Operator:

Good day, ladies and gentlemen, and welcome to the Clorox Company Fourth Quarter Fiscal Year 2024 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Ms. Lisah Burhan, Vice President of Investor Relations for The Clorox Company. Ms. Burhan, you may begin your conference.

Linda Rendle:

Thank you for joining us today. Our fourth quarter fiscal year 2024 results reflect the continued advancement of our strategy to strengthen our competitive advantage, accelerate profitable growth and set up our company for long-term success, all while navigating a recovery from the cyber-attack earlier in the year. Thanks to the team's execution, we ended fiscal year 2024 in a position of operational strength. We fully restored supply and distribution and recovered most of the market share that we lost. We closed out with flat organic sales for the full year, despite the significant disruption caused by the cyber-attack, which drove an 18% organic sales decline in the first quarter. Importantly, we continue to deliver on our commitment to rebuild margin to fuel growth, delivering our seventh consecutive quarter of margin expansion. We're on track to return to our pre-pandemic gross margins in fiscal year 2025. We also achieved another year of double-digits adjusted EPS growth. As we look ahead to fiscal year 2025, consumers will remain under pressure, which will continue to temporarily increase competitive activity and impact category growth. That said, we have a portfolio of strong brands in essential categories that have shown resilience during challenging times. We have and will continue to invest strongly behind our brands to maintain value superiority. While we have more work to do, we are confident that we have the right plans at investment level to win with consumers and deliver strong financial performance in fiscal year 2025, supported by a return to volume-driven sales growth, pre-pandemic gross margin and free cash flow in line with our long term goals. With that, Kevin and I will take your questions.

Filippo Falorni:

Linda, maybe I wanted to start with just the visibility on the top-line outlook. Obviously, you called out the dynamic in the first and second half. But given the consumer environment and the weakness that you're seeing and the promotional intensity in some of your categories, why are you expecting more of an underlying, particularly in the back half of the year from a volume and pricing standpoint? Do you expect still negative pricing to drive the volume growth? Any more color on the top-line outlook, understanding the dynamic in the first half?

Filippo Falorni:

And maybe one for you Kevin, on the gross margin clearly, outdelivery this quarter. What surprised you to the upside in the quarter? And as we think about next year, there was a lot of volatility in the manufacturing and logistic in the commodity front, maybe some level of expectation on those items for next year?

Operator:

Our next question will come from Peter Grom with UBS.

Linda Rendle:

Sure, Peter. I'll start us with that. And I think that's a helpful place for us to go a bit more into household and what happened there. That was the bulk of the miss that we had in Q4, but feel like a number of these businesses, to your point, we saw good trends heading out. First I'll cover, which you all know that our grilling business, the largest quarter we have is Q4. It's about 50% of our business and it's a heavily weather dependent business. Unfortunately, for both Memorial Day and July 4, weather was terrible in the U.S., very rainy for Memorial Day and extremely hot for 4th of July and that meant the category was down anywhere from high single-digits to double-digits. And as a result, our Kingsford business came in short of expectations. I don't look at that as any type of structural issue in Kingsford. We had good merchandising plans and where consumers did pull, we saw good take through. I think that is simply just the effects of weather, and obviously a portion of why we didn't deliver. And then two other businesses, which I'll break down in a little -- each is a little bit different. They share some same characteristics. But we've spoken a lot in the past about Glad and Litter. And those were the other two that contributed to the Q4 mess. And in the case of Glad, distribution recovery happens later in the quarter than we had expected, but we have fully recovered distribution. So feel very good on the exit rate from a distribution perspective. And as well, we talked a lot about the fact that when we were out of stock, we had a harder time getting our large sizes back, which is one of our biggest growth levers and critical consumers. They're looking for large sizes. They're going to buy a large size than another competitor. So we didn't know exactly what that purchase cycle would look like and that happened again later in the quarter when we saw people come back to our large size business. That being said, we think that was largely a Q4 dynamic. We have strong plans in place for fiscal year '25 across spending and innovation. And then just some data points to kind of show the extra rate coming out. Obviously, distribution, as I said, was fully recovered by the end of the quarter. That happened a little bit later than we expected. Shares trending in the right direction. We were down nine-tenth of a share point in April, but up to just down two-tenths of a share point in June. So a very big change as we got that distribution in place. We're back to growing share at our largest customer. And then on that very important large size business, that was actually one of Amazon Prime Day's number one sellers. And so feel like Glad is in a great position to deliver the growth that we expect it for in 2025. And then finally, for household, I'll cover Litter. And Litter is a little bit of a mixed story. Certainly saw improvement as we went through the quarter. We got distribution back to what we expected it to be, et cetera. But we are not fully capitalizing on the growth in that category at this point. And we have the operational things in place to do that. We've fully recovered supply. We have our customer service levels back to where they need to be. But, we recognize that this is a category that's going to take a bit more time due to its nature. Just a few things to keep in mind. One, you have some consumers who -- it's difficult to switch because their cat's used to a Litter. And that's a little bit more of a headache to switch litters back and forth when we were out and now back in stock. So we're working through that. We're beginning to regain those consumers back, but it's taking some time. This is a business that's heavily on subscription, which I've spoken about before. And while we've made progress getting people back to their subscriptions for fresh step, we still have more work to do. Then we've seen increased competitive activity as people become more value focused, et cetera. And so I think that dynamic in the category combined with just what's going on in the broader context of the categories, where everybody is really attuned to delivering for consumers given how stressed they are, that's a business that's going to take a little bit longer to recover. I feel fully confident in our ability to do it. We have strong innovation on that business. We have strong spending. But that's one that we're working week in and week out to get those consumers back and it's just going to take a little longer than we had originally expected. If I can to ladder all that up, I feel good. We had one business that was weather related, Glad on the right track, Litter improving, have more work to do. And I think that's what we're going to be working on that for the next couple of quarters. But we're really happy with the progress. We have superior value brands. We're investing them in strongly. And there's growth for us to go get. Litter is one where we haven't fully participated in that growth and we are laser-focused on ensuring that happens in '25 and beyond.

Andrea Teixeira:

Linda, if you can elaborate more on the elaborate more on the category health? You spoke a bit about how consumers continue to seek value. Wondering, if you can go through the key categories and give us a state of the union. And also in related to that, the RGM capabilities, I know you've in the past have done a lot of that. I wonder if you are, as you set up this 3% to 5% organic sales growth for fiscal '25, if you're deploying some ways of RGM that could help you achieve that.

Operator:

And we'll move next to Chris Carey with Wells Fargo.

Kevin Jacobsen:

Yes. Hey, Chris, on Q1 sales and as you referred to our guidance of we think it's going to be 20%, 25% growth. And keep in mind, we're lapping an 18% decline in organic sales growth from the prior period. We think that growth is driven by both recovering from cyber as well as the strength of our demand plans. Now as I mentioned, that will be partially offset by increased trade spending. In this normalized environment, we're now lapping a period in front half of last year, when we were at a depressed level of merchandising support because of the out of stocks. And so you'll see good strong top-line growth modestly offset by increased trade spending in the front half of the year, which will depress it a bit. And then, as you get to the back half of the year, we average about a normalized level of spending in the back half of '24. I wouldn't expect much of a price mix impact year-over-year in the back half, but a little bit more pronounced in the front half.

Kevin Jacobsen:

Yes, sure. On the gross margin lines, you talked about sequentially going from Q4 to Q1. As we said, we think we're going to have a good solid quarter in Q1 up 400 basis points to 500 basis points, but that will be lower than what we landed Q4. Part of it is what I mentioned. The reason we over delivered Q4 is because of this BU mix. We just sold less household products relative to the rest of our portfolio. We don't expect that to be the case in Q1. We expect those businesses to continue to recover and take a larger portion of our sales in Q1, so you won't get that that temporary benefit. And then in addition to that, I talked about the trade spending. You'll have a bit more of a trade spending drag in Q1. And then lastly, some of it is just based on our cost savings timing. We have hundreds of cost savings projects that have natural timelines and so those play out over the course of the year. I'm not particularly too concerned about how it plays out in any given quarter as long as we deliver good strong cost savings for the year, which we expect to do, but that'll have some impact on quarters as well.

Kevin Jacobsen:

Yes. On the 3% to 5% organic sales growth, yes, our expectation will have good strong growth in the back half as well for both volume and sales. When you think about our sales of 3% to 5%, we expect this to primarily come from growing volume and growing share and we expect it to happen both in the front and back half of the year.

Bonnie Herzog:

I had a quick follow-up on Litter. Linda, you mentioned more work to do and mentioned strong innovation you have. So could you maybe touch on some of that for us? And then whether there is more innovation planned to be rolled out in FY'25? Also, could you give us a sense of the magnitude of increased spend levels you'll need to win these consumers back? I guess, maybe just a big picture on trade spend and promos, how big of a risk you see for spend levels to go beyond what you're factoring into guidance? I guess I'm asking, given the retail and consumer environment.

