The Clorox Company (NYSE:CLX) dbAccess Global Consumer Conference June 5, 2024 3:15 AM ET
Company Participants
Linda Rendle – CEO
Kevin Jacobsen – CFO
Conference Call Participants
Stephen Powers – Deutsche Bank
Stephen Powers
All right. Good morning, everybody. Welcome back. I’m Steve Powers. I’m the Head of Deutsche Bank’s US Consumer Packaged Goods franchise. And I’m thrilled to welcome back The Clorox Company to our conference. With us today are Chief Executive Officer, Linda Rendall — sorry, Rendle. And Chief Financial Officer, Kevin Jacobsen. Thank you both for joining us again. Welcome back.
Linda Rendle
Thanks for having us, Steve.
Question-and-Answer Session
Q – Stephen Powers
So, Linda, we’ll start with you. A lot has happened since we were here last year. The company was hit by a cyberattack last August and then subsequently recovered, in my opinion, remarkably well over the back half of last calendar year. What have you taken away from that experience? As we look ahead, where is the organization today relative to where you’d planned originally heading into fiscal ’25?
Linda Rendle
Thanks again for having us, Steve. It absolutely has been a year full of lots of challenges, but also opportunities. And maybe what I’ll start with is just the course of the year where we are. And then I’ll talk about a few of the additional lessons learned and just the takeaways that we have from the experience of the cyberattack. So first Q2. Thank you for your comments. We’re well ahead of expectations as we rebuilt inventories faster than we expected. Q3 was generally in line with expectations, a bit behind on sales, but ahead on margin and earnings. And importantly, we made the progress that we expected on supply chain, on rebuilding distribution on share. What we talked about finishing out the fiscal year was we had a number of things to finish the job on. The first was fully recovering temporary distribution loss we experienced during the cyberattack. And just for everybody to put it in perspective, we lost nearly half of our distribution during that time, given the fact that we had to go manual, et cetera. We still intend to finish that at the end of the fiscal year. We’re on track for that. If you look at the latest one-week data, we’re down about 1.5% and we still have some customer resets that are happening in June. So feel very good about that progress and our ability to fully restore distribution to what it was pre-cyber. Supporting that was that we had to fully restore supply and our service to customers. We were able to do that at the end of Q3 and return customer service levels back to pre-pandemic levels for the first time since COVID. So feel great about that. And then third was ensuring that we activated against merchandising, which we weren’t able to do when we weren’t in stock and didn’t have the inventory. And what we had assumed is that level would return to pre-pandemic level. So significantly higher than it’s been over the last 3.5 years, and that is happening now as well. So feel like the fundamentals of our business heading out of ’24 will be restored. We feel good about that, and that was always our intent, restore the fundamentals of the business to have good exit momentum as we head into fiscal year ’25, and get back to what we wanted to build brands, launch innovation and get back to the momentum we had in fiscal year ’23, where we had a very strong year. So that kind of puts in perspective where we are. As we look forward, it’s really about regaining that last bit of share that we are down. So we’re down just about 0.5 point still in share. For — purchase cycle in our business is about 90 days. So every quarter, we get a shot basically at getting that consumer back that left that we haven’t recovered yet. So we’re laser-focused on that. We’ll be focused on that in the front half of fiscal year ’25. And just a few of the lessons. We had very strong cybersecurity practices, talent, training in our organization, and we still got hit. And so we are, of course, taking the opportunity to continue to advance that roadmap. We’ve been spending quite a bit of money on that roadmap over a number of years. But the reality is those criminals are getting more sophisticated. And so we’ve tried to spend the opportunity helping everyone else understand what we went through, so it minimizes what can happen to other people. And then for our organization, Steve, it reinforced our strategy. We must be more agile, leaner, more consumer-obsessed, and that’s what we intend to do through our transformation. So it really gave us the confidence that we’re on the right path, whether that be in our digital transformation, our operating model, how we are thinking about our brands just as COVID did as well and is really only giving us energy to accelerate that transformation.
Stephen Powers
Reinforcement, not a provocation of change.
Linda Rendle
That’s right.
