The Clorox Company (NYSE:CLX) dbAccess Global Consumer Conference 2022 June 15, 2022 5:15 AM ET
Company Participants
Linda Rendle – Chief Executive Officer
Kevin Jacobsen – Chief Financial Officer
Conference Call Participants
Stephen Powers – Head of US Consumer Packaged Goods Research, Deutsche Bank
Stephen Powers
Yes, alright. Welcome back, everybody. Thanks for joining us. Thanks especially to The Clorox Company for joining us back here in person in Paris, we’re thrilled to have you guys. Joining us from Clorox is CEO, Linda Rendle; and Chief Financial Officer, Kevin Jacobsen. Guys, thank you again for spending time with us today. There’s a lot to talk about, I want to try to balance the near-term and the longer term. But maybe let’s — maybe start looking backwards, because there’s been, I mean, since you came into this role, until there’s been a tremendous amount of change in your business, change in the environment, and the environment continues to change. So as you just reflect on the last few years, you know, you think about what your, kind of, long-term aspirations are? What do you think the biggest accomplishments have been? And what do you think the most important success factors are in terms of your ability to consistently hit long-term objectives?
Linda Rendle
Yes. It’s certainly been a dynamic environment, I don’t think you’re having anyone come up here and say something different. But we’ve been really fortunate in many ways to have so much of our portfolio exposed to great tailwinds. And I think we’ve done a very nice job taking advantage of that during this time. But we’ve also had, and particularly of late, a lot of tailwinds, excuse me headwinds as well and that’s from a cost environment perspective and I’m sure we’ll get more into that. But I feel really good about the fact that we’re executing well and the factors that we can control on that, pricing, cost savings, removing COVID related costs.
And what that translates to from an accomplishment perspective, we’re growing about 2% sales in our previous strategy period and we’ve averaged 5% over the last three years. And that’s been due to the fact that many consumers entered our categories, and we were able to introduce them to our brands during that time. And one of the things that we set out to do at the very beginning was ensure we can maximize the value creation that comes with that. So we invested more with the consumer, we invested in innovation and brand building, we put an additional point of brand building in last year, and that’s really paid off. So prior to the pandemic, about 55% of our portfolio was deemed superior by consumers and we’re now at 75%. And I think as we head into a very difficult period for the consumer, that’s going to bode very well for us as we take the actions that we need to restore margins.
And then finally, we have not taken our eye off the ball from a long-term perspective. So we are investing $500 million, we announced that last year in our technology transformation journey and that’s incredibly important for us to come out of the strategy period with the capabilities we need to be more effective and efficient. And we are staying true to our strategic investments across innovation and brand building even in such a difficult time.
Stephen Powers
Great. When we — let’s, kind of, hit the topics to [indiscernible], right? Supply chain costs, pricing elasticity so on and so forth.
Linda Rendle
Yes.
Stephen Powers
Let’s start with supply chain, both inbound and outbound. Where are you now in the, kind of, the health of the supply chain? And where are there — either active bottlenecks or potential bottlenecks that you’re most monitoring?
Kevin Jacobsen
Yes. Steve, thank you. And if you look at our supply chain, I’d tell you it’s been an incredibly difficult environment for the last two years as we’ve managed through not only the extreme demand we’ve seen for our products, but the ongoing supply disruptions that we’ve received broadly for the last two years. You know, the one way to describe the environment we’re operating it in, I think over the last two years, we’ve had over 200 force majeures declared on us. So for various reasons, material suppliers, manufacturers couldn’t provide the product we needed. As a result of that, we’ve had to build up a resiliency within our supply chain to be prepared to manage through that disruption, as well as manage through the uncertainty of the demand signal we’re getting as we’ve seen a pandemic environment transitioning more to an endemic environment now. That has built up millions of dollars of cost in the supply chain to be able to manage through that.
And then Steve, to your point, where are we at now? And so now I’d say, we’re seeing the moderating in demand as we expected. And so as a result of that, we have the opportunity now to go back and start looking at pulling those cost out of supply chain, maintain the resiliency, but do it in a much more cost effective manner. And so just a few examples, we leveraged a number of third party manufacturers during the pandemic to help us meet demand. We’re now stepping out of those relationships and we’ll wrap that up in the next month or so. And so we’ll bring most of the production back in-houses where we were before the pandemic began.