Bonnie Herzog:

And maybe just a quick second question on your EBIT margin. It's still below historical levels. In the context of everything you just mentioned, how should we think about further recovery and essentially ultimately seeing when they could reach historical levels? And I guess, I'm asking the context of, again, everything you just mentioned, Linda, as well as gross margins becoming less of a tailwind moving forward and then certainly A&P investments and the increase and the expectations there?

Operator:

Your next question will come from Dara Mohsenian with Morgan Stanley.

Kevin Jacobsen:

Yes, as it relates to our 3% to 5% goal, that will come from volume growing slightly above 3% to 5%. And then our expectation for price mix is modestly negative, and that's primarily driven by this increased trade spending I talked about in the front half of the year to get back to a more normalized level of merchandising support. We don't have any meaningful pricing in the plan for fiscal year '25. We'll do a little bit internationally, but that won't have a ceding impact on the top line. It will be primarily coming from volume with a very modest offset in price mix.

Linda Rendle:

Yes. It does. It's one of the steps that we take to ensure our financial algorithm is in a good spot. We're committed to continuing to evolve the portfolio in Argentina and VMS are great examples to ensure that we have businesses that are less volatile in the case of Argentina and businesses that we feel can deliver the consistent and profitable growth that we need to, and that really comes down to our decision on VMS. Both of those support a more stable, consistent sales growth. Both of them support margin expansion, as Kevin covered and a more profitable business overall. Obviously, that will have an impact to reported sales this year. But if you look at organic, it's pretty strong. And then as we move forward, what I think it really allows us to do is, focus on the places where we have growth opportunities. It allows us to focus in places like Litter, where I said we have more work to do, in other parts of the business, like international that has grown above our sales average. PPD, which we feel confident now is returning to a stronger grower in the portfolio. So that really in the future as we look to '25 and beyond, not only does that create a new base to grow from that is stronger, but it also allows us to focus on the opportunities in front of us.

Kaumil Gajrawala:

On advertising, I saw in this quarter it was at about 14% of sales. Is that just a little bit of maybe a step-up in spend as you got one into the end of the year, just setting you up for next year? Is there something else going on?

Kaumil Gajrawala:

And then on promotional activity, but in the context of thinking about gross margins and promo activity, is the assumption that the levels that we're at right now in terms of train spend and promo is where we're sort of leveling off? Or is there an assumption, that it's going to continue to climb over the course of the next calendar year and that 100 bps of gross margin expansion incorporates the likelihood of promos increasing still?

Operator:

Our next question will come from Kevin Grundy with BNP Paribas.

Linda Rendle:

Yes, Kevin. As you can imagine for '25, we look at a number of scenarios on what the right level of spend was on advertising on promotion. And our general managers, we pushed them to say, are there incremental spending opportunities that are good, decent short-term payout but would contribute long-term even more. And what they came back with was that 11% to 11.5% range that we had. We think that strikes the right balance. Here's maybe just a little bit of thinking about what you're seeing in share and what we expect and why we're comfortable with the 11% to 11.5%. If you look at share for the extra rate of what we had in June, less than three quarters of recovering from a pretty major cyber events where our distribution, et cetera our distribution was down a third. We lost five full share points. We ended June down three-tenths of a point in share in aggregate. I don't love being down in share, but I think that speaks to the power of the plans, our execution and our brands. To be clear, we intend to grow share in fiscal year '25. But what we're seeing is, just as we restored distribution, which happened mostly in May and June, we haven't even had a full purchase cycle with the consumer yet, which is about 90 days on average. What we're seeing is household penetration begin to rebound. It's not exactly where we want it to be right now, but generally things are all moving in the right direction. And that spend of 11.5% and the increased promotional spend we think is prudent based off of that. I'll be clear though, if the year starts to play out differently and we are not seeing what we expect from our businesses share improve, we feel absolutely comfortable coming back and saying, we need to spend more. And I know I think that would be met positively. But what we're trying to balance right now is top-line growth, ensuring that we have the fuel by expanding margins. We think we have that balance right, right now. And as I've said time and time again, we are not afraid to spend just like we did 14% in Q4 if we feel it's the right thing to do for the business for the long-term.

Robert Moskow:

Hi, thanks for the question. I guess we can wait for the 10-K, but can you give us a kind of a snapshot on how cash flow ended for the year? It was down for the first three quarters, but wanted to know if there's any kind of recovery in fourth. And then, how should we look at fiscal '25? Is it kind of a -- can we take the net income and kind of just add D&A and subtract CapEx? Or are there any kind of cash expenses that will really hit it or working capital changes that we should be aware of?

Robert Moskow:

Where does that stand in your priorities for how to return cash to shareholders? Would there be a step-up in fiscal '25 or does it depend on other factors?

Operator:

And your next question comes from Javier Escalante with Evercore ISI. Just one moment, please. Then it looks like his line has disconnected. We'll move to our next caller, Olivia Tong with Raymond James.

Kevin Jacobsen:

In regard to I think you mentioned gross margin primarily. If you look at gross margin, what drove the roughly 360 basis points of improvement? For us, it was another very good year of cost savings, and I really credit our team in spite of the cyber disruption, folks stayed very focused on delivering the productivity improvements that we're counting on. And so we delivered 180 basis points of gross margin expansion through cost savings. That was a very good year for us. We also had pricing primarily in international markets, and that was really Argentina prior to the divestiture, but that certainly contributed to gross margin expansion as well. And then lastly, I'd just say, we've moved into a commodity environment that's fairly benign. If you look at commodities, we've been dealing with tremendous amount of inflation the previous two years. This year is essentially flat, we had no real commodity drag and you had all the benefits of cost savings and the pricing actions we took flowing through to the bottom line. Those are really the primary drivers.

Linda Rendle:

Sure. Maybe I'll just close the point on margin, Olivia that you made. Kevin certainly outlined exactly what happened. I think what I would just note is, our continued confidence in the overall margin transformation program we put in place, that's leading to this type of sustained increase in cost savings. We're pulling levers that we pulled before in new ways and we have completely different capabilities that we've built, as well and we're enforcing that by investing in our digital transformation, so better access to data and insights and allowing us to move quicker. I think that's really what we've been pleased to see as it's played out. We have increased confidence and obviously giving us confidence to return to pre-pandemic gross margins, which if you look at the last few years, that's a significant feat given what we had experienced from a commodity increase perspective and overall inflation. That's what I would call out as we continue to get more and more confident about that and it gives us confidence in fiscal year '25 to return to those margins. And I think to Kevin's earlier point that gives us the flexibility to invest if we need to. We feel like we have the right investment levels now, but given the fact that we've made such strong progress there, if we need to invest more, we are ready to do that. And then your point on household penetration, as the industry took pricing, one of the trade-offs we always know that happen at a time when you take pricing is you trade-off household penetration and usually that's temporary. And that happens for a number of reasons. Consumers, you have elasticity and elasticity plays out in a number of ways. Consumers leave the category, consumers decide to behave differently within the category, they make substitute, they have longer purchase cycles, et cetera. And then as you see pricing roll through, you see consumers naturally come back, because they find their alternatives didn't work or they go through all of their pantry. We'd expect to see that happen naturally. But then the work that we're doing is really focused on ensuring that, we are focused on superior value, that we offer them a value that when they go and they're choosing their household essentials that they return to the category and they return to Clorox Brands. And we're seeing that, over the last couple of quarters with some improvements in household penetration. We would expect to see that continue and support the volume driven growth that we'll have in fiscal year '25. But there's a combination of things that we think about in this. Superiority is a combination of pricing, the brand and the product experience. We are ensuring that we have the right price points, which we feel good about. And as I've said before, we continue to look through our net revenue management work to ensure that price points and price gaps are where they need to be. They largely are, but we will absolutely take on if we see a place where our price gaps aren't where they need to be and we'll do that work to ensure that we have that. And we'll use things like price pack architecture to deliver even additional value to those consumers, who may have exited and need a different pack size or buying in a different channel. And then, if you think about product, that's where really innovation and focusing on claims matters. We had a strong innovation program this year. But what I would just emphasize is the last few years, we've had a number as the world has, but I think in particular if you think about Clorox, a number of operational disruptions outside of our control. And we've been trying to balance both margin, earnings, top-line and I think we've done a good job at that. But the organization now is really focused on returning maniacally to growth, given our confidence in margin rebuilding, given our confidence in the brands. And so we are really focused on where is our product need or boost from claims perspective. We are -- pretty innovating. How can we make our innovation even bigger and how can we bring to life those platforms that we intend to launch. And I'll give you maybe just an example of one that doesn't feel like a big deal, but is actually having really an impact in the marketplace, and that's Clorox Scentiva. We launched that a number of years ago. It was very successful. And I talked about in CAGNY that we were going to relaunch Scentiva. And we did that with better claims, better scent profiles and we've actually had the largest quarter in Q4 on Scentiva that we've ever had. A good example where the team is getting laser-focused on value and we're bringing in consumers who maybe can't afford anymore to buy a cleaner and an air freshener and they're getting a great value by having an all in one product with Clorox Scentiva. Good examples of where by category we're being pretty maniacal about that. And then finally, investment. As I've said, I feel like we have the right level of investment on [ANSP] and promo to do exactly that making sure we're capturing consumers at back to school, during times when their family gets ill, reminding them what we can do to keep them safe as well as talking about the trust of the brands and the promises that we deliver. All of that adds up to growing household penetration over time. That's what the team is focused on is, how do we return them to the levels that we were at before and grow them from there, and that it will be part of how we grow share in fiscal year '25.