Stephen Powers
I think I said that correctly. Kevin, maybe the same question to you, just perhaps from more of a financial lens in terms of where you would say the company, from your perspective, is ahead of where your expectations were 6, 12 months ago? And where there’s more ground to make up?
Kevin Jacobsen
Yes. It’s a good question. If I take maybe a bit of a longer-term view, and Linda mentioned this, we exited the last fiscal year with tremendous business momentum. And as a result, we delivered very strong financial performance, mid-single digit top line, expanding margins, double-digit earnings growth. And then we came into this year with an expectation to build on that momentum. Now clearly, the cyber event has put us behind to a certain extent. But Steve, to your question, what I feel really good about is in spite of the cyber event we’re working to recover from, if you look at gross margins, earnings, cash flow, we will end this year stronger than we anticipated even coming into the year before the cyber event itself. And I think that’s a real testament to our team that’s continuing to focus on creating value while recovering from the cyber event. And then to Linda’s point, we’ve got some more work to do on the top line. We recovered distribution at the end of this quarter. We’re still working to fully recover share, but it’s really about setting ourselves up for momentum going into ’25. So feel very good about the progress we’re making. And then as we head into ’25, we expect to be able to advance sales, margins and profit based on the recovery efforts we’re doing.
Stephen Powers
Okay. Great. I’m sure you’ve encountered it in your meetings thus far here. I certainly have in my conversations, and it’s been a topic throughout the conference just in terms of the health of the US consumer. I guess, number one, sort of what is your perspective on the health of the US consumer broadly from your perspective? And then when we look — when I think when investors zero in on consumption data and near-term trends for Clorox’s brands, there’s been some signs of category slowing, some pockets of promotion, elevated promotion, and arguable delays, at least from — versus what investors were thinking in terms of the recovering of that final leg of distribution. So again, perspective on the consumer and then how do trends to date square with your expectations on those fronts?
Linda Rendle
The US consumer is certainly under a lot of pressure right now. We’re seeing the impacts broadly on everything they’re experiencing, inflation and accumulation of that, the fact that it is a bit more persistent than we all had anticipated and a number of factors that are putting pressure on them. In our categories, though, they’ve been fairly resilient. And we expected a category slowdown at the beginning of our fiscal year ’24, and we expected the promotional environment to return to pre-COVID. And those things are just happening. And they’re very consistent with what our expectations were. So we view it as pretty stable to what we expected. We’re watching it very carefully as we move forward. We expect the consumer to continue to be under pressure for at least 12 to 18 months more. And we’ll see how that all plays out. But the good news is, we compete in household essentials, and so these tend to be categories that are very resilient to these types of pressures. I mean we’re seeing that. But if you just kind of put the numbers in perspective and, of course, last year had pricing in it, but our categories were running at mid-single-digit growth, and they’re now in low single digits. And so under pressure, but more returning to what they were pre-COVID. And I would say that’s fairly resilient, given what the consumer is going through. And then in terms of the expectations of where we are with consumer, I mentioned this at the beginning, we’re absolutely on track with what we committed on our distribution. So it’s exactly aligned to our expectations, and no different than what we’ve been communicating, which is by the end of the fiscal year, we would be back in full distribution. Share, we always knew would lag because you have to get all the fundamentals in place. And then every purchase cycle, you’re working to get them back. And every category is a little nuanced and different and you have to take particular actions and you’re learning what’s working and what’s not working. So I’d say that’s in line with expectations. Of course, we’re anxious to get that share back and then grow from there. But we feel like the things that we have said we would do to exit the year with good momentum are in place.
Stephen Powers
Good. And we’ve heard — just maybe a build on that, we’ve heard from a number of — I mean, QSR restaurants investing in value on their menus. You’ve got a number of retailers recently, Walmart, Target, Amazon, Walgreens, all highlighting some degree of rollback or promotional price investment on their part on consumables. What’s your take on those actions? And I think investors are split. On one front, retailer investment in consumable pricing is good for manufacturers to the extent that you’re beneficiaries of that investment. On the other hand, it’s potentially a slippery slope and leading to even more elevated promotions as we go into the back half and into next year. How do you frame it? Do you see a risk of normalized promotion becoming sort of overly intense?
