The Clorox Company (CLX)
CAGNY 2023 Conference Call
February 23, 2023 02:00 PM ET
Company Participants
Linda Rendle - CEO
Kevin Jacobsen - CFO
Conference Call Participants
Kevin Grundy - Jefferies
Andrea Teixeira - JPMorgan
Jason English - Goldman Sachs
Presentation
Unidentified Company Representative
Good afternoon again. It is my privilege to welcome Clorox back to CAGNY. Joining us today, we have Chief Executive Officer, Linda Rendle; and Chief Financial Officer, Kevin Jacobsen. Please join me in thanking them for their continued support of the conference, including their sponsorship of the break immediately following their presentation.
To say the least, it has been a busy few years at Clorox, and I cannot think of a better time to be having -- to be hearing from Linda and Kevin. We are coming off of fiscal Q2 results that exemplified the company's commitment to rebuilding margins while maintaining top line growth despite persistent macroeconomic headwinds.
Amidst the environment that we hope will continue to settle around us, we can now turn our attention to what Clorox is best known for; growth through value-added innovation that is enabled by consumer intimacy and attractive long-term returns that are underpinned by financial discipline.
And so Linda, with that, I'll turn it over to you to bring it life for us. Thanks.
Linda Rendle
Thanks, Tim. Good afternoon. Good afternoon. I know it's a lot to ask. Thanks for the good afternoon back. We do have a snack for you after this, as Tim mentioned, and so maybe we'll reenergize you for that. So let's get started. We really appreciate your interest in Clorox, and thank you for joining us. And as you might expect, this presentation contains forward-looking statements. I know you take that all as seriously as we do. Let's get started.
So the focus of our discussion today will be on how our strategy and the execution of that strategy are positioning us given the strength of our brands, the investments that we're making in our brands, to deliver both short-term and long-term results. Specifically, we have leading brands in categories that are in consumers' lives every single day. Those brands have never been stronger, and we continue to invest in them.
Importantly, we are taking a comprehensive set of actions to deal with near-term inflationary headwinds and at the same time, investing for the long term. In Q2, we made good progress, but we have a ways to go to rebuild earnings, but we believe all of the actions that we're taking are setting us up to return to profitable growth, to deliver long-term value creation for all of our stakeholders.
Let's start with a quick overview of who we are and how we view our competitive moat. We have a diverse portfolio of leading brands in the health and wellness and household essential spaces. We compete in over 100 markets around the world, but the vast majority of our sales are in the U.S. Our North Star is maximizing economic profit, and we do that with a choiceful and disciplined playbook, focusing on creating leading brands, and we like to compete in categories where we can leverage our superior value and innovation and capabilities to be the #1 or #2 share brand in that category and deliver strong growth.
Importantly, we've been a leader in the ESG space for a number of years, and we further committed to that in our strategy by embedding the way that we manage ESG into our business units. We want to do that because we can maximize the impact when we think about that holistically. And of course, the bedrock, as I mentioned, of this competitive moat are our brands. And given the environment that we are facing right now, which is difficult to say the least, it is very important that we can rely on these strong brands and that we continue to invest in them. And here's just a summary of what our portfolio delivers. Over 80% of our portfolio are #1 or #2 share brands in their categories. We are in 9 out of 10 U.S. households, and our portfolio has never had a higher consumer superiority rating.
I know you've heard a lot of people talk about that today, but that is the percentage of our portfolio that consumers deem superior 76%, and it's never been higher, and I'm going to talk a little bit about that later and what we're doing to continue to support that superiority amongst a lot of the aggressive actions we've had to take, including 4 rounds of pricing. We're really happy to say have you taken that for rounds of pricing that we have stable shares. To be clear, we intend to grow market share over the long term, but this is really reassuring to see our brands hold up given the level of pricing we have to take with the inflation we're experiencing.
And then the last number is the 3-year CAGR we've delivered from a growth perspective. This is significantly higher than it was pre pandemic. And we've done everything we can to maintain that boost that we got from COVID amongst the broad set of our portfolio and it's resulting in a stronger growth number. And what we want to ensure that we do is keep these brands healthy, we keep that growth momentum going while doing the important work of rebuilding profitability. And so how we activate this portfolio and where we see our competitive moat is with our strategy, and we launched the strategy is called IGNITE in 2019.
And what we set out to do was to leverage innovation across the 4 choices that we made and those choices are very integrated. We wanted to innovate on how we create fuel. We want to innovate, of course, on consumer experiences. We wanted to innovate on how we work. We knew we need to be faster, support a more digitally enabled back in 2019, and that is much more the case today, and we'll talk about that as well. And we wanted to innovate on how we evolve our portfolio over time. This strategy has served us really well through COVID and it's continuing to serve us well through an inflationary period that's extraordinary. But we've had to lean into some of these choices harder, and we'll talk about that coming out.
So I said I'd come back to superior value. This is the thing our team obsesses about. Do our brands deliver greater value to the people that we serve than the competition in our categories? That is what we're measuring ourselves against. And you can see 76% is actually a record high. We've been measuring this about 10 years ago. We were just under 50% of our portfolio is superior. When we came into our IGNITE strategy, we're at 54% superior. And through this pandemic and the investment in our brands, we've grown to 76%.