We’d be able to rationalize all the new material suppliers we signed up. 100s of new suppliers we’ve added for resiliency, we’ll go back and rationalize that. And so while that has been a source of the margin decline, I’m sure we’ll talk about today, Stephen, it’s also now as we look forward, it will be a source of how we’ll rebuild margins as we go back and optimize the supply chain.
Stephen Powers
So on the in-house versus third-party manufacturing, I think typical run rate was more like 80:20, right? Then you went up 50:50, and so you’re saying you’re essentially back to 80:20 in the next couple of months. As we think about ’23, that should be back to par.
Kevin Jacobsen
That’s exactly right. So when we finished our third quarter and for us that ended in March or third quarter, we had stepped out of most of those relationships, we’ll finish that up this quarter. So as we start our next fiscal year, which for Clorox starts in July, we’ll be back to a fairly normalized production mix.
Stephen Powers
And that is potentially a very large margin driver, right? Because that was a big?
Kevin Jacobsen
Yes, it’s interesting. I would say there is certainly a headwind to that. It is, by no means, the biggest issue we’re dealing with. We are seeing cost inflation across every aspect of our business, where it is most acute for Clorox is in commodities and logistics, about 75% of our total inflation in those two areas. And so while manufacturing is certainly contributing, it is not the biggest issue we’re dealing with. It’ll be a nice contributor to that process to rebuild margin, but not the biggest contributor within the levers we’re going on.
Stephen Powers
Right. So on the cost fronts, frame for us just, you know, frame for us the magnitude of inflation that you’re dealing with, you’ve got official guidance through ’22, so you can quantify that. But as you’re thinking about looking over the horizon, how should we on the outside be sort of dimensioning the inflation headwinds that you’re sizing up yourselves?
Kevin Jacobsen
So let me talk about our fiscal ’22 first and as I mentioned, we’re just wrapping fiscal ’22 up. We’ve talked publicly about $530 million of cost inflation in commodities and logistics. Now again, that’s not all the inflation, but that’s probably 75% to 80% of the inflation we’re dealing with is in those two buckets. In a typical year for Clorox, we’d be looking at something closer to $50 million of inflation. So we’re dealing with 10 times the level of inflation. And as a result of that, our margins are down this year.
Now I think Steve, what’s interesting is we look forward, so what is the environment? What do we think the environment is as we go forward? Right now, we’re in the process of finalizing our plans for next year, but we expect an ongoing inflationary environment. Now we don’t expect rates to be rising at the rate we’re dealing with this year. But we do expect this inflationary environment will continue. And so as we work to rebuild margins, cost deflation will not be an element of that, it will really be driven by the actions we take, more so than the external environment, helping us grow margins.
Stephen Powers
Yes. So on those actions, pricing, revenue growth management, productivity. I guess, let’s talk about pricing first, where you are in your pricing journey to offset some of those costs? How you’re thinking about potential waves of future pricing to offset inflation that you’re sizing up? There’s been obviously a lot of dialogue between whether or not consumer is able to take that pricing, whether retailers will allow that pricing two sides of the same coin perhaps. But just so — let’s talk about pricing first and where you are and how you’re thinking about future pricing potentials?
Linda Rendle
Yes. So on pricing, we have three rounds of pricing announced, two of which are in market. We took the first in the fall, and that’s a price increase we have a good read on now, because consumers have gone through their purchase cycle, and we’ve been able to measure that. And what we would say about that first increase is that elasticities are a little better than they were pre-pandemic, and that’s pretty broad across the categories we took pricing on.
The second round went in April and that one very early indicators are similar, although I would say it is far too early to measure that out given the purchase cycle we have about 90-days on average across our portfolio. And so that will take a few more months for us to see the full effects. And then July, our largest price increase goes into effect, the broadest and deepest price increase. We had always intended to take pricing in July, but we broaden that after the impacts that we experienced from the war in Ukraine. And that will be end market in July. So far it has gone very well. And what we can read is very consistent with our expectations from a consumer perspective. We are not seeing any significant trade down or trading across brands, due to pricing and it’s been very rational. So our categories, all the competitors in those categories are all taking price move and we would expect the economics to be fairly similar in categories that are the same.
