue that. And I think as part of our IGNITE strategy, we put additional levers in place thinking about the role of technology and the role of sustainability could play and helping us do that over the long-term. So we're very much focused on managing as many of the short-term cost inflation increases that we see through those types of levers. What we're looking at right now is over the mid- to long-term based off of the outlook what role could pricing play. And that has to play a broader role in the category plans that we have. It's not something in isolation. So what we're focused on right now is strong innovation, strong brand investments, ensuring that we have the right assortment on shelves with retailers to match the fact that consumers’ behaviors and needs have changed. And that is really the single highest priority we had in addition to supply over the last many months and continues to be over the next few months. So that would be why I would answer we're not ready to announce any type of pricing action at this moment because what we're focused on is serving consumers, what we're focused on is growing our categories, getting back to supply and we're focused on a terrific innovation agenda we have for the back half. And if we can do that with excellence, we will get to a place where as Kevin said, it's a very nice back half as you look back and take a broader view compared to fiscal year 2019. What gives us conviction though in the strategic – our strategic ability to take pricing again is the health of our brands, and the fact that we have been investing, the fact that we do have an innovation portfolio that strong, the fact that we have been partnering openly and transparently with retailers on how we get through the last 9 to 10 months together. So as we make those decisions, we feel confident in that overall suite of activity that we have that can help the categories. We'll continue to evaluate when the right time might be to do that. But for now we are really focused on investing in those brands, getting capacity back to 100% and innovation.

Got it. Thanks for the comments, Linda. Quickly, Kevin, just on capital deployment. As you know, company is carrying a higher than usual cash balance. The debt leverage looks pretty low relative to historically what you've carried about 1.2 times net debt-to-EBITDA, roughly, so understanding that you’re, look, addressing some capacity needs for the business. But given the cash balance, given the pretty strong balance sheet, and the fact that, look, your socks off again today what was a pretty strong quarter. And the group is trading at relative lows versus the market that we haven't seen since the global financial crisis, really. And you have about $1.5 billion in board authorization. What would be the argument against leaning in a little bit more heavily on share repurchases at this point in time? And I'll pass it on. Thank you.

Yes, thanks, Kevin. For us, as it relates to our capital deployment priorities, as you know, Kevin, no change in the priorities we've talked about for quite a while. Now we'll continue to prioritize investing in our base business and you folks see us doing it this year. Kevin, as you mentioned, we're increasing capital spending to increase our production capacity. We're also increasing investments in our brands in terms of advertising R&D and technology. So that'll continue to be job one. We'll also continue to pursue strategic M&A. We want to expand our portfolio, particularly in the health and wellness space. We have a number of areas we're interested in. So we'll continue to evaluate those and look for opportunities to do that. And as you mentioned, we have a very strong balance sheet right now, where we're carrying a little under $800 million on the balance sheet that is elevated. And so, as we've said, if we don't have a need for that cash, we will look for ways to get it back to our shareholders. If you think about this year, I expect over the balance of the year, we're going to return about a $1 billion to our shareholders, about half of that through our dividend, the other half through share repurchases, that's up pretty significantly. We were somewhere around $780 million or so we returned last year. So we've stepped it up this year. And then as we develop our plans for fiscal year 2022 and beyond, we'll continue to evaluate the best opportunities to invest that cash. And as I said, again, if we don't have a good use for it, we're not going to keep it on the balance sheet. We'll look for ways to get that back to folks.

Got it. Thank you both. I appreciate it. Good luck.

Thanks, Kevin.

Thanks, Kevin.

[Operator Instructions] I have a question from Olivia Tong with Bank of America.

Great, thanks. Most of my questions have been asked, but just one for you. It's just around your conversations with your retailers and just thinking about the categories that you participate in going forward, not necessarily just now or even 6 to 12 months from now, but how they're thinking about shelf space allocation, level of promotion necessary to drive the category in cleaning, and not only just in cleaning and disinfecting, but also your other big categories. And again, this is sort of thinking two to three years down the line with allocation to shelf space and how to think about running the categories post-pandemic. Thanks.

Thanks, Olivia. You're hitting on exactly what we're talking to retailers about right now and we're partnering with them on is what is the long-term for these categories as we get through what's been an incredibly unprecedented, I think we can never underestimate or overuse that word unprecedented. And we're really turning to what does the future look like. What will the habits and behaviors that have started today that we believe will be very sticky in the future mean for the assortment that's needed, for the type of promotion that's needed for the shelf space. And what I would say is that varies depending on the category. And our categories have always been different at shelf, what's required from an assortment perspective, how much is merchandise et cetera. So we’re working with them on those individual plans. We're bringing them consumer insights and what we're seeing in the changing behaviors. So for example, the fact that people are cleaning and disinfecting more, and we expect that to continue. They're cleaning different surfaces. They're thinking about the fact that when they leave the house, they're thinking about those surfaces around them in a different way, and we're helping them to plan for that. And then I think really importantly, what we've talked to them about is the innovation needed in order to address those needs and how we ensure we introduce that innovation in a quick manner that we get it on the physical or digital shelf and that we get the right trial behind that. And retailers are really receptive to hearing that right now. And in fact, are loving the fact that we're coming with so much innovation despite all of the craziness over the last nine months. So without getting into specific category details, that's exactly what we're doing. And retailers will begin to make those first moves as supply gets to the place where we're able to fully meet it and you'll start to see what it looks like online. I think a couple of themes, the first is simplification. We've taken the opportunity to simplify our portfolio, to help us run faster and many of our businesses, and that's panned out really well for us. I'm actually really well for retailers and so they're going to continue to drive simplification. We win in that environment being a number one and number two share brands. And then the second thing is omnichannel, making sure that a consumer has access to the right products depending on where they are and where they're shopping. And we're focused on that with retailers and ensuring that they have all of those right levers in place depending on where consumers are entering into their store.

Great, thank you.

Thanks, Olivia.

And this concludes the question-and-answer session. Ms. Rendle, I would now like to turn the program back over to you.

Thank you, everyone. I'm happy with our first half results and look forward to strong execution of our plans in the back half. We'll speak again on our next call in May. Please stay well.

This concludes today's conference call. You may now disconnect.