And the good news is this is fiscal year '22. But this number is actually through calendar year '22. So we had already had 3 of our price increases live in market, and we maintained that record high superiority of 76%. And this is something that's incredibly important to our team. We must continue to invest in our brands to maintain the superiority. That will give us the ability to continue our top line momentum while rebuilding margins. This is a critical loop.
And what are those investments that we're making? We're making the things you would typically think we would be making for a company that focuses on superior value. We continue to invest strongly in brand building. We're also holding our team accountable to delivering more from that brand building and increasing their ROI. We are investing in innovation across all of our category. We want bigger innovations. We're going to talk about that as well. But importantly, on the bottom, we also have had to invest over the last couple of years in our supply chain, just to ensure that we could meet the demand we're experiencing on our business and, of course, deliver other things like reliability, reduce costs, et cetera. So we've made most of those investments, and we will continue to invest as we need to.
And then from a digital and data analytics perspective, when the pandemic hit, we knew we had to do a digital transformation over time, but it became urgent, and we made that choice to make that investment 2 years ago. We're at the beginning of that implementation, and we're excited about the capabilities that will unlock for us.
So how have we performed since we launched our strategy in these areas. So on fuel growth, as I've said, we've implemented record levels of pricing. So 4 price increases in the last 12 months, and they've gone largely as expected. We're also really proud of the work that we've done on our cost savings program, which has delivered for Clorox for many, many years. Cost savings is in our DNA. But we went back and looked and said, what else can we do given the inflationary environment that we're in, and we've made our cost savings program work harder by expanding the areas that we look in, using data and technology to get bigger ideas. And we had 2 record quarters in a row in our Q1 and Q2 of cost savings results.
On innovate experiences, this is the heartbeat of how we create value for people. We wanted our innovation to do more for people and create more value. So we wanted to create big, sticky innovation platforms, which I'll talk about in a minute. And really the reason we wanted to do that, we wanted innovation to have a higher impact. A lot of times, you can launch an innovation, it's really good in year 1, and it starts to fall off. But we had good examples in the company where we were able to launch a platform. We have one dating back 10, 15 years ago that we could continue to launch new versions that we could continue to invest in, and that's a very effective and efficient way to do innovation. And so we've seen a 50% high -- 50% higher net impact from innovation than we did in our previous strategy. And we'll talk about this second bullet point a little bit later in the presentation. We've also achieved an all-time high ROI on our media. And that's driven in part by our personalization capability that we began to build a number of years ago.
On reimagine work, this is probably the choice we made in our strategy that we've had to do the most work on over the last few years in terms of going much further than we had originally anticipated. And I'll talk about that a little bit later, but this is about our digital transformation. It's about introducing an op model that helps our people maximize their impact in growth and margin transformation environment and then all in hopes of getting our S&A to 13% over time, which we intend to do. And on the portfolio, we are pleased with our Clorox. You see we have strong brands. Job #1 is keeping them healthy. But we are always looking for opportunities outside of that and would make a deal for the right asset at the right price, but we don't feel we have to do that.
So importantly, those 4 choices I just covered work together in a system. When we create the right fuel to invest in our brands and our team works as effectively as they can and we integrate sustainability goals into how we do work, that's what creates magic. And I hope I can share some of the innovation examples and other examples we have in our portfolio that show how the strategy comes together to be comprehensive.
The other important point here, though, is we are really in a mode of balance. We are having to balance the choices that we make so that we are driving results in the short term. And we have a lot of earnings to rebuild. I mean it is clear, and we've started good progress on that. But we have a long way to go. And so we must make progress in the short term but we cannot take our eye off the long term. And that's why you're going to continue to hear us talk about the strength of the investments, how deeply committed we are to them because we can't make that trade-off.
The other thing that we're balancing is how do we maintain the top line momentum we've had, so the strongest sales growth that we have on record in a 3-year CAGR, while also rebuilding margins at the same time at the right pace. So you're going to hear Kevin and I talk about that we have a lot over the last year, and we'll continue to talk about the balance we make on these choices.
Okay. Reimagine work. I said this was the place that probably changed the most since we launched our IGNITE strategy in 2019. And back then, we knew we had to be simpler, faster and more digitally enabled. And then the pandemic hit and people moved online at a rate we haven't seen before. And we were running a supply chain without the data infrastructure that we needed. And we were doing a lot of things manually. And we looked at each other and said, this doesn't feel like a great time to embark on a digital transformation, but we must.
We must do the right thing for the long term. We must do the right thing for building the Clorox capabilities that we're known for. And we have done that in some areas. Marketing is a good example, but we didn't have the infrastructure of the capability sitting on top. We made that choice a very difficult choice. But actually, when we look back on it, it was pretty easy to invest in a $500 million digital transformation that is in process right now. We are going to launch our first region of our ERP later this calendar year. We'll continue then launching in the U.S. later and the digital capabilities that surround that ERP are in process now through the remainder of the strategy period.