What we’re watching though, this is three rounds of pricing and the largest amount of pricing we’ve ever taken in a single year. And though our brands are very strong right now, and elastities are holding, we’re going to watch that as we head into a very difficult time for the consumer. What gives us confidence? Our brand strength, we’re in household essentials, and what we’ve seen in data so far. But the unknowns around the total impact for the consumer, what the impacts of a potential recession could look like and other factors, you know, we’ll make adjustments if we need to. And that is the mode we’re in, being as agile as possible as we can in pricing. But I would say to-date, we feel very good about where we are.
Stephen Powers
Okay. You know, we have seen private label shares as a proxy in some of your categories tick up, tick up not only year-over-year, but tick up relative to 2019. Is that from your perspective expected? Is that a sign of concern to the extent that you’ve got the information? Are you seeing those pockets of — I would argue, trade down happening in lower income demographics? Or are there specific cohorts that you can call out as to what’s actually happening with the consumer, which is clearly not a singular person. Just give us a little perspective on where you are seeing maybe some signs of weakness?
Linda Rendle
You know, the last taking a very big step back, which I think is important. Over the last 20-years, we have not seen a material increase in private label share in our categories. In an aggregate for us as a company and so far, what we’re seeing is relatively the same. Private label actually decreased significantly over a full point during the pandemic as people reached to trusted brands to deal with really tough issues in their life. And what we’re seeing is private label growing share. But for example, last quarter, we grew share on a basis point perspective twice what private label did. So I do think there’s going to be movement in and out. There’s lots of noise going on given assortment is being recovered. As you know, many of our categories have not been able to supply. Some of that is still true across our categories, we’re not fully able to supply yet. Cat litter is a good example of that, but we don’t see any material changes right now that give us concern. But again, as I said, we’re going to watch this closely.
Our brands actually over indexed with low income consumers. And that’s because they can afford for products to fail. We are in core parts of their everyday life or in their laundry and they can afford to buy new clothes, if bleach doesn’t take a stain out. If a trash bag has to be doubled, that’s not a better value, if they’re afraid it’s going to break. And certainly in the cleaning and disinfecting space, they’d better make sure those germs get killed, because they can afford to take a day off of work. So what we’re focused on is do we have the right overall value, the combination of the brand and the product and the price. We believe we do and for those consumers that are extremely price sensitive and they exist, they’re a smaller portion of the American consumer, very small. We’re going to see trading in and out as we have, but we feel against the majority where superior overall value matters that we’re really well positioned and then we’re going to continue to focus on enhancing that value as we take pricing.
Stephen Powers
Okay. Let’s take a step back or outside of the here now. And talk about just the broader company strategy. So you’ve got a strategy IGNITE, maybe let’s just — maybe you could ground us all in the key tenants of what that strategy is? And how, I guess, each of your major segments contributes that strategy going forward?
Linda Rendle
Yes. The overall value creation lever that we pull in our IGNITE strategy is innovation and we do that across four main choices and then one very important lever that we embed in our business in ESG. So those four choices are how we feel growth in our brands? How do we deliver the cost savings that we’ve been known for many years? And in fact, we expanded that cost savings target in our IGNITE strategy to ensure we have the fuel to invest our brands. And certainly now that’s an even more important focus than it’s ever been for us.
The second is innovate shopping — our brand and shopping experiences for the future. The consumer is changing, they expect more from brands and how can we be there for them when they’re showing up online in a store and then when they use that product at home and giving them a superior value.
The third is about reimagining work. And boy, did we Steve have a chance to reimagine work in a whole new way during this pandemic. We wanted to be a faster and more agile company before this even hit. And we had to accelerate much of the work that we had talked about in order to deal with the rapid changes that this has thrown our way and I think we’ll continue to throw our way over the coming years. And then evolving our portfolio both organically, getting more from the businesses that we have investing differentially and then where it matters. And then we would love to create another growth runway at some point when the time is right and there’s good value out there from an asset acquisition perspective focused mainly in the health and wellness space.
And then importantly ESG, we have a long history of delivering against ESG commitments and we wanted to further our progress there and that required embedding that into how we operate our business units. Our general managers are responsible for goals, particularly in sustainability. And we also have a corporate center that supports that. So I feel those trends that, that strategy was built off had been cemented in this latest period, but they have really allowed us to operate in this environment I think in a very effective way given what’s been thrown at us.