Linda Rendle
We view this as return to business as usual, actually, and it’s what we expected. Given a more pressured consumer, given the fact that most of our categories pricing has rolled through and we are no longer lapping pricing, we absolutely expect the promotional environment to return to what it was pre-COVID, and that’s what we’re seeing. And for us, promotion in our categories is a healthy thing to the right degree. We want to ensure we’re introducing consumers to innovation and reminding them and keep pulse periods, what our brands stand for and why we can deliver them a better experience. And for retailers, they are trying to show a perception of value and attract shoppers to their location. And what they’re dealing with is shoppers are changing the way that they shop. As they’re looking for value, they’re going to different channels, et cetera, and all of those retailers are doing what they always do, which is cementing their perception of what the value equation is for the consumer. So we very much view this as returning to business as usual and what it was pre-COVID. It’s what our expectation was. Of course, we’re watching it carefully. We don’t have any expectation that this means a rollback in all of the pricing that we took. We think this is just the normal temporary reductions that have happened pre-COVID for years and years and years. But of course, we’ll watch that closely because we would not want to roll that back, given the significant inflationary pressure we’ve been under and that we expect inflation to continue in our business.
Stephen Powers
Yeah. Okay, which is a good lead. Kevin, the gross margin progress that has been made has been, I think, pretty remarkable. In the context of normalized promotions, inflation that continues, what’s the outlook on gross margin, the confidence that you can kind of continue to make progress on that front? And then we’ll start there.
Kevin Jacobsen
Sure. What I’d say overall is, and for those of you who follow us, we remain committed to fully rebuilding gross margins. And that’s something Linda and I have talked about for a while now. And, Steve, I appreciate your comment. We’ve made good progress over the last several years, up 360 basis points last year. We’re targeting another 275 basis points this year. And I expect to grow margins next year. We’ll announce our outlook next month or in a couple of months. And so I fully expect we’re going to recover gross margin. And then get into that cadence of 25 bps to 50 bps of EBIT margin expansion each year after that. And Steve, to your question about what gives us confidence, what I’d say gives me confidence is a few things. One is we have a very well-established cost savings program that has delivered value for many years. But in addition to that program, we’re really enhancing our capabilities of what we call margin transformation. So beyond just cost savings, we’re now starting to pursue more aggressively net revenue management opportunities. I think that’s a bucket of opportunity for us. We’ve just started to pursue, and there’s a lot of additional value we can create. And what I really like about net revenue management is not only does that expand margins, but helps drive the top line as well. And so you’ll see us do more work in that space as we go forward. And then as we look at least to next year, Steve, to your comment about the cost environment, while we have not completely finished our plans, everything we’re looking at suggest we’ll be in a moderately inflationary environment, but more in line with a typical year, which gives us a lot of confidence that, that level of inflation, we can more than offset with our cost savings. You add the net revenue management. That gives us the confidence to both cover that cost environment and then contribute to expanding margins as we go forward.
Stephen Powers
And I guess you’ve talked about — I guess, and you kind of alluded to a bit holistic margin management across the business within each business unit in order to fuel growth. How close is the organization — or where is the organization on the journey to that idea of kind of ubiquitous holistic margin management? And then where are the priorities for reinvestment to fuel that growth?
Kevin Jacobsen
Yeah, I can talk about where we’re at in that journey. So if you think about our cost savings program, well established, deployed across our global organization, and that will continue to add strong value. When you think about net revenue management, I would describe it still is in very early innings in that space. And there’s a lot of tools in that toolkit if you think about net revenue management. If you think about one of those tools, it is strategic pricing, and we’ve been pulling that lever for the last several years, very well established and developed. I expect less of that going forward, at least in the near term. But when you think about the other elements, design to value, price pack architecture, trade spending efficiencies, I describe that very early innings for us. We’re increasing the technology we can apply to that space, is going to give us more data, more insights. We’re bringing outside experts to help us to build that capability. And so that’s a space I would say, Steve, we’re going to be able to continue to build out as we move forward, and there’s a lot of value behind that opportunity.