In addition to that, we had talked about with our team we need to be more agile. We need to be more resilient. And what we recognized in this is we had to do this structurally and through the right processes and tools. So we implemented a streamlined operating model just a few months ago. We've implemented the first phase of that, and we have another face coming up here with our team at the back half of our fiscal year. And that is allowing us to actually codify what we want people to do.
They have to move faster. We have to be leaner. We have to be more responsive and really importantly, closer to the consumer. And not just the marketers, not just the sales folks, every single person in our company needs to be oriented on what they need. And that's how we maintain that 76% value superiority is by having everyone in our company closer to the consumer, and that's what that Atmel intends to do. And again, I mentioned this will help us reduce S&A to 13% of sales over time, and these 2 initiatives work better to make us a stronger and more resilient company over time.
Okay. I'm going to spend the bulk of our time not surprisingly, talking about our brands and innovation. And in IGNITE, we had set up 3 big choices in the Innovate experiences bucket. The first was we wanted bigger, stickier innovation. The second was we wanted to deliver a frictionless shopping experience with retailers. So part of our brand proposition is how people get it and they hold our brand accountable for that, and we saw ways, and I'll take you through an example later where we could advance our share leadership by being first on this. And then, of course, the bedrock of everything that we do is those brands. And in 2019, we said we wanted to be purpose-driven, and we wanted our brands to be more personalized. And I'll walk you through how we've done that, what our results are to date.
So a bigger stickier innovation. I talked about we had examples in the company where we had launched an initiative or an innovation that was sent in on a really big idea. I'm going to talk about one of those. It's our Glad with platform that started in 2009, and it was such a big idea in such a bigger consumer need space that we were able to leverage many technologies, many different iterations in order to expand on that platform year after year after year, making the marketing work harder, making our distribution work harder, getting retailers on board to where we were going.
And we wanted to replicate that in every business that we have at Clorox. Everybody what was already accountable for a 3-year pipeline. If you're a general manager, you have a 3-year amortization pipeline. Now they're accountable for 3-year innovation pipelines that include platforms. And that means they actually have to think further than 3 years now because they have to be dreaming about what big spaces they can go after.
We only -- not only wanted this platform to be bigger, we needed it to be sticky. And what we mean by sticky is in year 1 is when you tend to see a big bump from innovation and then sometimes, you end up having it kind of bleed out of the back. And we wanted big enough ideas that we could continue to invest in that in year 2 and year 3, we're adding incremental volumes. I'm going to walk you through 3 examples of platforms that we have at Clorox, and I'm going to tell you what's working well. And I'm also going to share what hasn't worked well and what we've learned from that and how we're embedding that and how we do innovation moving forward.
And the first one I want to start with is our retail cleaning business, which from Tim's introduction is probably -- there was a lot of news around the Clorox cleaning portfolio during the height of COVID and the extreme demand that we faced. And consumer behavior has been continuing to evolve. It is still evolving as we normalize, but what we know is consumers care more about their health and wellness. They connect that back to cleaning, and we have tons of opportunity with our Clorox and our other cleaning brands to meet them where they are and create better product experiences for them and brand experiences to meet their evolving needs.
And what we talked about in this platform is it all begins with the idea of starting clean. Let's play the video.
[Presentation]
Linda Rendle
So that insight from consumers that they're ready to move past what's been an awful 3 years for many. And they'd love to move past what is an awful thing for many people as they experience significant inflation in their lives where they have uncertainty about their jobs. But what we want to help them do is have great experiences with our brands that allow them to start clean. We know that when consumers have a clean house, it creates space for them in their minds and their body. And we can do that through our brand communication like we did here, but we can do that very tangibly through innovation.
So an example of a platform that comes out of this insight is our Clorox Disinfecting Mist, and we talked about this last year. Clorox Disinfecting Mist is the first non-aerosol disinfecting spray that kills 99% of germs on hundreds of surfaces. And the cool thing is this combines a very important sustainability element. This is a refill model. So consumers are also able to reduce their plastic waste, and we're able to help reduce our plastic waste and get to our sustainability goals with this launch.
People have loved this who have tried it. It is a modern version of a disinfecting spray in a category that hasn't changed for a really long time. I'm also going to talk about how that's very difficult and what we learned in that. But this is a platform that we are going to grow, and I'll talk about this in a little bit for years and years to come, but this first iteration has been a success.
Now that $25 million sales number, we are not satisfied with that. We expect this launch and this innovation to be much bigger over time as we continue to invest. And what we've learned is it is very difficult. We knew this, but we learned it tangibly with this launch, we learned it is very difficult to change consumer behavior even when you have a better product. And the people who use it, tell you it is. I love it for all the reasons you tell me it's good, but they're just used to the routine.