Stephen Powers
Okay. And how do — I guess, those underlying megatrends overlaying intersect with your key business segments. And what’s the expected contribution of health and wellness versus — I’m sorry, yes the health wellness segment, I was going to say, cleaning, I’m old school, versus household versus lifestyle. You know, contribute to the growth algorithm that you’re aspiring to?
Linda Rendle
Yes. You know, the mega trends that we had focused on when we wrote IGNITE health and wellness, personalization, multicultural millennials and the rise of that population in terms of spending power and then responsibility, which contributes to sustainability. And that has been cemented in all of those businesses, there’s opportunities whether you’re in a glad, a trash category, you’re in Burt’s Bees with natural personal care or certainly in cleaning and disinfecting. And then we saw some enhanced trends as part of the pandemic. People staying at home more and that impacts our food business and charcoal business. People clean more, they use more trash bags, they adopted cats during that time. Digital adoption, which we’ve been focused on for a really long time, has really given growth platforms to all of our businesses. So what do we expect from them?
We expect all of our businesses to contribute to our growth target of 3% to 5% and to expand margins. Now to the degree they which is depending on which category they’re in, the opportunities, and our general managers are always looking at the external environment and coming to us with what they believe they can do. And then we differentially put resources against those businesses to contribute to that target. But as I look across the portfolio, I don’t have a business that I say you don’t have enough tailwinds to expect you to grow in the future. And that’s how we approach the business. We might expect more from Burt’s Bees, because of the tailwinds than we do from a business that has just less natural consumer tailwinds. But we’re expecting all of them to grow and we reevaluate that strategically on a regular basis and then we tactually plan in an annual year what can we expect.
What I’d say about all of them though, as we deal with the next 12-months, every one of them is in a different part of the pandemic journey and the lapping of that. So for example, cleaning, we just had the two biggest waves of COVID in this last fiscal year. We have to lap Delta and Omicron in that consumer behavior. It’s going to take a lot longer for that new normal, that endemic state to show in the data, in addition to pricing, in addition to changing of things like cold and flu, et cetera. So that business is going to take a bit more to normalize we still think higher given the tailwinds, some of which like cat litter, we actually haven’t gotten to a place where we can fully even support all that volume. That’s going to look like a different curve.
So what I’d say is in the short-term that’s going to be bumpy. And as we provide guidance in fiscal year ’23, we’ll give you how we’re thinking about that, but each one of our brands will experience the short-term in a different way, but I feel very confident about their ability to contribute to the 3% to 5% over the long-term.
Stephen Powers
Yes. And the 3% to 5% does embed structurally more out of those cleaning segments than what you were expecting pre-pandemic as well as with international driven by cleaning overseas. In order to achieve the stepped up growth that you’re now aspiring to, do you — does it require, again, as you look through the near-term stepped up investment, whether that’s A&P, whether that’s R&D, less easy to measure capabilities, investments. Is the investment required to the cost of growth? Does it go up? Or do you believe that you can achieve more growth, because the tailwinds are just stronger on a similar level of historic growth — historic investment?
Linda Rendle
You know, there are places where we’ve made investment choices again on the differentiation. So we are investing more in places like cat litter from a capital perspective and ensuring that we have the right ability to manufacture or opening a new plant coming up here, given what we’re seeing on the tailwinds. But we’re being very choiceful about what business needs, what type of investment, but we think we can manage that in our overall pool of investment that we have around 10% of advertising, the level of trade investment we have, we took capital up during this pandemic period, but we would expect that to be in a more normalized range moving forward. So we feel like we have all of the tools.
The thing that you would expect from us, we drive efficiency on that spend every year. And so we are getting more for those dollars and that’s how we’re funding some of the new ideas and many of which we’re doing, we’re just changing how we actually do the work. So innovation, for example, Steve, don’t necessarily need to spend more money on innovation, but we have to reorient the way that we innovate. And we’ve done that by trying to create bigger, stickier innovation platforms, which is working. And that is really about how work is done and investing over many years versus necessarily changing the fact that we have to spend double on R&D to do that. We can use our current resources in a more effective and efficient way.