Lauren Lieberman:

Linda, I mean your last answer gave a lot of color on this, but the implied market share gain, I think is very significant. I hear you on the kind of trend line and where you've gotten back to and more or less flattish. But talking about volume growth north of three to five in a category backdrop that you've described as challenged, resilient but challenged consumer just feels like a really big push. I guess number one, would be why start out with such a high bar? Because again like mid-single-digits volume is a big number and it just yes -- I'll leave it there as my first question.

Lauren Lieberman:

And then if I can just follow-up on some gross margin components. Kevin, you've been super clear that mix is a big contributor this quarter. I just want to clarify, was that in that logistics and manufacturing line? And if you could give any guardrails for like roughly how big it was just when we think about next year's comparison? And then also commodities for fiscal 2025 kind of flattish or is that expected to be a benefit?

Operator:

And we'll go next to Anna Lizzul with Bank of America Global Research.

Linda Rendle:

Yes. The digital transformation, we're really pleased with our first wave of our ERP and global finance, rollout that happened on July 1st went very well and gave us strong confidence that, we have set up that wave to learn when we do the new U.S. coming up next year. And so, we have been maniacal about documenting everything that we've learned to set us up for the biggest transition that we have coming on that ERP portion. And as what you saw, we've talked about the fact that, that was delayed due to the cyber event. But we're still on track to finish the program, in fiscal year '26. And we'll make again strong progress this year on the ERP. Next year, the U.S. will come online, and we have additional capabilities coming online as well. We were able to reshuffle some things so that we end the program about the same time. We have seen some value, as you think about the overall digital transformation we have in place as we put our data lake in place, you saw that through things like our marketing efficiencies that we've already had early results on but the bulk of the value that we get and this is a very strong return on investment project comes in '26 and beyond as we complete the implementation of the ERP.

Steve Powers:

I know we're running longs, but a couple of questions if I could on that 3% to 5% top-line goal for next year. I guess maybe this gets a little bit at what Lauren was asking about, but is there a way to think about how that compares to the assumed rate of consumption growth in fiscal 2025? I'd expect maybe a couple of points at least of net distribution gains contributing to shipments. So maybe assume consumption running below 3% to 5%, but just wanted to clarify and hopefully quantify that gap. And then as you're talking about it, if we think about it across the segments and just talk about segment variability relative to that goal, are each of the segments expected to run essentially within that range? Or do you see room for some -- any to run notably ahead or below? It seems to me like household and international candidates to run modestly ahead for different reasons, but I just want to play that back for your reaction.

Steve Powers:

And then if I could, Kevin, you may not want to go here, but I'm going to try anyway. Just you mentioned the structural benefits from the portfolio reshaping, the exit of Argentina VMS, those benefits of margins. I'm wondering if you could give us some kind of quantification or order of magnitude as to how material that is, as you think about the margins that margin improvement is embedded in the '25 guidance?

Steve Powers:

You appreciate the framing. I appreciate the answer.

Javier Escalante:

I have no clue what happened, so let's see whether it works this time around. I would like to tackle the household business slightly different. When you step back, it's rare when you see negative pricing and negative volume at the same time? And I know that you spoke a lot about promotional activity, but to what extent the volumes are telling you is that you took too much pricing? And I have a follow-up.

Javier Escalante:

And then the second question has to do with A&P spending or marketing spending. And one particular business that looks very weak in [Circana data] that includes Ulta as well and Amazon and Burt's Bees. So the brand has been weak for a long period of time. It goes through channels that are not compatible or not the same of the balance of the portfolio. And you compete with companies that spend multiples of 14% in marketing, like over 30%. The question is, as you review the portfolio, do you think that you are competitive in Burt's Bees or you will consider adjustments?

Operator:

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

Operator:

This concludes today's conference call. Thank you for attending.

Operator:

Good day, ladies and gentlemen, and welcome to the Clorox Company Third Quarter Fiscal Year 2024 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Ms. Lisah Burhan, Vice President of Investor Relations for The Clorox Company. Ms. Burhan, you may begin your conference.

Linda Rendle :

Thank you for joining us today. During the third quarter, we continued to progress our recovery from the August cyber-attack while advancing our Ignite strategy to build a stronger, more resilient company. For the most part, our progress in the third quarter was in-line with our expectations. Sales came in lower, as a few businesses experienced slower supply recovery than we planned. Gross margin came in higher, benefiting from our margin transformation program and a [modernized environment] (ph). Despite lower sales and strong investments in our brands, we finished the quarter ahead of our expectations on adjusted earnings per share. Before we turn to questions, I think stepping back and putting these results in context is important. Given the magnitude of disruption from the cyber-attack, we knew our plans to restore the fundamentals of our business would be complex, and a recovery path would not be linear. We have made tremendous progress and are laser-focused on finishing the job. We tracked well ahead of our expectations in the second quarter and knew we had more work to do as we entered the back half of the year to return our business to the strong trajectory it was on at the start of fiscal year 2024. This included fully rebuilding inventories, restoring normalized service levels, and rebuilding commercial plans for each of our businesses, which we accomplished by the end of the third quarter. These actions unlock our ability to fully restore lost distribution due to the cyber-attack and return to normalized merchandising levels as planned in the fourth quarter. Through Q3, we have regained nearly 90% of the market share we lost and expect to make further progress in Q4. With service levels now normalized and strong investment levels behind our brands, we're confident we can rebuild household penetration and return to volume growth over time. Despite the significant disruption and lost sales we've experienced and based on our team's strong work, we are now positioned to exceed our original gross margin target and meet or exceed our adjusted EPS guidance we provided at the beginning of the year before the cyber-attack. Importantly, our recovery progress to date puts us in a good position to exit fiscal 2024 with strong fundamentals. In addition, we continue to execute well against our IGNITE strategic priorities throughout our recovery. We made substantial progress rebuilding gross margins, continuing to target returning to pre-pandemic levels over time. We launched innovation invested in our brands and capabilities, progressed our streamlined operating model and digital transformation, and completed the divestiture of our Argentina business, which supports our goal of evolving our portfolio to deliver more consistent and profitable growth. In closing, we're taking the right steps to navigate the near-term and continuing to advance our IGNITE strategy. I'm confident we have the right investments and plans to deliver against our strategic and financial objectives and enhance long-term shareholder value. With that, Kevin and I will take your questions.

Peter Grom:

Thank you, operator, and good afternoon, everyone. Hope you're doing well. I was hoping to get some more color on kind of the implied 4Q organic sales growth and how this informs you on kind of the path forward here. I know this was always the case, but it seems like you're expecting to kind of close some of these distribution gaps of 4Q, more or less implying that you're going to overship versus consumption. But when you kind of look at the implied 4Q guide and to kind of where you need to be to land at the low end -- of low single digits for the year, doesn't really imply a ton of growth considering this dynamic. So maybe first, am I thinking about that right? And if so, how does this exit rate inform your view on the growth looking out to next year just in the context of the long-term algorithm of 3% to 5%? Thanks.

Kevin Jacobsen:

Hey, Peter. You know, as it relates to the outlook and I think specifically your question, organic sales growth in Q4. What I expect to see occurring this quarter is improving volume trends. If you look at our volume performance, we're down about 7% the front half of the year down 4% in Q3. I expect that to continue to improve as we move forward. I also expect we'll see some increased trade spending. We continue to work back towards a more normalized promotional environment. Q3 was still below sort of that normal level, so I think you would expect to see some increased trade spending. And then as a result of the divestiture of Argentina business, it's gotten a lot simpler. I don't expect any FX headwinds. I don't expect any meaningful pricing now. Most of our pricing was in international -- that would all go away. So you should see improving volume trends, a little bit of uptick in trade spending, and that gets you down to probably flat to down a little bit in terms of organic sales growth in Q4. And that would keep us on track to be up about 1% for the year.

Kevin Jacobsen:

Yeah, I think there's a few things. You saw where we landed, Peter, in Q3, a little over 42%. We think we'll be closer to 43% when we exit. You know, as Linda said, we're not prepared to provide our outlook for next year. But I would tell you, we fully expect to continue to expand margins in fiscal year ‘25. So we'll exit this year. You know, over the full year, we're probably up around 42%. And I expect a bill on that next year.

Kevin Jacobsen:

Thanks, Peter.

Andrea Teixeira:

Thank you, everyone, and good afternoon there. Linda, you mentioned in the prepared remarks few areas of the portfolio that experienced slower supply recovered than planned, that impacted the third quarter. And I understand the 10% that you mentioned that still is below the service levels. But relative to your 2% organic growth, how much was out-channel consumption given also comments in that same report that you experienced consumption losses? So can you elaborate more on which areas you were still below in share and what gives you confidence that the consumers you lost during that period within your consumption patterns would come back. And then Kevin, a clarification on what you just said about building margins into 2025 -- the fiscal 2025. How do you see rising prices in other commodities? Are you embedding these two inflationary commodities and how would you expect to offset that? Is that mostly on the savings? They IGNITE, how we should be thinking as we move forward.