Stephen Powers
Okay. Linda, one of the — behind the IGNITE strategy, there’s been a long-term journey to modernize capabilities, transform digitally. You mentioned streamline the company’s operating model. That was disrupted for at least 6 months as we kind of work through the cyberattack recovery. Where are we within the larger arc of those efforts? And what are the biggest — if you think about the next 12, 18 months, what are the biggest next step priorities on that journey?
Linda Rendle
Yeah. Our IGNITE strategy contemplated really reimagining the way the company operated and enabling our people with the tools, data, technology, processes and the operating model to be able to move as fast as we could, know the consumer better than any one of our competition and take advantage of that to deliver great experiences through innovation and brands. The cyberattack did delay our ERP implementation, but we used this opportunity to try to continue to cement the operating model and other parts of our transformation during this time. I’m trying to walk and chew gum at the same time. And I think we did most of that successfully. So our operating model, for example, is on track, and we still implemented all of the components that we expected to this year. And really, that operating model is focused on being more integrated and end-to-end, and man did we need that during the cyberattack when we were trying to coordinate incredibly difficult manual processes and then switching back to automated. So actually having that — the principles and the org structure in place helped during that time, but it reinforced the need to do that. Then on the digital transformation, we’ve put some of those tools in place and are already seeing value. For example, we wanted to get to know 100 million consumers in the US and then be able to use our capabilities through data and technology to personalize to them. And that is working incredibly well. We’ve actually invested in digital marketing well ahead of our peers for a number of years. But we feel terrific about these capabilities, and it’s driving significant improvement on return on investment. In fact, we’ve had record efficiencies coming out of the spend, which gave us confidence to spend more this year. We typically spend about 10% revenue on A&SP, and we spent 11% this year. And so I would say many of those capabilities through that digital transformation, we’ve been able to leverage this year despite what happened in cyber. The next phase is ERP, which will fully unlock all the efficiency gains we expect to get as we implement this. So the good news is we’ve made progress. We’ve delayed the ERP understandably, but we’re picking that work back up and ready to go and begin that next year. And I feel great about where the organization is, but transformation takes time. And maybe one of the things I would call out, I feel great about brand-building activities, marketing. But at the core of what we want to do, we want to be innovators. And although I’m happy about progress we’ve made, we want to make more on innovation. And we’ve created a great set of digital tools that leverage data and technology to know the consumer better. Now we need to go use these tools to develop deeper pipelines, bigger ideas. And that’s something we’re very focused on as we head into this next period is how can we get more growth and win with the consumer in the ways that we’ve imagined. But to your point, it took a little bit of a back seat over the last six months. But we’ve ramped those efforts back up as we head into fiscal year ’25 and ’26.
Stephen Powers
Got it. When investors hear ERP, they get nervous sometimes?
Linda Rendle
Yeah, I’m sure.
Stephen Powers
So, what’s — what, I guess, kind of proactive steps have you taken to kind of mitigate the traditional risks of ERP implementation as you approach it?
Linda Rendle
Everyone gets nervous about ERP and it’s always about the transition. I’m actually really excited about the ERP and appropriately nervous. But what we envisioned through this ERP was not just implementing an ERP because we had to, because we have something that’s outdated. But we challenged the team to say, what type of return can you get on this ERP? And so the team has signed up for a significant return on this investment and thinking about how we work differently and it’s tied to our operating model. And we’re really excited about what we see from both a growth and efficiency perspective with that ERP. So everybody is excited about it because they know what it gives to the company. But then, of course, managing that, we’re one of the last to make this transition in our industry. So we’re working with all the experts who’ve gone through this with the other companies where the switch gets flipped on and something doesn’t go right. So the good news is we have the benefit of all the learning of the people who’ve gone before us. And we have great partners in this journey. And then, of course, we thought about all the contingencies and risk mitigation that you would expect us to do. In addition, we are not going first in the US We’re going to implement this in Canada first, which is a good-sized business and will help us get good insight, but also protects us as we learn through that part of the transition.
Stephen Powers
Okay. Now on the kind of the — yeah, consumer insights portion of the digital transformation, personalization, it feels even since you announced the objectives, the goalposts have moved, right? AI, huge topic in general and at the conference. So how are you kind of keeping up? And have you changed the kind of the near — the kind of the medium-term destination that you’re aspiring to within the program?