Stephen Powers
Okay. And the — you mentioned capital, part of that capital is going on to capacity. Part of that capital is going into, you know, and expense is going into the technology program. In your mind, those are the, you know, we’re in a window now of, you know, depending on the investment, you know, two, three to five years of a stepped up capital intensity to set the company up for the next leg of growth. How much time is this period of outsized investment buying you relative to normal, right? This is — it’s viewed as a one-time investment. Is it — is this a — this a 10-year ROI that where you feel like, okay, we’re going to — we’re buying ourselves 10-years of glide path or is it or we’re going to be back in this conversation sooner or is it longer?
Kevin Jacobsen
Yes. So as you think about the investments we’re making and to Steve’s point, we’re really making two investments we’re investing in our facilities to manage the elevated demand, that’s a very good investment that pays a very good return that will last over a long period of time. The other important investment we’re making is a $500 million investment and essentially digitizing this company. That’s really an investment, as you said, Steve, for our future. We don’t think that’ll contribute a tremendous amount of value over the balance of our IGNITE strategy, which ends in 2025, that’s really making an investment that ensures work competitive 10, 15, 20-years into the future. And so we’re really looking at that as investing now to continue to drive good returns, but making the appropriate investments that ensure we can deliver value well beyond our current strategy period.
Stephen Powers
Okay. So when I — you’ve said it’s going to take you more than a year to rebuild the margins for all the reasons you laid out. As you look out over time, I mean, is the view that the company can get back to a margin profile and a return on invested capital profile that’s analogous to pre-pandemic Clorox by the time we get through those investment periods and we’ve given ourselves more time to build margins? Or does the future Clorox for some reason end up a lower margin or higher — sorry, lower margin or lower return on invested capital business?
Kevin Jacobsen
Yes. I would say on the margin question, Linda and I both believe there is nothing structural we’re seeing that prevents us from rebuilding margins back to pre-pandemic levels. And if you don’t follow Clorox closely, margins before the pandemic were about 44%. We’re going to lose about eight margin points due to the cost inflation, I described earlier. Our expectations, we’re going to rebuild that over time. Now what’s most important for us is not to prioritize only margin, but prioritize rebuilding margin in the context of continuing to invest to maintain a healthy portfolio and continue our top line momentum. We’ve more than doubled the growth rate of this company through the pandemic. What we don’t want to do is start pulling back on innovation, pulling back on advertising investments, investing in our facilities to accelerate that margin recovery. The way we’re going to maximize the value of this company is maintain the top line momentum and rebuild margins at the appropriate pace.
Now when you think about margins specifically, we think we put the lows in our second quarter which ended in December. We made nice improvements in our third quarter. We had about three margin points and we expect that to continue next year. In spite of an ongoing inflationary environment, because of the good pricing work we’re doing, the cost savings work, we expect to continue to improve margins, but it will go beyond ’23 to rebuild those. But at this point, we’re not seeing anything that suggests we can’t get back to those pre-pandemic levels.
Stephen Powers
Okay, great. We take some of your businesses in turn, you know, you mentioned cleaning, the portfolio and the pandemic comps. And where that business settles out probably is TBD, right? How are you thinking about it? What is sort of the upside, the points of upside potential that you’re monitoring, weighing that against the prospects of mean reversions of pre-pandemic? How are you — like what are the range of scenarios that you’re trying to assess is what becomes the new normal?
Linda Rendle
Yes. I think for cleaning, this was a business that contributed above sales target for us in the prior period. So it was an opportunity for us even in a place where the categories were relatively low growth, we were able to grow share during that period if you look at an all out lot basis and we did that through innovation. We’re making consumers’ lives easier. Cleaning is not anyone’s favorite thing to do, there might be the extreme — we have a few extreme cleaners out there, who love to do that. But it’s not the most, you know, joyous thing to do. So the way you create values, you make it easier for people. You make it a better experience. And we through innovation, we’re able to do that and drive growth, we’re going to continue to do that. But now it’s a heightened focus for the consumer. They think more about it when they leave their home. I don’t know about you while we’ve been shaking a lot of hands while we’re here and you’re thinking about a top of mind. How do I stay, well, and that is true of every consumer that we touch right now.