So as we're continuing on our platform launches, we're having to make sure that right at the beginning, we're getting trial that we're using display and store and online that we're communicating the right benefits that we're explaining what's difficult or different to people so that they know why it makes sense to buy the product. The good news, though, is this is in 2 of the top 5 items, new items in the entire home care category this launch. So we're on to something good and very incremental. And we see many, many years reiterating on this. And in fiscal year '23, we are launching a free and clear line, which also relates back to consumers' worries as they've been disinfecting more in their house. They're worried about using chemicals around their pets, around their kids. And this has no harsh chemicals, dives or fragrances. So it gives them that reassurance. They can do all the disinfecting they need to keep their family well, and they can do it in a safe way.
We also launched an ultra-bathroom foamer. So using this technology we have a foaming nozzle. People love foam in the bathroom. And there's been little innovation in that segment. So we're able to expand this product innovation, which is really a packaging innovation to go well beyond that initial Disinfecting Mist launch. And we have plans in fiscal year '24 and beyond to take this in many other places.
That is example in cleaning. Now I want to move on to the fun part of the program, which is about cat. This is supposed to relax you. There is science that says watching cat videos, and I know many of you have watched cat videos sitting work. Somebody want watch the lawyer who had the cat filter on, come on, you've all seen that one, right? No. Yes, you have. But what we knew is during the pandemic, people became closer to their pets, 84% of people said that they become closer to their pets. Now I became closer to one dog, the other dog has been on permanent probation since the pandemic. So I don't know if that's really the case.
But cats are a joy to people's lives, but they also come with a really harsh reality. It's called the litter box. And for those of you who own a cat, that chore is one of the most dreaded things in the household. People hate it. And litter manufacturers, including us, have done a great job over time making this better for consumers. We've made it smell better. We've made it lightweight. We made it not stick to the cat box. We made it not stick to the cat paws, so they're tracking it all around the house. But one thing no litter manufacturer had done was actually reduce the chore itself, have them change the litter box less frequently. So let's look at a video of what we came up to solve that issue.
[Presentation]
Linda Rendle
Another cat video. I hope you all feel a little healthier after watching that. So people love this litter. They absolutely adore it. And as those of you who work on innovation know when a consumer starts playing back to you all the descriptors of how you think about a product and they say it to you, you know you have a winner. They were telling us is the best litter I've ever used. I don't have to change my litter boxes off and it's great. The problem was the only people who are giving us that feedback were people who had tried it. And Outstretch actually was not a success in the first few months of launch. We thought we had it missed the mark.
We knew we had great product testing. We knew for people who had tried it, it was great, but we had not gotten the communication right. So the team went back very quickly on the insights, they adjusted the plan. They focus more on functional benefits, they revise the advertising, and we still have additional changes coming to the packaging coming up here. And that has led to a dramatic increase in the performance of this launch. And it's nearly $50 million in sales over the last year as a result and one of the leading SKUs in our clay clumping portfolio.
And incredibly, this is the number we're most excited about, 49% repeat, which is so high, 1 in 2 people are repeating on this, and that number continues to grow. And that's the takeaway that we have when you do platform innovation, if you have a good idea, it's really easy sometimes to walk away from things. When you've spent money and you're a little nervous, but getting the right insights, moving them fast, and that's part of why our digital transformation is so important. We need our people to have the right insights to be able to move. No one we have a winner and double down on it.
And then as you would expect, this innovation is a multiyear platform. So we're relaunching with the same insights that we had our unscented version about stretch because we think we can improve upon that this year as well as a refill model in e-commerce that I'll actually speak about in a minute. And then we have plans for fiscal year '24 and beyond to build incremental benefits into this category. So they changed their little box less often with incremental benefits. That benefits not only the caps, but their pet parents.
All right. Now let's look at one more example of a platform innovation in another category where we help people deal with their worst messes.
[Presentation]
Linda Rendle
So Glad is the example I mentioned at the beginning, this has been a platform Glad with since 2009 that we're building on. And our first version of that was Glad with Febreze, that was very successful. We added to that Glad with Gain, all those [indiscernible] there that was also successful. And we heard the perfect moment in the pandemic when people were staying at home and smelling their garbage more, so launch Glad with Clorox. And what Clorox does is reassure people about the germ kill, but it really helps us reduce the food and bacterial odor people were experiencing in their garbage. It's also really helpful now as people are trying to stuff those trash bags more from a value perspective when you're not having odors left in the kitchen.
This has been a much bigger success than we thought. And we've learned on this one, how can you move faster actually when something is going better than you expected, how do you make sure you get the right resources there, how do you make sure you up your innovation plan. So this is an example of something going better than we thought it would, and our team has had to take those learnings and make sure we accelerate it. And so well that it's been $120 million of sales in year 1, which is well beyond again, our expectations and very incremental to the category. 45% incremental in the trash category is a very high number with very strong repeats.
And as you would expect since we've been growing this platform since 2009, we have additional iterations coming in the future, including a launch of Glad with Pine-Sol, and we have additional launches in fiscal year '24 and beyond.
All right. So we have innovation, and of course, the way that we get innovation to market is through our retailers. And we want to deliver better shopping experiences for people. We call them frictionless. A lot of retailers call them frictionless. But we had to do some very important work before we could do the work of frictionless and that is restoring fundamentals at retail. And not only did we have extreme demand fluctuations, I think many of you know we had extreme supply challenges during the height of the pandemic. More than 40% of our portfolio was significantly supply constrained during the height of the pandemic, and that led to retail conditions that we weren't happy with.