Linda Rendle
The good news is, the program we developed had great room for these new tools. And so we already had significant investment in AI and many of the tools and integrated business planning that we were putting in place. But as GenAI came along, we asked ourself, how would we use this in this digital construct? And what we’ve got very clear on is we do not want to do this kind of approach where everybody uses it for their own thing in the company, but get very focused on the right use cases. For us, we believe that is on consumer insights and innovation, and we’re focusing that work there and then also doing some test and learn on other places we can drive efficiency in the company and manufacturing, et cetera. But one of the tools that we’ve launched with GenAI is an innovation tool that allows us to do trend scanning across the world. It allows us to quickly develop digital prototypes, hundreds at a time, test with millions of consumers, not 20 in a room like we used to, and then deploy innovation. And we can do this at a pace that we just couldn’t even imagine before. So we launched our first innovation with this actually in the spring. And from start to finish, it was 90 days from just doing the query on the insights to when we launched it. That — we’ve never done anything that fast before. So we’re excited about what this can mean. It won’t mean all innovation could go in 90 days. We have regulators to deal with and businesses need to go through processes. But to develop that funnel, know the consumer better, we are really excited about where this can take us. And the one thing that we’re remaining disciplined about it is stick with the use cases we think can drive the most value, not just for fun.
Stephen Powers
Not just for fun. And so, Kevin, from your perspective, or Linda, you can weigh on this as well, but how do we think about — I mean there’s a lot of excitement around these new tools. And they create all these different advantages and speed to market, reduce cost, but they also require investment. Is this a sustainable competitive advantage that you’re pursuing? Or is this sort of the new costs of doing business? And how do you think about that?
Linda Rendle
I would say, just like any tool that consumer companies have today, nobody has a really unique tool. Everybody has net revenue management. Everybody has an ERP and a system. It’s how you uniquely decide you’re going to create value with that in your organization and then create competitive advantage. All of us can do digital marketing. All of us can get to know consumers, but it’s what you choose as the capabilities that are unique to your — the way your value creation model works and can you execute them better than any else. So I absolutely think there can be competitive advantage. And I absolutely think there can be ways that companies can uniquely use these to deliver value. And that’s what we’re trying to do is focus on where we can get the most value and where we can create unique differentiation for our brands and our partnerships with customers. And how long that will go for and what people choose to do, we’ll learn from each other, but I feel like just any tool, it’s about what you do with it versus the fact that you only have to have it alone. Everyone’s going to have GenAI. But I feel good about the areas that we’ve chosen to start with it on. And we’re learning what other people are doing and we’ll adjust if we need to.
Stephen Powers
Okay. Maybe just to kind of go across your big businesses, whether — however you want to by segment, by brand, by category, however you want to summarize it, just sort of places where you’re most pleased with the progress, where you feel like you’re well ahead in other places, where you feel like you have maybe a little bit more work to do. And we’ll focus on the US and then same question internationally.