Kevin Jacobsen:

Andrea, your question on ‘25 and gross margin, you know, as I'm sure you can appreciate, we're still in the process of building our plans right now for ‘25. But where we're sitting at today, I fully expect we're going to be growing top line, expanding margins, growing earnings. And so as you think about how we grow margin, I think to your specific question, certainly top-line growth helps build margin. Additionally, divestiture of our Argentina business, that was [margin-diluted] (ph) to the company. So, divesting that business certainly helps our margin. And then our margin transformation efforts. We think collectively that more than offsets what we believe will be a level of cost inflation but continue to moderate. So, we do not believe right now we're going to be in a deflationary environment next year. There will be some cost inflation, but it continues to moderate. And the actions I just mentioned we think are more than enough to offset that and allow us to continue to build margin next year. But the exact amount we're still working through.

Kevin Jacobsen:

Yeah, we don't break that out, Andrea, specifically. But I can tell you it was significantly below the company average in terms of gross margins. You can probably do some math. It was 2% of sales and well below the company average in terms of gross margin.

Kevin Jacobsen:

Yeah, thank you.

Christopher Carey:

Hi, everyone.

Christopher Carey:

I wanted to ask about sales delivery in the quarter excluding international. So in the prepared remarks, you spoke about increased competitive activity as you were trying to get back on shelf. Price mix was negative in your key division in the quarter. And I'm trying to marry that with, I think you had sounded quite good recently on the logistical dynamic of getting back on shelf in the quarter. And so I guess I'm trying to put maybe altogether the why behind sales coming in a bit below your expectations and whether competitors are perhaps a bit firmer on shelf and share gains than you had expected, and you need to increase competitive spending, whether that's in price mix? And obviously, you called out some trade promo in your gross margins this quarter, to get back on shelf and whether you think to your comment to the prior question, you may need to actually accelerate that spending over the next several quarters if this shelf-uplift is not exactly how you expect. So you can tell, I'm trying to wrestle between not just that sales came in below the expectation, but the why and some of the actions that you seem to be taking to try and rectify the situation.

Christopher Carey:

Okay. One quick follow-up would just be Manufacturing and Logistics was a 210 basis point negative impact to gross margin in the quarter. That's a pretty notable step-up. And I don't think we're seeing logistics inflation at that level. Kevin, can you maybe just contextualize what happened there in the quarter? And whether that specifically is durable going forward or whether this is just an anomaly? Thanks.

Christopher Carey:

Okay, thank you.

Dara Mohsenian:

Hi guys. I get you don't want to be too explicit for fiscal '25 at this point, but I just had a follow-up question on top-line growth as we move into next year just relative to a normal base this year. Kevin, can you just talk about or Linda, any puts and takes as you look out to fiscal '25 as we think about top line growth? And maybe also just quantify what level of sales did you lose in fiscal '24? Do you expect to lose in fiscal '24 from the systems issue relative to a typical year?

Dara Mohsenian:

Okay. And then on gross margins, you talked about a CAGNY to focus on holistic margin management and RGM. Can you give us a little more color on how important that might be over the next couple of years? And as you think about recovering gross margin pressure over time as you indicated in the prepared remarks, is that a big piece of the recovery? And as we think about the recovery, is this a multi-year effort? Should we think about a lot of progress coming out in fiscal 2025? How do you think about that conceptually from a timing standpoint?

Dara Mohsenian:

Okay, thanks guys.

Operator:

Our next question comes from Anna Lizzul of Bank of America. Your line is open.

Linda Rendle:

Sure. We're seeing pressure across all consumer groups. And we are seeing behaviors broadly outside of our categories changing for nearly everyone, as they evaluate what's going on. And as they think about what's happening in the future whether that come down to the interest rate environment, et cetera, cost of housing, a cost of a basket of groceries when they go to the store. So we are seeing that behavior quite broadly, and we called it value-seeking. People are buying larger sizes, they are buying smaller sizes and they are thinking about the trips they take, et cetera. I would say, in particular, we always have our eyes focused on the lower income consumer as they are more pressured. And I -- and to-date, we have stood very well with them. And we tend to do it during times -- tough economic times for low-income consumers because we deliver products at a great value that work really well, and they can't afford to make a mistake in our categories. And so we typically fared-well, and we continue to see that we are doing well with low income consumers. And we haven't seen a material trade to private label that isn't due to the cyber-attack. And of course we are watching that closely as we get our distribution and our merchandising back, but we largely believe private label growth is due to the fact that we weren't on the shelf. And we are seeing Q3 their share was lower than it was in Q2. We are seeing all the right indicators our households are coming back that might have tried private label during that time when we were off the shelf. So we're watching all income tiers always focused on low income, but that was a very general comment to say that all consumers are under more pressure and are certainly evaluating their behaviors and how they are spending their wallet. And then when it comes to our spending plans, we had always anticipated that we would return to pre-pandemic merchandising levels before we even saw a more stressed consumer. Because we just thought that was the right level of spending to ensure we were introducing people to new innovation making sure that we are capturing new behaviors in times where consumers are open to that. For example, when they send their kids back to school or when they send the kids to college. And so we'd always anticipated that, and that -- this promo though does also support our return to share growth and our return from a distribution perspective. So we like that it works doubly hard for us. But I wouldn't say, we are doing this because of our recovery from cyber. We just always anticipated that this merchandising level of return. And then from an advertising and sales promotion level, we did increase that this year because we saw a pressured consumer and wanted to make sure that we were communicating our superior value, et cetera. But these are all within the range of normal spending for us in a given year. We typically spend around 10% in advertising and sales promotion. It will be closer to 11% this year, and we are returning to a level of reduced revenue spending that we've had in the past. So, we don't see any need to go further or deeper than that. We feel like we have the right level. But this really is about more normal course of business than it is that we're seeing consumer behaviors that we need to react to.

Operator:

Our next question comes from Javier Escalante of Evercore ISI. Your line is open.

Linda Rendle:

Sure, Javier. I mean it has certainly been a complex last few years and lots of puts and takes. And so what I would comment on is we intend to grow market share. That is our mid- to long-term goal, and that is the bar we hold for ourselves to say if we are winning with the consumer or not. Clearly, given the cyber-attack, we have not grown market share this year, but we're seeing the trend move in the right place. So for perspective, we lost about 5 points of share, nearly one-third of our market share during the low point from a cyber perspective. And we are back down -- we ended the quarter down about [0.75] (ph). We've made progress since there if you look at the weekly data. But what we first need to do is restore market share and then grow from there, and we believe we have the right plans to do that. If you look at many of our businesses, they are variable versus the market share they had in the past. But in aggregate, we mostly returned and some businesses were higher, for example, on our cleaning business. We made significant progress on market share, even though we had COVID and then, of course, multiple rounds of pricing. And our brands have held up really well. So my evaluation would be heading into the cyber that we were in the right place from a market share. We had plans to grow market share. Cyber has unfortunately caused another place where we took a step back, and we have to rebuild, but I'm confident in our ability to return and then we're working on plans in fiscal year '25 and beyond to deliver that market share growth we aspire to.

Linda Rendle:

Yes. I would say, first of all there is a price mix in a trade component of Q3, and certainly, Kevin can walk through that in more detail. But if I just take step back and say, what were the dynamics in Q3 that give us confidence and what were the dynamics that negatively impacted us? It's pretty clear. We weren't able to fully supply on a couple of those businesses that you mentioned, Glad and Litter in particular. And that means we weren't fully available for the consumer, which we don't like. But the good news is, as I've said, we recovered that ability to supply by the end of Q3, and we feel good heading into Q4. And also, there were more competitive dynamics, given that fact that we couldn't fully supply. We saw more merchandising from competitors, et cetera. As it specifically relates to private label, if you look -- there was a stressed consumer prior to the cyber event, and we didn't have any material loss to private label and share during that time, nor have we, in any recessionary time lost any material share to private label. We offer brands with great value. We offer innovation, the consumer trust us, they love our products. They love our brands, and we spend behind those brands to ensure that they understand the superior value we deliver. And we see that beginning to take hold and work in Q3, as we restore distribution and inventories. We saw private label share come down versus Q2 and heading in the right direction back to what we would expect it to be in a more normalized environment. We expect to continue to make progress as we restore distribution in Q4. So I think it would be pretty understandable to say -- when you are not fully on the shelf and you don't have all your distribution, a consumer is going to choose what's on the shelf, and they did. And -- but we feel confident in our brands, confident in our spending plans that we'll restore that back. And history would tell us when we were out of stock in COVID that happens. When we've had product issues where we're out of shelf on time sell, we came back. We restored our share in distribution. We have a long history of doing this, and I remain confident in our ability to do it in Q4 and beyond.

Operator:

Our next question comes from Filippo Falorni of Citigroup. Your line is open.