We weren't meeting our service goals with our retailers, our distribution, some of which we had driven, a lot of which we had driven, went down as we were only able to produce a certain number of SKUs. And we had to forgo merchandising, which is important to our business because we simply didn't have the supply. Our retailers were fabulous partners during this time, and I'll talk about how our relationships have only improved with them, but we needed to do the work on the fundamentals before we could take frictionless to the next level. And we've done just that.
So last quarter, we delivered our highest service level since the pandemic. We still have work to do because we're still experiencing intermittent supply disruptions given the challenges of the global supply chain, but we've made significant progress. That's allowed us to restore distribution where we believe it matters. And we don't ever see ourselves going back fully to where we were before, but we've grown total distribution points since fiscal year '20 by 14% and nearly all of our businesses are up from a distribution perspective.
And then merchandising. The vast majority of our business is sold at full price off the shelf. But merchandising plays a role, like I told you in innovation, introducing new ideas to consumers. It also matters around key pulse points like back-to-school. And if you take an example on our disinfecting rights business, we had such a great return to merchandising for back-to-school. We have the single highest share week in 4 years in this last back-to-school period, even through the high of the pandemic when Clorox wipe for the hot thing. And this has allowed us to strengthen our partnership with retailers.
So many of you know Kantar, they do an annual survey where actually retailers rank manufacturers, and we have grown significantly over the last couple of years in our ranking, including moving to the #3 spot and manufacturers under $10 billion. And we've improved in every single capability that retailers rate us against. Joint business planning, supply chain, sales team, co-marketing, sustainability, we've improved on every single one of them. And that lets us get back to the work of ensuring that we are delivering frictionless shopping experiences for our consumers.
This is an example in e-commerce. Our e-commerce business nearly doubled during the pandemic. And 10 years ago, many people would have said there's no way literal economics will make sense to ever do that online. But this is actually one of our biggest e-commerce penetration businesses, and it solves a consumer problem. Who wants to log a 30-pound box litter home from the store. They don't. They want to get this delivered and chewy.com does an incredible job along with many of other retailers. But we partnered with chewy on innovation, on having the right pack size, the right joint marketing programs. And as a result, we're the #1 litter on chewy.com, and we've grown our business at a 3-year CAGR of 17%. So this is an example of what we can do when we have the fundamentals right. We bring great brands with innovation to retailers who are really focused on their shopper.
Another example is in Burt's Bees. Burt's Bees is a really giftable holiday item. And people spend a lot of time thinking about what they're going to give people during the holidays. And we had the opportunity to partner with the women, Cleo Wade. If you don't know Cleo, she is an American activist, author and poet. She speaks really deeply to next-gen consumers who really want to make a difference in the world. And she happens to be a huge, huge fan of Burt's Bees. So we collaborated with her and target to put together a holiday program that included special packs, co-marketing, information back that connected people with Cleo and her messaging that really resonates with them. And we had put a great holiday program together, including huge increases in our social media presence, impressions, et cetera.
But importantly, for Target, there was a 20% increase in the retail sales during this holiday program off of a big program the year before. And probably even more importantly, given all the supply chain challenges we've been experiencing, the team collaborated so well together, and we had over a 90% sell-through rate of this. And this is the type of thing that we want to bring to retailers a holistic experience for their shopper where they can experience our brand well beyond just using a Wade Balms at home.
And then finally, as I said, the foundation for having great experiences for consumers is having strong brands, and we've defined that as being purpose-driven and personalized with superior value. And here's our report card on what we set out to do. We've talked about being 76% of our portfolio being superior. 100% of our major brands have been activated with purpose. We set that as a goal back in fiscal year '19. And why that matters, it's not purpose for purpose sake. It matters because brands with purpose matter more to consumers. And that's how we build superiorities because they care about the idea the brand stands for.
And then we set a goal to know in the U.S., 100 million consumers. The reason we want to do this is we want to personalize to them. We want to give them more personalized experiences. And when they share information with us, we can share a value exchange back with them. We're 75% of the way to that goal. And that has helped enable really incredible progress on our media spending. We already had very strong ROIs on our advertising. We went all-time high from a media perspective, 45% increased return on investment since -- before the pandemic, and we've continued to spend strongly behind our brands. So this gives us the confidence as we continue to invest in our brands that we're doing it in a way that's going to grow both top line and bottom line over time.
Okay. I hope those examples help you see how we believe that we're taking the right actions and that we have the right portfolio to both continue our top line momentum and rebuild margins. Kevin?
Kevin Jacobsen
Good afternoon, everyone, and thanks for joining us today. As Linda just said, we're confident our IGNITE strategy positions us very well to deliver strong financial performance as we move forward. And you folks will remember, when we launched our IGNITE strategy, our goal is to accelerate the financial performance of the company. And while we're confident in our ability to do that going forward, the reality is we've been more challenged recently based on the extreme cost environment we're operating in. But I'd say, importantly, we believe we're taking all the right actions that allow us to continue to invest in the top line momentum while taking the actions necessary to rebuild margins. And our commitment is to rebuild those margins back to that pre-penemic level, and that work is well underway.