Linda Rendle
Sounds good. Maybe I’ll start with a short-term comment and then bridge that to long term because I do think both these are on people’s minds. And the two businesses that we are laser-focused on the recovery, all businesses are important on the recovery, but particularly our Cat Litter business and our Glad business in the US and a couple of factors that play into that. One, both of those businesses were supply challenged. Litter has been supply challenged for a while as we brought a new manufacturing facility online, given the high growth of cat ownership in the US and the category growth that came with that, and we’ve been playing catch up for a number of years. And then when the cyberattack happened, that delayed those efforts. And then Glad is just an incredibly complex business. And when the cyberattack happened, not having right inventory in the right place, created some disruption. So those two took a little bit longer to get supply back and took until the end of Q3 to do that. They are both now fully restored and we can meet demand. But those are two that we’re laser-focused on. We have strong belief distribution. We’ll continue to meet the expectations we had by the end of the quarter, but they’re a bit behind from a consumer perspective. And maybe just give you a little bit of color on why Litter is different — and Glad it’s a little different just because of the delay. But Litter is different for a couple of reasons. The first is, if you’re a pet parent, I haven’t seen a lot of cat people at this conference at least the people who I have talked to. So maybe there’s some at people in the audience. But if you have a cat, and it’s using a litter box, that can be a very stressful thing as a pet ownership, and it can be stressful to the cat. So when we were out of stock, and pet owners had to transition their pet to a new litter, that was a stressful experience for them. Now we’re asking them to switch back, another stressful experience. So we’re trying to do everything we can to make that as seamless as we can, and we know we have great litter and we have great innovation on Fresh Step, but that’s a little bit more of an emotional decision than it is to go back to your Glad trash bag, or go back to your Clorox disinfecting wipe. So we’re managing that very closely. And then the second dynamic is for e-commerce, quite a bit of that business is subscription. So what happens for subscription is the reason consumers do it is because you have to think about it. And what happened is they got switched to a competitor when we were out of stock. And now we need them to take action and switch back to us. So we’re experimenting with ways to do that. Is it just communication? Is it reminding of the benefits? Do we need to give them a discount on that first subscription? So it’s a little bit more of a nuance. We’re working very hard to get it done, but it’s one of those ones where we’re staring at it kind of on a daily basis and are we making the progress. Glad I feel more as just a timing delay and feel better about that. And certainly, the distribution and the merchandising will help. But we were out of stock on large sizes for quite a while, and that’s what drives our Glad business. And now that we have those restored, we expect that to turn around. And then I would say the rest of the businesses are generally on track against the cyber recovery and feel good about where they are and just continuing to put focus on closing the remainder of the fiscal year out and then finishing the job on share. For International, just an incredibly brilliant team and business. And so from a cyber perspective, we are where we need to be. We’re recovered to the degree we need to be. And there’s no additional work to be done outside of the normal work in International. From a long-term perspective, we have several businesses that continue to have pre-COVID and COVID tailwinds, but some of them have been muted by what happened with the significant inflation. But if you look at our Cleaning business, for example, we’re still as big of a business volume-wise as we were pre-COVID, actually a bit bigger, despite taking four significant rounds of pricing. And we still see consumers caring more about cleaning and disinfecting. So feel great about the opportunities we have in the long term. And we compete in a high share way in a number of segments, but there are a number of segments that we don’t compete in. And so we think there’s lots of opportunity in our Cleaning business, including our professional cleaning business for continued growth. Really excited about our food business. We don’t talk a lot about our food business, but it has been a growth engine for the company, a margin engine for the company. And we just see so many opportunities through innovation to give consumers great flavor experiences and expand, and our customers and consumers are really excited about that brand. I’m excited about Cat Litter once we get it restored. There’s so many cats in the US and so many opportunities in the cat wellness area for us to create great value there. And then I would call out businesses like Brita and Burt’s Bees that have continued great tailwinds behind them. And we think the innovation that we have coming up. One of the things that we’re doing with Brita is that many US water supplies are compromised to now, and we’re working with municipalities to provide consumer solutions to have safe drinking water in their homes. And that’s a really exciting opportunity for us that we can deliver consumers a great solution through a brand that not only gives them great tasting water, but safe water. So I always want to cover the rest of them, too, but they’re more on the average. What I’m going, but we do. We’re really happy with the portfolio that we have. And if you look at International, the same thing, there’s lots of growth opportunities. We divested our Argentina business in Q3, which was the largest source of volatility that we had in the company, and that was absolutely the right choice for us and for our investors, and we were glad that we found a buyer that feels passionate about their ability to create value in that market. And we can get our team in Latin America focused on the growth opportunities that we have there. And then the rest of the world, we continue to see opportunities in our Cleaning business, our Cat Litter business for continued growth. And our International business has been growing above our company average for a while now. So we’re really looking forward to those opportunities. I wouldn’t say International changes in our posture on it. It’s 15% of our sales, and we don’t expect it to be 50% of our sales at some point, but it’s a great opportunity to be growth accretive for the company.
Stephen Powers
Yeah. It was about three years ago that you raised the algorithm on the basis of more opportunities seen in disinfecting and more opportunities seen in international, some overlap between those two ideas. But has anything changed on that front? It seems like efforts probably have been delayed to realize those objectives. But as you think about the medium to long term, has anything changed? And how are you — what steps — especially internationally, what steps are you making to position the portfolio for accelerated growth?