And I believe that innovation is the way that we will capture their hearts and minds and create value. We just launched a line called Clorox Disinfecting Misters, it’s our first big foray into the disinfecting sprays category, a place we haven’t competed, which for Clorox, just affecting equity is, kind of, mind boggling, but we did it in a completely different way that allows us to give the consumer an easier way to clean. A much better experience when you use that versus the current aerosol product, it’s a real delight, and it’s an ESG win in helping the consumer to act more sustainable, which they care about. And it’s a platform for us to create growth for many years across that cleaning portfolio. So that’s how we’re thinking about it is we want to make sure that we support the behaviors we see, which again people care more about those outcomes, but we have to recognize people don’t love to clean, and we do that in creating great innovative experiences from. That’s true, absolutely in cat litter, the same exact thing. How do we keep a cat well and their pet parents from having the downsides of having a cat in the house, you know, if their litter doesn’t keep those odors down.
How do we support people as they stay at home more? We believe that we are going to see consumers continue to stay home more than they did. Through hybrid work and through the pressures of having to deal with inflation and a potential recession and so how do we have better meal occasions for them? Sometimes it’s not even product innovation, so we make Hidden Valley Ranch, if you are a ranch lover, it’s the best ranch out there. And we don’t have to necessarily give people a new ranch, but we can teach them new ways to do that. If you’re having to stay at home, it’s a drudgery to cook all the time and you can’t afford a meal out from a consumer perspective, so we’ve launched more innovation that we call multi type that isn’t just about product, but about giving people new recipes to try, new ways to grow their food, using Hidden Valley Ranch, et cetera. So that’s how we’re thinking about it for all of our businesses. The lever will be innovation and we will give them those experiences that are better for them and our brands given the tailwinds we’re exposed to are uniquely positioned to do that.
Stephen Powers
How important is having that innovation both in order to, you know, to couple that innovation with and ask for higher price, as well as to drive, sort of, price mix in the portfolio?
Linda Rendle
There is very rare cases where we would launch an innovation that is not a price premium to what we do today. Because, again, we’re trying to solve the problem for the consumer. And that problem should be worth a cost to them, and we find that to be broadly true. In cases that we might not do that, it is more of we’re dealing with a competitive to or we’re dealing with a value issue at a certain tier, but that’s very rare. So it’s important that we do that. And what we know is we want that top line to be accretive in every occasion. It takes a little bit longer for the margin accretion to happen, because you don’t have scale. But what we plan is for that to happen, you know, in your three or four, and once you get enough scale behind the innovation, you would want it to both be top line and margin accretive.
Stephen Powers
So if I think about wherever your pricing lands prospectively over the next 12-months, what percentage of the total company price increase is simple list price increases on pre-existing products versus the introduction of new more premium innovations?
Linda Rendle
Almost the vast majority of the value from this year was in pricing, because of the degree of pricing that we took. As we look for, but we also had a very strong contribution, double the average net impact from innovation that we’ve had in previous years. So both of those are going to play out this year. In years going forward, we will see both a truckload component of that, we’ll also see a net revenue management component, so price pack architecture will play a bigger role, which is, you know, counts in kind of both buckets, because it will come through innovation and we’ll continue to expect innovation to be an outsized contributor versus what it was in the prior strategy period.
Stephen Powers
Okay. A business that — from my perspective hasn’t performed to potential and to the vitamin, mineral supplements that which has been a focus area for the company, but one that I think has been a little more of a struggle to realize, especially during a time when that category definitely had tailwinds. How are you thinking about that part of your portfolio today? Where does it rank in terms of a target for prioritized investment? Is it a — are you going to double down? Or are you stepping back and reassessing that part of the business?
Linda Rendle
So we acquired vitamins, minerals and supplements business through two acquisitions over the last five years. And what I would say is as we did when we bought it, we love that space. It is growth accretive. It has good consumer tailwinds and we bought businesses that were not in a more commoditized part of the segment. Think about letter vitamins, but more in ingredients that we knew had science behind them and could create the type of benefits for consumers that we see with our other brands. That being said, even though I still like the categories, I’m not happy with our performance. And to put it in perspective, it’s about 4% of our sales today. So not a big material impact to the company, but not where we want to be. So we’ve gone back and looked at our strategy, which we have refreshed.