Linda Rendle:

Thanks, Filippo. We fully expect to recover in Q4, the distribution against our plan that we had fiscal year '24 that we lost. We view that as temporary. And we have seen the shelf decisions from retailers. They are now in the process of converting their sets. As we speak in some of our categories and some will happen throughout the quarter. So we have strong confidence that we will restore that distribution. And that really was not the Q3 story because we always knew most of that distribution would come back in Q4. That's really more of a supply and service level issue story in Q3. And again, we have fully recovered from that, and we are heading into Q4 in a great place. We're able to fully supply that distribution that we will recover. I'd also just note, I did a recent roadshow with all of our top retailers. And they want our business pack on shelf-two. We are the brand that leads their categories. They're very invested and growing with us. Our conversations we're focused on growing, moving forward, our innovation plans, what we want to do to unlock our joint digital plans now that we're well underway on our digital transformation, now that we know 100 million consumers, how can we personalize better to them. The conversations were very growth-oriented, future focused and they're looking forward to having our full distribution back as well so that we can grow their categories.

Linda Rendle:

Sure. You are absolutely right that we talked about international being a portion of that growth. And if you look at the performance of our International over the last couple of years, it certainly has played a role where it's growing faster. But we also talked about having a more consistent less volatile business. And Argentina was a high source of volatility and variability. And certainly, you saw the FX impact play out, and you heard Kevin talk about what we expect moving forward. So that was definitely on our minds to reduce the volatility and variability that we had and then be able to grow from a very solid base. And you might recall from a few years ago, we had purchased the majority ownership of a JV partnership we have in the Middle East, was a good example of looking at markets that we could grow faster in that were more stable and predictable and that has played out very well. We continue to have a really healthy consumer there. Innovation is working well in that marketplace. And so what I’d say is, it's very consistent with what we've said before. We have continued business in Latin America that we feel good about, and we'll continue to grow business in Asia, Europe, the Middle East. And we continue to have growth pockets on businesses like Litter, et cetera, our cleaning business, which is the majority of our business is international and we continue to expect international to be a strong contributor, but it will be much more profitable and stable versus what it was before.

Linda Rendle:

Thank you.

Lauren Lieberman:

Great. Thanks. Just a couple of things. So first was just in the release you specifically called out that part of the increase in the gross margin outlook was a more favorable outlook for raw material cost or for input. So just curious on a little bit of color there. And then secondly was thinking about Argentina, I know we are not going to do business planning guidance for '25. But just thinking about when you lap Argentina, like Argentina FX is such a huge impact, for example, on gross margins even this quarter, last quarter. Do we like reverse that? Or is it just the impact disappear because the business is gone. I'm just kind of thinking ahead. Again, not about the totality of gross margin, but just how to think about the absence of Argentina moving forward and the margin impact on the business.

Lauren Lieberman:

Okay. And that impact from Argentina from the exit and just going back to it's actually a pretty small business. It is a small net impact when you put all these pieces back together on the year-over-year margin like in this quarter next year for example?

Lauren Lieberman:

Okay. Great. And then one thing I just want to clarify. I think I figured out the call in on, but there were two conflicting statements in the release in the prepared remarks about supply chain constraints being a problem in the quarter, but having resumed normal service levels. So I didn't know if it was a timing difference, like normal service levels as you exit the quarter, but constrained by supply chain during the quarter. I just wanted to make sure it's clear on how those two statements fit together.

Lauren Lieberman:

Okay, all right. Thanks so much.

Olivia Tong:

Great, thanks. I wanted to ask you two questions around margins. First, on gross margin. Obviously, the EPS outlook for this year is now higher than where you were pre cyber-attack and much of that is due to the gross margin expansion of about 100 basis points ahead of where you thought you were going to be at the beginning of the year. So in the past, you've talked about 200 basis points of gross margin improvement annually, as you recover from the post-COVID decline this year, now [$2.75] (ph). Last year, obviously, a lot more than that, despite all the ups and downs with the cyber-attack. So, can you just talk about ex-Argentina, ex the cyber, all these things, the ability to keep outperforming on gross margin, what you learned from this year last year, what capabilities continue versus some of the one-offs that are helping and hurting this year? Or just sort of the ongoing recovery on gross margin relative to the post-COVID timing? Thanks.

Olivia Tong:

Got it. And then just a point of clarification on your call for higher advertising in the second half --. Are you talking about higher as a percentage of sales sequentially or that the year-over-year change in second half is higher than it was in the first half? And how much of that is due to the clear pullback in spend in first half when you had -- you're out of stocks versus just desire to have greater programs, greater opportunity to support some of the innovation? Thanks.

Olivia Tong:

Great. Thank you.

Linda Rendle:

Thanks so much, everyone. We look forward to updating you on our continued progress on our next call. Until then, stay well.

Operator:

Good day, ladies and gentlemen, and welcome to The Clorox Company Second Quarter Fiscal Year 2024 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Ms. Lisah Burhan, Vice President of Investor Relations for The Clorox Company. Ms. Burhan, you may begin your conference.

Linda Rendle:

Hello, everyone, and thank you for joining us today. We delivered financial results above our expectations in the second quarter, thanks to very strong progress on our recovery from the August cyberattack, continued advancement of our strategies to drive top-line growth and rebuild margin, as well as the swift and effective management of currency headwinds in Argentina. We are rebuilding retailer inventories ahead of schedule, enabling us to return to merchandising and restore distribution. As a result, we made great strides rebuilding market shares. Importantly, throughout our out-of-stock period and recovery, we've maintained our strong brand superiority results as measured by our consumer value metric. This speaks to the power of our advantaged portfolio, the superior value of our brands and their role in consumers' daily lives. While there is still more work to do, we're on the right path to return our business to the trajectory it was on before the cyberattack. Looking ahead, we expect the operating environment to remain challenging, as consumers remain under pressure and their value-seeking behaviors continue. Nevertheless, we remain committed to growing the top line and rebuilding margins and expect volume to play a stronger role in our top line performance as we lap pricing. We're well-positioned to make further progress in rebuilding distribution and market shares, as well as drive volume and household penetration growth over time through strong demand creation plans. Given the progress we've made in the second quarter, we are also updating our full year 2024 outlook. We have a strong diverse portfolio of trusted brands, we play in essential categories and we're making the right investments guided by our IGNITE strategy to create long-term value for stakeholders. I'm confident that we're taking the appropriate actions to build a stronger, more resilient Company that is positioned to win in the marketplace, and deliver consistent, profitable growth over time. With that, Kevin and I will take your questions.

Andrea Teixeira:

Thank you. Good afternoon there . Linda and Kevin, I just wanted to go back, obviously, an amazing performance you caught up with I think with the second quarter fiscal you caught up with kind of according to my math a minus 2%, pretty much first half against first half of the prior year. And then what are you implying given the Argentine peso depreciation is underlying beta as you put in prepared remarks and your commented it just now but then you have a greater FX headwind. But when you go and flow through everything and according to the new guidance the plus 200 basis points improvement in gross margin. It implies that your gross margin in the back end declines vis-a-vis what you had in the back end of last year. And so I was just trying to reconcile, because your numbers kind of imply profitability going down, the way I understand the transactional FX. But it seems a bit high. If you can kind of walk us through why would that happen given the beats the magnitude of the beats?

Andrea Teixeira:

Yeah, that did Kevin. Thank you. And I think one of the kind of like a fine point on that commentary. When you say, in the prepared remarks, I think Linda had mentioned you're confident to regain shelf space and you're looking obviously regained service levels. It sounds to and even in our meeting recently in New York, you kind of alluded to initially that guidance and I think we all in this call appreciated there was a lot of moving pieces and you're conservative. It seems like you're embedding some potential risk at that point of not being able to recover the service levels, now you did recover. So I'm more in the side of like thinking of the strength of what you achieved in six months. I'm thinking more, why not expecting that momentum to continue now, that you potentially could recover some of the shelf space losses that you had, especially now coming up on the spring reset.

Andrea Teixeira:

Thank you. I'll pass it on.

Peter Grom:

Thanks, operator, and good afternoon, everyone. So I wanted to ask on the organic revenue growth trajectory. Can you maybe just help us understand how you are thinking about volume versus price in the back half of the year. Linda, you mentioned you expect volume to be a stronger contributor to your performance, does that assume a return to growth or just kind of less of a drag versus what we've seen prior to the disruption. And then just on the pricing as well, particularly as you now lapped the US pricing but are taking incremental pricing related to Argentina. Thanks.

Peter Grom:

Got it. And that's really helpful . And then I guess just, Kevin on the 42% exit rate, I think, I may be reading too much into this, but are you simply just trying to provide some color on the second half phasing, or are you trying to signal how we should be thinking about the gross margin recapture opportunity looking out to fiscal '25.

Peter Grom:

Thanks so much. I'll pass it on.

Operator:

And we'll move next to Anna Lizzul with Bank of America.