I'll talk a little bit more about that. But before I do, I just -- I want to take a step back and talk about the value we've created for shareholders over a very long period of time. If you look at Clorox over decades, we've created a very strong return for our investors. The way we've been able to do this is we concentrate on driving profitable growth in our core portfolio, and we're disciplined in how we deploy our capital. And when we do that, we generate very nice cash flow, cash we invest back into the business to strengthen our competitive advantage. And then we return cash to shareholders. And over the last 5 years, we returned about $4.7 billion to our shareholders through our share buyback program and our dividends.
And as we look forward, you should assume we're going to continue to be disciplined in how we deploy capital. And if you think about our capital allocation priorities. For us, what I know, what Linda knows, and we have many of our leaders here, what the leadership at Clorox understands very clearly is how we generate the strongest returns is investing in our base business to create a profitable core portfolio. And that's exactly what we've been doing during the IGNITE strategy. If you look at the last 3 years, we've increased advertising investment levels. And as Linda just shared, we're seeing the results of that spending. We have the highest superiority we've ever had. We continue to increase our investment in innovation. And innovation is driving more top and bottom line results for us.
And then we've increased our capital spending. As a result of the increased demand for our products, we've increased our production capacity to keep up with that demand. And I think what's important is while we're making these important investments and strengthening our portfolio, we're also investing in the future of the company. Last year, we announced a $500 million investment to fundamentally change our digital capabilities. And while it's going to generate some nice value for us over the balance of our IGNITE strategy, this is really about an investment in the future of the company, setting us up to be competitive well into the future. And folks, while we're making these important investments in the business because we generate very strong cash flow, we're able to continue to support the dividend.
If you look at Clorox, you can see on the slide behind me, over the last 5 years, we've increased the dividend on average about 7% per year, operating in the top 1/3 of our peer group. And importantly, we've been able to do that while maintaining a relatively low level of leverage. Our goal at Clorox's debt-to-EBITDA of 2 to 2.5x. And as you can see, for the most part, during the last 5 years, we've operated at the very low end of that range. Now more recently, because of the challenging cost environment, we've seen our margins decline last year, and we've seen some compression on profitability. And so our leverage has ticked up a little bit. But we fully expect, as we rebuild margins, we rebuild profitability, we'll move that back down into our targeted range as we go forward.
And folks, I can tell you, if you are disciplined in how you deploy your capital and you focus on investing in your core portfolio, you can generate some very nice returns on invested capital. And that's what we've been able to do. If you look at our ROIC over the last 3 years under IGNITE strategy, we've operated in the top 1/3 of our peer group, delivering about a 24% return on average.
And as we move to our IGNITE strategy. And as Linda and I have both talked about today, our goal is to accelerate the financial performance of this company. The financial goals we've set is to grow top line 3% to 5%, expand EBIT margins annually 25 to 50 basis points and then continue to generate very strong cash flow, which we define as 11% to 13% of sales. And you can see over the last 3 years, during our IGNITE strategy, we've grown sales about 5% per year on average at the high end of our target. Now in terms of EBIT margin, we have not delivered on our goal. We have seen margins contract over the last year specifically. Now we believe the actions we're taking to rebuild gross margins, rebuild profitability, we will now return back to growing margins. That starts this year, and we'd expect that to continue as we go forward.
And then if you think about our sales progression, if I think about our performance over our previous strategy period, we generated about 2% sales growth per year on average. And then when we launched our IGNITE strategy, and our goal was to get more value from innovation program, as Linda talked about, as well as creating a more consistent, stable international division, we raised our target of 2% to 4%. And then as a result of the pandemic and the changing consumer behaviors that benefit both their cleaning and disinfecting portfolio, but they also benefit of household essentials portfolio. We further raised our goal of 3% to 5%. And as you've seen, we're operating at the very high end of that range.
And folks, I can tell you, we are quite pleased with our top line. We clearly have work to do as it relates to rebuilding margins. Importantly, as we've said, we are committed to getting back to pre-pandemic levels of gross margin, which for us was about 44%. And we believe we're taking all the right actions to put us in a position to do that over time as we move forward. We've taken multiple rounds of pricing, including our most recent round we just took in December. We continue to drive a very well-established cost savings program. Now each year, we target delivering 175 bps of EBIT margin expansion through cost savings. And this year, we'll exceed that goal.
We're also working to optimize our supply chain. I can tell you folks during the pandemic, we spent tens of millions of dollars trying to create resiliency in our supply chain, trying to manage through the global disruptions we were dealing with. As supply chain disruptions are starting to normalize, we're able to go back and pull those costs out. And that work is well underway, and it's contributing to our margin growth. And then we're driving admin productivity. As Linda mentioned, we launched an operating model change earlier this year. And while that's really being designed to make us a more competitive company, we also expect to save $75 million to $100 million as we implement the set of changes. And our digital transformation as we continue to drive this initiative, we'll expect to get more admin productivity. And so over time, we think we can move closer to 13% of sales.