And we are focused on innovating faster in that category. We are focused on creating more scale across our brands, we bought us a lot of very small brands that we thought we could build to big share brands and midsize categories, kind of, like we compete today. That’s taking a little bit longer, the household penetration in the segments we compete in is still very small, 2% to 4%. So I feel good about the space. I think there’s lots of room for us to create value. We have brands that are doing very well today. We have some brands growing double digits. But we have to prove to ourselves we can do this consistently, that we can apply our capabilities before we would, you know, make any other choices in that segment and that’s what the team is laser focused on right now. And we’ll continue to report back as we progress on the journey.
Stephen Powers
Is that something we should expect tangible progress on in fiscal ‘23? Or is it more of a longer term project?
Linda Rendle
It’s more of a longer term project. I mean, I expect improvement in fiscal year ’23 for sure. But in terms of that longer strategy taking hold and the work that we have to do, for example, we will get rid of some of the brands that are very, I mean, very small and consolidating it to other brands. That’s going to be some bumpiness as we get through that transition. But I would really expect by fiscal year ‘24, you see a significant change to that business and we’ll be having a different discussion about the plan that we need to have.
Stephen Powers
Okay. I think all of the conversations we’re having earlier around supply chain and consumer and cost and pricing was U.S. focused. As you think about the international part of your business, similar questions around how you assess consumer demand and health of those markets in those brands outside the U.S? Is that an opportunity for you to lean into as we go forward? Or do you expect a bumpy road ahead in pockets of international as well?
Linda Rendle
You know, international we have a very similar profile in the markets we’re in where we have pretty big share brands that have good fundamentals with the consumer. And so very much like in the U.S., we know that consumer base well and we have a product portfolio that is designed for their needs. And that has done very well. We set out to accelerate profitable growth in our IGNITE strategy and we’ve done just that in international. And we’ve also seen the pandemic give us some opportunities to push in places that we didn’t think would have as much growth potential at the beginning of this. Just like in the U.S. for cleaning, for example, that’s the majority of our business in international and we see an opportunity to expand and give people better cleaning occasions.
Wipes is a very small portion of the business around the world, but we’ve been able to expand our distribution into 35 countries. And just like the U.S. has had about the last 25-years to grow into a bigger wipes business, we’ll do the same thing in international, and that’s going well to start. We also have opportunities we spoke about in our original IGNITE strategy like cat litter and we have a very premium business in parts around the world that’s doing well. Burt’s Bees has lots of tailwinds that are supported in markets all around the world.
The other thing is, I like where I am in international from a markets perspective now. I’d like to have a little less exposure to LatAm, but I don’t have a big reliance on China. We have a small business there. And so that’s enabling us to deal with some of the volatility we’re seeing in world markets, because we don’t have the degree of exposure. So we feel good about our ability to continue to grow in international and over time move more of our portfolio out of LatAm and into markets like the Middle East, which we made a bigger plan a few years ago and that’s going very well.
And I think in the near-term though, that business is focused on the same thing all over U.S. businesses are. We have to price, which the international team is very good at and does every single year. We have to ensure we have the right value across our brands and implement that in addition to going after those growth levers. And for that business too, there’s going to be a moderation of cleaning behavior just like there was in the — or is in the U.S. So we’d expect that bumpiness, but again, in the long-term, we see really strong tailwinds that will enable us to grow to the degree that we wanted to in IGNITE.
Stephen Powers
In terms of consumer demand and the potential growing headwinds to consumer demand, are — you know, benchmarked against how you’re assessing future prospects in the U.S.? Are you — are there places in international realm where you’re more optimistic, where demand is going to be more sustainable versus equally concerned or more concerned given the macro dynamics?
Linda Rendle
You know, I think every market is different. And a lot of what we’re experiencing in the U.S. we’ve experienced in Latin American market for many years.
Stephen Powers
Many years, yes.
Linda Rendle
So I would say it varies, but we see some additional strength in Asia that we haven’t seen in parts of the world. But the good news is we’re on the beginning of our journey in many of these.
Stephen Powers
Right.
Linda Rendle
So the opportunity for just distribution, we’re widely distributed in the U.S.
Stephen Powers
Right.