Linda Rendle:

Sure. This assumption on a modest slowdown in categories is one consistent with what we provided as an original outlook to fiscal year '24, as we saw the consumer come under more pressure, and we originally had the assumption of a mild recession which we are no longer assuming, but still assuming that consumer is going to be under more pressure given all the factors in the macro-economy. And so that's consistent with that. And if you look at our categories, given they're all mostly household essential categories, we would expect no large difference in those categories. We might see little nuances here and there, but on average, we expect all of them to be slightly slower. And that's consistent with what we've seen in the past in times like this. But I wouldn't call out anything in particular that would be a wide variance to that assumption.

Kevin Jacobsen:

Sure. As it relates to Lifestyle that was in our Burt's Bees business, we do quite a bit of holiday gift packing and merchandising in the second quarter on that business, and so you have increased promotional activity. And so that was specific to the second quarter. And you may see that occasionally based on merchandising plans as we go forward.

Operator:

And our next question will come from Dara Mohsenian with Morgan Stanley.

Linda Rendle:

Sure, thanks for the questions, Dara. So, obviously, as you said, we won't provide any perspective on fiscal year '25, but the thing is that you've outlined are important as we think about closing out this year. And then, of course, the future of our continued commitment to grow top line while rebuilding margins. And what we see from a top line perspective is very strong brands. And I think I'd highlight again what I called out around brand superiority. Even in the out-of-stock issue that we experienced and cyber, we maintained our brand superiority ratings, which is significantly higher than it was pre-pandemic. So our brands continue to remain strong and we feel great about the investments we have in the back half, both increasing our advertising and sales promotion levels and we're going to spend about 11% this year. We continue to expect that. And we do expect trade promotion to increase as Kevin highlighted earlier. And innovation plans. We've also spoken about the fact that during the cyber incident we walled those resources off and so our innovation plans remain on track and we expect innovation across every major brand at Clorox. And we'll continue to invest in those plans. So I feel great about the brand's health going into this. From a category perspective, as we said, we expect to see some moderation in category growth. We tend to fare well in times when the consumers stretched because we offer value superiority. And in fact we're seeing in many cases, people still trading into premium segments of our business, we're seeing that in wipes, we're seeing that in premium litter, we're seeing that in our food business and across many others. So feel really good about where we stand with the consumer, even as they are more challenged and we're not seeing excessive trading to private-label. We did see some during our out-of-stock period, but we're seeing that rebound as we get back on shelf. And then retailers. I'll just take another moment to thank them and I can't thank them enough. They've been tremendous partners. And I say with confidence our relationships are stronger coming out of this. Unfortunate incident than they were heading in and they were strong heading in super grateful for their partnership and what they've done and we're back focused on category growth and focused on finishing the job on distribution. And I have full confidence given the plans that we have that we will restore distribution. It will just be how fast we can do it and on what timing. And again, some of those things are out of our control. But we have the right plans, we have the right relationships and strong brands to get it done.

Linda Rendle:

Sure. On the merchandising and competitive front, we continue to see merchandising levels below what we saw pre-pandemic. And we expect in the back half for those to continue to ramp up. But what I'd say is, some of that was depressed given the fact that we were out-of-stock and not had as much merchandising. But we're not seeing anything in any material way, where we're seeing deep discount price merchandising, where we're seeing a fundamental change. But we would expect that, that level to rise, consistent with a more pressured consumer. And I would say there are little pockets here and there in categories, we're seeing some competition in litter, where there's a bit more aggressive merchandising and price promoting going on, but nothing outside of what we have assumed in our outlook from our categories and competition. And again, we continue to expect merchandising to increase both ours and competition in the back half, but we don't expect that to go to levels beyond what we thought pre-pandemic. And we'll see how that plays out.

Dara Mohsenian:

Thank you.

Filippo Falorni:

Hey, good afternoon guys. So, Linda, I wanted to go back to your comment of, there is still some jobs to be done in terms of recovering shelf space. Maybe moving in a few categories if I look at the track channel data, there's three big categories where your total distribution points are still below pre-cyber-attack levels particularly trash bags, bleach and cat litter. Maybe you could give us a color like what are your plans are to get the shelf space back.

Filippo Falorni:

Great. That's super helpful. And then Kevin, two quick follow-ups on the gross margin. First on the commodity line, it was neutral this quarter. You talked about maybe a more favorable environment. Are you expecting some deflation in the second half, meaning a benefit? And then on the manufacturing and logistics, maybe you can walk us through the drivers on that line as well.

Filippo Falorni:

Got it. Super helpful guys . I'll pass it on.

Operator:

And we'll move next to Chris Carey with Wells Fargo.

Linda Rendle:

Sure. Yeah, Chris, I'll start with the cold and flu. And just so we're all level set. Cold and flu is actually this year very similar to previous cold and flu seasons that we saw before. So definitely different than last year. So started later than last year, but more like an average cold and flu season which we typically see in January and February, so I would say normalized is the assumption that we have. So too early to say what the impacts will be we'll obviously talk that when we talk Q3. But we're looking at an average cold and flu season. And to your point, that means as we lap it the lap looks different because we experienced cold and flu earlier last year. And we'll be experiencing a more normalized, so mostly a Q3 impact for cold and flu that's been contemplated in our outlook. And we have like we normally do normalized assumptions around cold and flu and we'll see how that plays out. But to-date it looks like a very normal cold and flu season. From an Argentina perspective that would certainly be our perspective and as Kevin highlighted we intend right now with the plans that we have and what we're seeing in Argentina to fully offset the impacts through pricing. We'll see what happens as we move forward. That would continue to be our posture. And the reasons and proof points, we believe we can do it our market shares continue to be very strong. Our brands are very strong, we'll watch that closely but based on what we're seeing today, we expect to fully offset the currency headwinds with pricing.

Christopher Carey:

Okay. And then just one additional clarification on some prior questioning. So just to be clear, so you're mostly caught up on inventory levels, but not entirely caught up. And so we're still seeing negative trends on a year-over-year basis from a sales standpoint in the Nielsen data, for example. You should continue to outpace your consumption data for maybe at least another quarter. Is that a fair analysis? And then you would expect some acceleration in consumption going into your fiscal Q4, just any way you could frame that for us would be helpful. Thanks.

Christopher Carey:

Okay. Thanks so much.

Operator:

And our next question will come from Kaumil Gajrawala with Jefferies.

Kevin Jacobsen:

Hey, Kaumil, we're expecting increased spending. So as you know, we typically spend about 10% of sales, this year we're targeting 11%, and in fact in the back half it will be closer to 20%, so we're leaning in investing to continue to drive value superiority at an elevated rate. So year-over-year, it will be higher based on the elevated rate of spending we intend to spend.

Linda Rendle:

The consumer has been fairly resilient and we've continued to say that, we saw that in the front half of the year. It is a little difficult in our categories to get a completely clean read just to be fair given that we were out-of-stock and so there's a lot of dynamics going on. But as we come back in stock we're seeing largely what we expected from the consumer in their front half which is a lot of resiliency. We continue to see value seeking behaviour. So we're seeing trading up to larger sizes, we're seeing trading into opening price points. Not seeing what we would expect anything different on trading into private label than we would have expected. Again, certainly more people tried private label when we were out-of-stock but we're seeing that reverse as we get back on-shelf. We continue to see a squeeze of other brands. So the leading brands and private-label tend to be the two that are doing well in categories that have multiple brands. So all of those behaviours continued in the front-half. What we expect in the back half is the consumer to continue to be under more pressure. That being said, our categories are fairly resilient, because we're household essential. So we're expecting a moderation, but this is not a reversal of the trends we've seen and we're seeing the shift from price mix being the driver of growth to volume, and that is certainly playing out. If you look at sequential volume improvement trends over the course of time, and if you kind of backup the effects of being out-of-stock from cyber, you're seeing consistently volume improving. At the end of December volumes were down very low-single digits for example, from a consumption perspective, if you look at the MULO universe. And we would expect to see that continue in the back half. So what we just see is consumer under more pressure, value seeking behaviours continue, a slight moderation in our categories, we've assumed all of that in our outlook. We'll continue to moderate. But to-date, the consumer has been resilient. And we think those things will play in through the other assumptions we have, like more merchandising in the back half. And you know competitors focused on ensuring that they are offering a great value to consumers as their wallets are stretched. But it's very, very consistent with what we had expected at the beginning of this year. We don't see any change in behaviour from consumer outside of those assumptions we had six months ago.

Linda Rendle:

Thanks.

Stephen Powers:

Hey, thanks and congrats from me, really to you and to the whole Company on pretty remarkable recovery these past several months. One quick follow-up and then a question. The follow-up, just on the categories that Filippo had mentioned, you talked about, there's still some work to do to fully catch up and recover. Is the expectation that as you exit fiscal '24 that you have fully recovered there or is there more work that you expect we should expect carries over into the back half of calendar '24 and fiscal '25?

Stephen Powers:

Okay, very good. And the question I had, if we step back from the last quarter, since August, when we go back to before the summer, we were talking about a lot of things, one of those topics was sort of the ongoing digital transformation of the Company, the operating model change that you guys have been working on sort of long-term strategic arc of business transformation. Has anything over this period since August set you back on that trajectory or have you been able to keep pace so that the progress that was anticipated at the start of the summer is still sort of broadly on track.