Linda Rendle
Nothing has changed against those aspirations over the long term. I would say we didn’t expect the inflation that we had when we first talked about that. So we’re dealing with categories that are a bit slower right now. We think that’s more temporary and muted, and we still think there are growth opportunities. But that’s what we’re staring at, very short term for fiscal year ’25, that is what are the category growth rates that then we grow share and innovation on top of, and where does that put us. But over the long term, we see a lot of category opportunities for us and continued ability to leverage innovation and brand building and net revenue management to grow top line. But it is — we’re at a period right now where, given the consumer pressure that we’re seeing out there, where categories are more muted, and that is a headwind to us as we think about that long-term algorithm.
Stephen Powers
Okay. One question that often comes — it comes up less in respect to Clorox than it used to, I would argue, is private label and — but it’s still is out there. You do compete in categories where private label has elevated share. That’s not new, but that’s true. And we see renewed efforts by certain retailers to invest in their own brands. How do you think about private label, especially in a 12 to 18-month period where the consumer is trying to come to terms with recent inflation? Is it — has it changed at all? Is it more of a threat? Are you more equipped to handle it? Just general thoughts on private label.
Linda Rendle
Private label, we think about just like we think about any other branded competition that we have. And we compete against large multinationals. We compete against private label. And they offer a certain value proposition to the consumer that is different than ours. And what we focus on is do we have superior value in our categories, regardless of who we’re competing against. And that is a combination of having a great equity, a great product and now I would include shopping proposition at the right price. And we still have superior value in those categories in which we compete against private label and multinational. And in fact, that superior value more of our product — our portfolio is deemed superior by consumers than it was pre-COVID still, even after all of this pricing that we took. So that’s the first thing we’re always laser-focused on is do we offer a better overall value to the consumer? And if we do, then we can win against anybody. And that’s what we’re focused on. And so as we look at private label, up until the point we had the cyberattack, there was no material switching between our brands and private label. We certainly saw value-seeking behavior, people looking at larger sizes, smaller sizes, perhaps trading down in our cleaning category from a wipe to a dilutable or a spray, but we haven’t seen a lot of switching. Now when we were out of stock, private label gained some share in our categories. We’re starting to see that normalize as we get our distribution back and don’t view that as a consumer value issue. We view that more as an out-of-stock issue, but we’re really focused on ensuring we get that all back. And if you kind of step back, Steve, and look at the arc of private label over many, many years in this industry and in our categories, they haven’t made a material change. They serve a very particular price, not value sensitive, price-sensitive consumer at all income tiers. Price-sensitive consumers exist at the highest income tiers and low income. We over-index with low-income consumers. We do well during times because they need a great value, it’s not price, it’s value, and we offer that to them. It’s something though that given the stress that consumers on we are watching closely, that’s why we’re investing more in our brands right now to continue to support them and ensure people know that we are a better value. But we kind of look at it as we have over the course of time. It plays an important role. We know that retailers will lean into it for price perception. We will play our role in the category, which is as a number 1 and number 2 share brand, the best value, and that’s how we’ll help them grow categories. Private label isn’t investing in advertising or innovation in our categories, that our role, and that’s where we can offer a better value.
Stephen Powers
Great. Kevin, if we can translate all of this into a cash flow outlook, kind of near, medium-term cash flow outlook, the business is poised to generate a lot of cash from operations as we go forward. But also, there’s obviously investment needs, both expense and capital. So what’s the near and medium-term cash flow outlook, we’ll start there, and then talk about how do — how we use that cash?
Kevin Jacobsen
Sure. So as you think about the cash flow outlook, and our goal under IGNITE was deliver 11% to 13% cash flow as a percent of sales. We were below that goal as we’re dealing with the significant inflation. And what you’ve seen, Steve, is we’ve rebuilt the profitability of this company. We rebuilt cash flow. So we’ve gotten that cash flow back into the low end of that range. And so we’re delivering very strong cash, and that gives us quite a bit of optionality in terms of how we want to deploy that cash. But I would say going forward, I expect to see that continue to improve as we’re recovering margins, recovering earnings.