I think the other comment I make here is these are the actions we're taking, and we're starting to see the results of this work. For you folks who follow us, you saw in our most recent quarter, we're starting to see gross margin expansion now. After about 7 quarters of declining to flat gross margins, we're now at a point where we had about 300 basis points. And importantly, we think that's going to continue. So we're projecting to continue to build margins through the balance of our fiscal year. And then we fully expect that to continue as we move into our fiscal year '24. So it's a good start. We have a lot more work to do, but we're making progress towards our goal to rebuild margins.
And so folks, let me end this presentation where Linda started. We believe the investment case in Clorox remains very attractive. We have a portfolio of leading brands that we're going to continue to invest to drive competitive advantage, further building out our competitive moat around our portfolio. We have a business model that generates very strong cash flow, and we're going to continue to be disciplined in how we deploy that capital.
All right, folks, we'd like to thank you for your time today. I do see we have a little bit more time. So Linda will join me, and we'd love to take questions from the audience.
Question-and-Answer Session
Q - Unidentified Analyst
Kevin, please.
Kevin Grundy
Kevin Grundy, Jefferies. Linda, question for you. Since taking over about 2.5 years ago, I think it's probably a fair characterization that the environment has caused you to be a bit more reactive than proactive than what you might have envisioned. So as you begin to see the benefits of the digital transformation, new operating model, a couple of questions. One, what do you see as the biggest areas within the portfolio and organization more broadly to unlock value? And two, how will this translate into superior financial performance for shareholders?
Linda Rendle
Yes, I think, Kevin, you characterized it right. I certainly didn't expect this. But this is a moment of opportunity, and that's the way that we viewed it as a team. The first opportunity was, of course, just to meet demand in a crazy environment. But the second was we have full ability now to look at the company and say, what do we need to do to maximize value over the long term. And that's exactly what we're doing. We've taken the opportunity to invest where we think it matters. And when we looked at ourselves and our performance over the pandemic, I mean, great to see the demand increases for our brand, et cetera, but we didn't move as fast as we could have. We didn't have the capabilities we needed to do that. And we were going to say not under our watch. We are going to fix that, and we're going to be stronger because we don't think the world is going back to what it was, it's going to continue to be more volatile. So I think we're making the right investments. I think we're taking the right short-term actions.
What I'm excited about is, as you saw, we have a great portfolio of brands that consumers love. They love them. How lucky are we that we get to be in 9 out of 10 U.S. households. We take that very seriously. So we want to get more out of the portfolio through innovation, and I think you heard that. And that's what our focus is. And it can't just be small innovations on the side. They have to be big innovations that are meaningful. And we have to push ourselves to do that. And I think we can do better. We can be faster at that. We've already started to get faster. We can be more digitally enabled to make that faster and have better insights and we can get clearer on what we're trying to solve for. And so we're in process of doing that.
And I think if you look at our portfolio, most benefited positively from the pandemic, Kingsford, the cat litter, the food. So there's so many trends out there that we can capitalize on, and I feel good about the vast majority of our portfolio. I've talked about places I don't feel as good. BMS is a good example we're continuing to work on. That has not been performing to our expectations small, but still not where it needs to be. So I want to lean harder into our brands, harder into innovation. And that when we do that and we take the pricing and cost savings, and we reinvest in those brands, we can create that virtuous cycle again where we return to profitable growth, and we must do that. And we know that's job one. I think I mean I heard people say it earlier today, you can't do one. You have to do both. And that's where I see the opportunity is. And then ultimately, it's a faster growing, more profitable company.
Unidentified Analyst
Andrea?
Andrea Teixeira
Andrea from JPMorgan. So on the last earnings call, you commented a little bit on how consumers have been behaving. And of course, you innovated well to keep that innovation and the value to the consumer. But can you comment a little bit on what happened most recently with the additional price increase if you're still seeing that same trend in the benign environment for that? And conversely, if you're seeing inflation relative to where you were and passing through for the supply chain partners that you have, I understand that you switched from a lot more 50-50 of third parties to now 80/20 to the historical level. So if you can comment on how you're seeing potentially like long sale inflation coming back to that?
Linda Rendle
Well, I'll start with the first, and then you can take the second. So as it relates to consumer behavior, what we've been watching really closely as we take our 4 rounds of pricing is how is the consumer behaving. And we felt really good going into those 4 rounds of pricing given our superior value and the fact that we've been investing strongly in our brands. And we have watched consumers begin that value-seeking behavior, but mostly within our own brands, we're seeing them move to value channels, which is not unusual. We've seen that before. We see them trading within our own portfolio. So trading up to larger sizes to get the best cost per use or moving to smaller sizes because they don't have a lot of money out of pocket to spend on a cleaning product that day, for example. And that behavior was continuing in the fourth round.
And we don't see anything at this point that's different. To be clear, we are still early in that fourth round, and we haven't gone through a full purchase cycle yet. So it's too early to say, is it exactly the same as the first 3. But that's what we continue to see from consumers and no meaningful trade down at this point to private label.