Stephen Powers:

Okay, excellent. I'll see in a couple of weeks.

Operator:

And we'll move next to Javier Escalante with Evercore ISI.

Kevin Jacobsen:

Hey, Javier, let me start with your question on FX and how it's impacting sales and gross margin. And when we entered this year, we were anticipating about two points of FX headwinds on the top line, mostly coming out of Argentina. The Argentina economy has declined more than we had anticipated. And as you may have seen in our prepared remarks, we're now anticipating about five points of FX headwinds on the top line that is solely a function of revising our expectations for Argentina. We now have in our outlook an expectation that the currency will devalue about 75%, and that's going to be back half loaded. If you look at the front half we had about three points of FX headwinds, and that puts you into the mid to high single-digit FX headwinds in the back half and again a function of Argentina. And then that also plays through in gross margins. We expect a greater negative hit to gross margins, as it relates to the FX impacts. So if you look at last year, FX was about less than 100 basis point hit, this year will be well north of that closer to 150 basis points or so. And again, it will be more pronounced in the back half of the year. Important to note that, maybe just to finish that up and I'll let Linda addressed the other question was, as I mentioned earlier, in-spite of those negative impacts based on the actions we have already taken and will take primarily as it relates to pricing, we believe, we can offset both the top line FX impact as well as the FX impact to gross margin. And as a result, you can see we're raising our sales expectation, expect to grow margins in-spite of a pretty difficult environment, we're dealing with there.

Javier Escalante:

Thank you very much.

Operator:

And we'll hear next from Callum Elliott with Bernstein Research.

Linda Rendle:

Thank you. And we certainly want to get back to where we ended fiscal year '23. We were very proud of the performance and what we had done. And of course we remain deeply committed to what we talked about which is expanding top line over the long-term 3% to 5% and expanding EBIT margins 25 to 50 basis points and we want to get back to that. Exactly as you said and our transformation as a critical component of that and ensuring that we have the right capabilities and processes, and that people at Clorox are more consumer obsessed and we're working faster in a leaner fashion to get there and we'll talk about that. As we spoke about actually at CAGNY, I think, it's two years ago now, what we expected from a growth perspective continues to remain, we continue to see opportunities in international, we continue to expect to see returning to growth in our professional business as that more normalizes. But we spoke about all the other things that we had seen trend-wise. We saw more cat adoptions and so natural category tailwinds for litter. We saw people having increased interest in disinfecting which still remains and we still see that or seeing as we look at the data today. People still have a heightened need to have their spaces cleaned and disinfected. People generally are taking care of their health and wellness more so, things like Brita have natural tailwinds. And water consumption. Our Vitamins, Minerals and Supplements business is the same thing, continues to have natural tailwinds. So we'll speak about all of that at CAGNY, but we remain committed to that 3% to 5% top line over the long-term and to do that in a more profitable and consistent way. And we have all the right levers and are pulling all at the right transformation buckets in order to do that, and I feel we're on the right path to get back to where we were coming out of fiscal year '23.

Linda Rendle:

Thank you.

Lauren Lieberman:

Great, thanks, everybody. So I was just looking back and I remember that last quarter when you were talking about the outlook and the recovery plan and expectations. That you said you expected customer inventory levels to be rebuilt by the end of fiscal 2Q. But tying to that was the conversation of mid-single-digit sales growth, right? So now retail inventories are in fact rebuilt, the main thing does it leave? But it was with sales growth that was way higher than mid-single-digit. So can you just tie those two things together for me because, I think the just the visibility in the forecasting I think is an open question. And if you go back even pre-cyber the pattern of exceeding your own outlook was incredible. But you do have to also ask the question of like what happens if it goes the other way, if this is a question of visibility.

Lauren Lieberman:

Okay. That's fantastic. And then just also on Burt's, I feel like when we all saw you in December, at the time you were talking about the challenge of Burt's and restoring that business just because of the natural complexity of SKUs and the line-up in that business and that holiday merchandising might actually be -- that might be a spot where you'd fall short. When I look at the trends in Lifestyle, right, clearly, Burt's had a great quarter. So there too kind of same story or I'm -- just I'm a little confused on that one, because it felt like that was a business, that was going to be tough to be able to get that merchandising in and holiday is pretty -- it's a important seasonal time for that brand is my understanding.

Lauren Lieberman:

Okay, perfect. And then the final thing, sorry in this vein, but I'm just trying to put the pieces back together, if you will. Logistics that was one area, Kevin, where you had talked also last quarter about that logistics cost would be elevated this quarter because as you mentioned, Linda you're shipping well above normal every day, right and that you're going to end up using a lot more carriers and freight and so on, beyond what you'd normally be contracted for, and that there'll be elevated cost with that. Again, like, I know there's many pieces of that gross margin build, but logistics is one that really jumped out for us, it's being pretty different. So I'm just not -- that's another area of question of kind of what played out differently there, was a retailer fine. I think you mentioned that in the prepared remarks, but that seemed like a pretty significant difference versus something that should have carried elevated cost within the quarter itself.

Linda Rendle:

Yeah. I'll just maybe make another comment on our operating model. Lauren and there were some good questions on our transformation and are we continuing it. And I think one of the things really proud of is one we learned a lot in COVID that we applied to the situation. Unfortunately, we were hoping we'd never have to play it again, but we were ready to go. The second thing is, this is an output of our operating model, getting laser-focused on what matters, putting a business leader in-charge who sees end-to-end who is able to make the calls and trade-offs, and she and her team were able to do just that, to be able to restore inventories and do all those things. Kevin spoke about, not requiring a lot of overtime. Our decision to take, our inventories up in Q1 was an important one, and we knew that we would work those down, but we made that choice early to ensure that we could do as much as we could in Q2. But I would just plug our operating model. That's a real output of what we've been driving and that changed to be bought more business unit focus, more focused on the consumer and customer and fast.

Linda Rendle:

Thanks, Lauren.

Olivia Tong:

Great. Thanks. And great work on the improvements. In terms of the macro backdrop you talked about how -- for second half you're now no longer expecting the recession that you had before, but could you just talk about what your expectation target for the current environment to stay the way the second half to be similar to what we saw in the first half or that there is still a step-down just not as much as you had before.

Olivia Tong:

Got it. That's very helpful. And then relative to your expectations going into the year, obviously, putting aside the cyberattack. Do you think you'll end the year in line with the your -- start of your target on promotion and merchandising levels? Because I'm trying to understand obviously, there's a lot of puts and takes of where your expectations they're now versus in August before the cyberattack happened. But you had said in the past that perhaps we'd have to do a little bit more promotion, little bit more merchandising just to make sure that given what's happened. Just wondering, today what you're thinking in terms of the level of promotion merchandising relative to where you started the year.

Olivia Tong:

Got it. Thank you so much.

Operator:

This concludes the question-and-answer session. Ms. Rendle I'd now like to turn the program back to you.

Operator:

This concludes today's conference call. Thank you for attending.

Operator:

Good day, ladies and gentlemen, and welcome to The Clorox Company First Quarter Fiscal Year 2024 Earnings Release Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Ms. Lisah Burhan, Vice President of Investor Relations for The Clorox Company. Ms. Burhan, you may begin your conference.

Linda Rendle:

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

Peter Grom:

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

Linda Rendle:

We're really confident there's no structural issues related to this incident. It's short term in nature. And as Kevin highlighted, we have full confidence we'll be able to restore distribution and share over time. And what Kevin highlighted is exactly right. It's about pace. And what we're focused on this year is making progress as quickly as we can, and that starts in Q2 with rebuilding inventories. And we already are shipping well ahead of consumption now as we finished out the end of this month and we intend to continue to do that for the rest of the quarter with the goal of getting back to inventory in retailers as fast as we possibly can. We think we'll get through the bulk of that in Q2. We'll have some left to do in the back half of the year.

Operator:

And our next question comes from Filippo Falorni with Citi.

Linda Rendle:

Yes. Thank you for the question and for the opportunity to once again thank my retailer partners for everything they have done during this time, they have been tremendous. And that is without exception, they have all gone above and beyond to ensure that we're getting as much product as possible to their shoppers. They partnered with us on manual operations, which is not easy for anyone to do. It wasn't easy for us and certainly not easy for retailers. They've been tremendous, and they continue to be tremendous.

Kevin Jacobsen:

Sure. Happy to, Filippo. We came into the year with an expectation we have about $200 million worth of supply chain inflation. Now that's broader than just commodities. That's inflation across the entire supply chain. And that is still an inflationary environment, but certainly moderating versus what we've seen over the last few years. As you look at that $200 million, about 1/3 of that we anticipate is commodity cost inflation, about 2/3 is in other areas of supply chain, primarily driven by wage inflation that shows up in a lot of different areas.

Anna Lizzul:

I just wanted to ask on regaining distribution. How much of the distribution recovery will need to be driven by innovation and do you already have this innovation in the pipeline? Anything in particular you had in the plan for fiscal '24?