Linda Rendle
Our products are in every channel. In some parts around the world, that’s not the case. And so we can continue to make progress on distribution and that’s a very good way to build a business over time. From a consumer health perspective, you know, I don’t know if there’s anyone who isn’t experiencing the other side of the pandemic. And in some markets, it’s even much more close than it is in the U.S. still. So we will continue to see, you know, them adjust. But I would say it’s not largely different than what we’re experiencing in U.S., a period of normalization and then for those consumers, particularly LatAm we’re always focused really strongly on value given what they’ve gone through and of course now what we’re going through in the U.S.
Stephen Powers
Okay, great. Couple minutes left. Kevin, I think your long-term priorities for cap allocation are pretty well cemented and clear. In the near-term, as you go through this inflation and the periods of uncertainty. How are — if at all, how are those capital allocation priorities shifting and being reprioritized in the near-term?
Kevin Jacobsen
Sure. As you think about our capital allocation priorities, I think we’ve been very consistent for a number of years. Our top priority will continue to be to invest in our base business. What Linda and I know very well is how we generate the strongest returns for our shareholders is maintaining a healthy profitable core portfolio. We have — I believe, the highest return on invested capital in our sector. We’ve done that because we know when you invest to grow their top line on an installed asset base, you can generate some very nice returns.
And Steve, to your point, what’s changed? What’s changed is, we’ve leaned in even harder on our base business. So as we’ve talked about, we’ve dialed up our investments in our facilities to expand our production capacity. We’ve leaned into advertising last year, we took that up by a $100 million to engage the consumers coming into our categories. And so what we’ve seen is what we’ve always been doing invest in your base business that drives very good returns and we’ve done that to an even greater degree over the last 12-months.
I think going forward we’ll get back to a normalized level investments in that space as we’ve gotten production capacity up and we’ve gotten back to the right levels of advertising innovation, but we’ll continue to support the dividend. Historically, Clorox has operated the top of our peer group in terms of average annual increases. We know that’s important to our investors, so we’ll continue to focus on the dividend. And then we’ll keep a sharp eye on our debt. And the good news is Clorox generates a tremendous amount of cash more than we need to invest in the business and so we’ll continue to look for ways to get that back to shareholders either through our dividend program or share repurchase program.
Stephen Powers
Okay, great. Maybe as a way to close, the importance of purpose driven growth has been, kind of, central to how you’ve framed the Clorox narrative. You touched upon you alluded to some of this as how — and how you framed IGNITE strategy priorities. How does a commitment to purpose driven growth help you win, not only with consumers, but with suppliers and retailers all on the value chain?
Linda Rendle
Yes. I think purpose has been made something much more fancy than it actually is. Purpose is about knowing your stakeholders and then acting in a way that’s consistent with what’s important to them and that drives why you do what you do. That’s all purpose is. And so for us purpose is, we want to put people at the center of everything we do. We champion people to be well and thrive is our purpose. And in order for people to live a good life, we have to have a healthy planet. We have to have a healthy social structure. And so we make choices consistent with our brands to do that. Sustainability is a huge part of that. And we’ve set very strong sustainability goals, including packaging reduction goals, we have a goal of reducing our virgin, plastic and fiber packaging by 50% by 2030, doing 100% reusable, recyclable or compostable. We set our science based targets for 2030, which will provide a nice pathway to our net zero goal in 2050. And that is an important way that we create value for the people that we serve to give them options to be more responsible, that’s important to them.
And of course, our investors as well that know that, that’s an important transition that we need to make. But that’s all purposes to us. It’s really about being is human centered and people centered as possible, and then knowing that’s how we create value over the long-term by meeting those people where they are. And the way that we do that, of course, is ensuring that our business units are responsible for that now. Our general managers are responsible for sustainability goals innovation goals, cost savings goals, and they’re, of course, trying to work the magic to make all those three things work together.
Stephen Powers
Have you been able to work that into incentive programs?
Linda Rendle
We do look at that. So that is a factor that we apply to people’s compensation as the Board looks from a — are we meeting our goals? That’s the conversation I have with the board. Have we made progress on that? And we have a scorecard that we work with our board on that. And then, of course, through the areas of responsibilities, our general managers are accountable for that, and that will play into how we compensate them.
Stephen Powers
Great. On that note, not to close. But thank you, Kevin. Thank you, Linda. Appreciate it. Look forward to future conversations.
Linda Rendle
Thanks, Steve.
Stephen Powers
Thank you all for joining.
Linda Rendle
Everyone for your interest.
Question-and-Answer Session
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