Kevin Jacobsen
And then, Andrea, I'd say on the inflationary front, it is still an inflationary environment we're operating in. And just to give folks some perspective of the magnitude of what we're dealing with, if you look at the inflation over the last 2 years, plus what we're projecting this year, that's about $1.6 billion worth of supply chain inflation. In a typical 3-year period for Clorox, we might be $250 million to $300 million. So it's that level of cost inflation we're dealing with.
Now last year was the most extreme year, $800 million of supply chain inflation. But this year, we're projecting another $400 million. And while we're seeing a little bit of deflation in the resin market, I would say that's being offset by just about every other major commodity we purchase. And so we expect every quarter this year through the balance of our fiscal year to be an inflationary environment, but moderating a bit as we move through the year. And I think the big question will be, where do we end up next year, and that's work we're doing right now. But where does the commodity environment go next year? And it's a little too early for us to call that.
Jason?
Jason English
A couple of questions. So first, in terms of the long-term EBIT margin expansion, 25 to 50 basis points, you felt obviously well below that last couple of years, a substantial drop. This year looks like it's a year where you're going to exceed the long-term target on the recovery. Should we expect you to be exceeding that for the next couple of years as we recover that?
Kevin Jacobsen
Yes, Jason, I think that's exactly right because our commitment is to rebuild gross margins back to those pre-pandemic levels. And folks, we're about a 44% gross margin when we started back in fiscal year '19. We ended last year at 36%. So that's 800 basis points we've lost, and we're working to rebuild that. So to your point, Jason, as we rebuild that I'd expect to see accelerated EBIT margin expansion until we get back to a more normalized P&L and then get back to that more normal cadence of 25 to 50 bps.
Jason English
That's helpful. And then a quick question on visibility, your visibility to the business. I think one of the trades that many of the trade investors used to really love about Clorox is the consistent, predictable, repeatable nature of the business. You did like the same results year in, year out. It's been really hard to call the last couple of years. I know the external environment is really volatile, but you were calling down, you couldn't find the bottom in the last 2 years, and now you're having a heart on kind of finding the top like you're missing your margin targets every quarter by hundreds of basis points. What has made the business even like so far post the pandemic, why is it still so hard to predict? And why is it so volatile relative to your own expectations?
Kevin Jacobsen
Yes, I can talk about that. So last year, we had several negative revisions. We just fundamentally called the commodity environment wrong last year. If you remember, we started off the year thinking we're going to have about $300 million worth of cost inflation. And you folks may remember the term transitory, and I think we assumed as transitory as well. And we got behind the curve. We ended up with $800 million worth of supply chain inflation and I'd say we chased that for a good portion of the year.
I think what's different this year is our expectation was about $400 million of supply chain inflation. We're more than halfway through the year, and that still looks right to us. I feel like we called the cost environment right. We're taking the right pricing actions. And as a result of that, we're delivering, if not exceeding expectations. But there's no question, last year, we just didn't get it right in terms of cost inflation.
Linda Rendle
Jason, I had one more thing that's really hard to predict. And every one of our categories had a significant COVID impact. Actually, Charcoal was our largest grower if you look at those 3 years. And so getting the consumer rights on 2 levels: 1, exactly what curve were they going to follow in terms of when they were leaving home, different parts of the country, their reaction to COVID across all of our categories has been difficult to predict and now normalization. We're getting better at it, but that has been difficult to predict. And that is playing -- in addition to the inflation, those 2 things together have made it more difficult and less predictable. We are getting, again, better, but we will want to get closer to the pen every time.
Unidentified Analyst
Folks, I apologize. We have just a couple of minutes left, and hopefully, we can continue this in our breakout session. Linda, just a couple of closing remarks, and then we'll take questions in the small room.
Linda Rendle
Okay. A couple of closing remarks. So first, we have a Hidden Valley. We didn't talk about in Valley today. But if you like ranch, we made it fresh for you today. Today, it was made. And it's out there at the fountain. I know you can't take it with you though, but you can try it while you're out there during the break. So get recharged with the Hidden Valley fountain. On a more serious note, it's great to see the diversity improving in this room, but I have to make a note that the diversity on this stage is not where it needs to be. There are 5 women out of 69 and not enough people of color and other forms of diversity. So I'm hoping each one of us can take note of that. And I know the CEOs on the stage take it very seriously, but we have to improve.
And I'm so glad again that we're seeing the room improve, but we need more diversity up on the stage in leading companies. And I'm proud to be representing a company as a woman where most of our consumers are women, but we need all more forms of diversity. And then finally, just a huge thank you for the time. It's a lot to listen to, and we appreciate your attention. We think we've taken the right set of actions, and we have the right portfolio for us to continue our top line momentum and rebuild margins, and we appreciate your questions and your attention. Thank you.
Unidentified Analyst
Thank you for the breakout. Thank you, Linda. Really appreciate it.
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The Clorox Company (CLX) Presents at CAGNY 2023 Conference (Transcript)