Stephen Powers
Okay. Linda mentioned happy with the portfolio as it stands today. But when we consider opportunities for portfolio optimization to enhance growth, like how do you approach that from an M&A perspective?
Kevin Jacobsen
Yeah, I think there’s a few things. like I’d say overall, if you look at our portfolio, I feel very good about the portfolio and how it positions us to deliver our financial goals we set as a company. Now having said that, we are always looking at the portfolio. We do that with our Board of Directors to determine if we’re the highest value owners. And occasionally, we’ll decide that’s not the case. And you saw that as it relates to Argentina, we made that decision last quarter. But then as we go forward, Steve, when you think about M&A, I think about it a couple of ways. One, I think we now have a strong balance sheet that affords us the ability to pursue acquisitions that we think can make sense for our brands, make sense for our shareholders. And then in the context of our financial goals we said we want to grow 3% to 5% sales. I think we have a portfolio that allows us to grow in that range. I think to get to the very high end of that range, we want to establish another growth runway for this company and you can do that organically, but you can also do that through M&A. So we’ll continue to look for good M&A opportunities that we could think could establish an additional runway for us. It would likely put us in a position to move very high into that growth range. So that work is underway. We’ve got the financial wherewithal to pursue it, but we’ll continue to be very disciplined in terms of how we pursue that.
Stephen Powers
Yes. Does the fact that there’s going to be an ongoing kind of fairly major ERP implementation, does that push out? Is that a considerate when you think about adding new business? Are there ways to do that in parallel to the ERP implementation? Or is there sort of a thought to say, hey, look, we should wait. Let’s get our house in order and stabilize first before we bolt on?
Linda Rendle
We could do them simultaneously and we’d have to think about the implications of that. And certainly, once we implement that ERP, any integration will be easier. So we’re anxious to get that done, but we could do them in parallel if we chose to ensure that we have the right mechanisms to do that in a way that allows us to be excellent at both.
Kevin Jacobsen
Okay. And I even add it, it’s not that dissimilar divesting a business in terms of the effort, and we just divested Argentina quite successfully. So I agree with Linda. That’s something we absolutely do.
Stephen Powers
Consideration, but not an obstacle.
Kevin Jacobsen
Yep.
Stephen Powers
Okay. We’ve got a couple of minutes left. I’m going to give you the last word actually, close us out. So I think — and I’ve been asking — I ask this everybody, and I think it’s a good way to round out what’s been a pretty wide range of conversation. Just what do you — for those investors who are looking at Clorox as an incremental investment opportunity, what are the key things they should consider to walk away with when they think about Clorox?
Linda Rendle
Well, first, thank you all for your interest in Clorox. We think we are a very strong investment case, but it really starts with the brands that we have and the superior value they offer to consumers. And that’s fundamental to how we create value over time. We have leading brands in the categories that we compete. And they do well in times that are prosperous, and they do well in times that are more tough. And we’re doing the work it takes to transform the company to get even more value out of these brands over time. And I feel confident in the choices that we’re making. And if you look at how we’ve handled a number of crisis from COVID to cyber, I think we’ve shown our ability to operate with excellence, but also make the necessary strategic transformation and execution that we’ve committed to. I would say we generate great cash flow, which allows for the investment that we need in our business and also allows for investments in things like M&A, et cetera, if that makes sense, and offers a great return for our shareholders. So we think we’re well poised from an investment perspective to do what it requires to continue to get us to the place that we want to be. And the thing that I would note, too, is we want to get back to some more consistency as we get through what we’ve seen as an incredibly turbulent time and volatile time. I mean we have confidence that the choices that we’re making will allow us to do that and create a great investment case for people who are interested in the company. And of course, if anybody has any questions or wants to go deeper on things, you can always reach out to Lisah Burhan, who’s in the back, or any of us as we talk about our plans and what we intend to do in the future.
Stephen Powers
Perfect.
Linda Rendle
Thank you, Steve.
Stephen Powers
Thank you, Linda. Thank you, Kevin. Thanks, Clorox. Thank you all for joining us. Have a great conference. Thanks, everyone.
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