Linda Rendle:

Yes. As you know, we'll continue to spend about 11% of sales on advertising and sales promotion, which was up versus last year where we spent about 10%. And we continue to believe this is the right level of spending to support the brands as we get through this inventory recovery and growth phase as we head into the back half. And of course, we'll make any adjustments that we see necessary by brand, et cetera. And it's also supported, I would note, by continued very strong performance from an ROI perspective. So we're getting more and more for that spend. So not only are we spending at a higher rates but we're also getting more for every dollar that we invest. And we'll continue to monitor that closely. But between that and the increased promotional environment we expect to see, we think we have the right money in the market to ensure that retailers have the right plans and the consumers are seeing our brands from a marketing perspective.

Lauren Lieberman:

I just want to follow up on that -- the gross margin conversation you had an answer to the first question. Because 1 spot where I was a little bit confused is, Kevin, you talked about pricing and merchandising dynamics, most notably for the second half and discussed them as being the same as prior assumptions and most notably to me on the merchandising side. But I'm not -- I feel like there's a disconnect because the prior gross margin pre-cyber, which you know is like a different time and world. I don't think it would have supported the idea of gross margins kind of flattish or flat to down in the back half. So I feel like there's a piece maybe missing outside -- I think you mentioned logistics costs for 2Q. But it does really something else is pressure in gross margins in the second half. So I just wanted to follow up on that point first.

Lauren Lieberman:

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

Lauren Lieberman:

So yes, I was just struggling with the shipments, right? So that if shipments this quarter roughly right are down the high 20%, call 30% for rounding sake. Having your net sales only up in the mid- to high single digits in 2Q and saying you're shipping above consumption, it just feels like shipments sprinkle should be higher than that, right? I feel like the thing we're shipping above consumption is almost like a circular logic because Nielsen is informed by what's on the shelf, not necessarily consumer demand.

Lauren Lieberman:

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

Linda Rendle:

Lauren, we had all of those debates to see and prioritize having the right level of spending. And that's exactly the exercise that we undertook. And we think what we have in combination with innovation, with the merchandising spend is the right level, if there's any change to that based off of what we see in the marketplace, we absolutely will make adjustments prioritizing the health of our brands and ensuring that we're in front of our consumer but we feel good about that 11%. It still is slightly higher than it was last year, if you just look at absolute dollars as well. And of course, we're driving our team to try to get as much efficiency impact as they possibly can on that spend as well. But we think it's the right level. And again, as we always do, we will prioritize that. And if there's any adjustment needed based off of the path forward as we rebuild, we will make that, but feel very confident where we are right now.

Christopher Carey:

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

Linda Rendle:

Sure, Chris. First, and clearly, we had incremental costs in Q1 associated with this as we dealt with the cyber-attack itself and the systems issues that we needed to overcome and build. So there was an incremental cost there. Second, on the marketplace piece, we felt like we put a plan in place that took into account what we thought was going to be a more challenging environment. And that plan works very well for us in this environment of rebuilding as well. So we think we have the right tools in place. We believe, again, we have the right level of advertising and sales promotion, promotional dollars invested in that -- on the recovery.

Operator:

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

Olivia Tong Cheang:

As you think about sort of rebuilding inventory and market share, how do you ensure that this doesn't impact your ability to stay on pace on innovation and then eventually, your ability to get back to the gross margin recovery path because there's obviously -- you're not quite back there yet. You're still working on that. How is it that you can stay on patient innovation with all the disruption that's happened in the business and potentially some need to rejigger the marketing, promotional dollars, et cetera, in the second half of the year?

Linda Rendle:

Yes. So 2 things. Prior to the cyber-attack, we had a number of particular cybersecurity measures in place, including endpoint detection and response tools across our enterprise. And as we experience this, we continue as we bring our systems online to enhance those and taking a series is to further strengthen our security controls. So that's 1 bucket.

Javier Escalante Manzo:

I have a question, I guess, is a CFO question. And it has to do with the business planning, forecasting and reporting that you had. How often do you communicate with the segments reporting to you? Because this seems to be kind of like a very simple business, mostly U.S.-driven. And I was surprised by the fact that it took over a month to know that the incident was material.

Javier Escalante Manzo:

I appreciate that. Now my question was, I used to work for 1 corporation, a large 1 global. And I remember that they used to close the books every month and we re-forecast every month. So basically, that was the question I was asking. So how frequent does the CFO office re-forecast the business plan on a regular basis, understanding that there was a cyber event, which is very unfortunate.

Javier Escalante Manzo:

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

Operator:

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

Operator:

And this concludes today's conference call. Thank you for attending.

Operator:

Good day, ladies and gentlemen, and welcome to The Clorox Company Fourth Quarter Fiscal Year 2023 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Ms. Lisah Burhan, Vice President of Investor Relations, for The Clorox Company. Ms. Burhan, you may begin your conference.

Linda Rendle:

Hello, everyone, and thank you for joining us. We closed out fiscal year 2023 with strong results, underscoring the significant progress we've made against our strategic priorities. Over the course of the year, we've been relentlessly focused on driving top-line growth and rebuilding margins in a challenging operating environment, while continuing to invest in the long-term health of our brands, categories and capabilities. Thanks to our team's strong execution across a comprehensive set of actions, we delivered on these commitments. For fiscal year 2023, we generated net sales growth of 4%, within our long-term target, gross margin expansion of 360 basis points and adjusted EPS growth of 24%. Our performance reflects our commitment to driving operational excellence and margin improvements, supported by the strength and resilience of our portfolio and the relevance of our IGNITE strategy. In addition to delivering results over the short term, we made progress on our IGNITE strategy. The investments we're making to deliver consumer inspired innovation, strengthen the superior value of our brands, advance our digital transformation and streamline our operating model, are positioning us to drive long-term profitable growth. As we look ahead to fiscal year 2024, we are clear on our priorities. While we expect the environment to remain difficult with macroeconomic uncertainty persisting, we are committed to building on our progress and have plans to enhance our value superiority at a time when it matters most to consumers. We believe these actions will enable us to continue to drive top-line growth and rebuild margins back to pre-pandemic levels and put us in a position to grow share and household penetration over the long term. I'm confident we're taking the appropriate actions to build a stronger, more resilient company positioned to win in the marketplace, deliver on our operational and financial goals, and create long-term value for stakeholders. With that, Kevin and I will take your questions.

Peter Grom:

Thanks, operator, and good afternoon, everyone. So I wanted to ask two related questions on the top-line. Maybe first, I know you called out stronger shipments in cleaning and some early shipments for back to school, but the minus 2% volume performance was certainly stronger than what we can see in the track data. Was that largely due to the shipment timing that you mentioned, or is there strength elsewhere that's not being captured by the data? And then just second on the organic sales guidance of 2% to 4%. You mentioned a mild US recession in the back half, you provided some color on phasing starting with mid-single digit growth in 1Q. I just would be curious to get your perspective on the balance of pricing versus volume in that outlook, specifically, as we move through the year. And do you expect volume growth at some point in the back half? Thanks.

Kevin Jacobsen:

And then, Peter, I can talk about the -- our plans for fiscal year ‘24 as it relates to sales. And as you saw, we're projecting 2% to 4% for the year. If you think about the front half and the back half, our expectations are sales to be closer to mid-single digits in the front half, excuse me, and then low single digits in the back half. And that phasing from front half to back half, I'd call out a few items. The first is, as you saw in our prepared remarks, we're projecting a mild recession in the back half of our fiscal year, which would be the front half of calendar year ‘24. So we think that will put a little bit of pressure on consumers in our categories, and we've reflected that in our outlook. The other item to be aware of is we are now going to lap the four rounds of pricing we've taken when we get to the middle of the year. So that fourth price increase we took last December, we will lap that when we get halfway through the year. So the second half of the year, we'll now have lapped all the pricing we've taken. So as a result of that, what we expect to see is you'll see improving volume trends as we move through the year, and you'll see the benefit of price mix larger in the front half and then really start to tail off in the back half. And so as we get that that low single digit growth, it'll be a combination of some price mix because we're still doing a little bit of pricing internationally, improving volume trends, but recognizing we still think it's going to be a difficult economic environment for consumers.

Operator:

And our next question comes from Anna Lizzul from Bank of America. Please go ahead, Anna.

Linda Rendle:

Yeah. 2% to 4% percent organic sales growth and 0% to 2% from a reported is what we're expecting now. And that is slightly below what we want from a long-term perspective. But, just to put that in perspective, of course, if you look at our four-year CAGR and our strategy period, we did deliver in the midpoint of that range at 4% and again, 4% this year. This year coming up is a kind of a tale of two halves, is the way I would talk about it. And we expect stronger growth in the front half as we continue to lap the two price increases that we have. And then in the back half, we expect it to get tougher for consumers. And right now, our expectation is a mild recession. So when you put those things together, I think in aggregate, we feel good about the top-line that we've committed to. In addition, that includes about 1 point of a headwind from our vitamins, minerals, and supplements business. As we spoke about, over the last couple of calls, we have re-engineered that plan to focus more on profitability, and we've done that at a trade-off from a top-line perspective. So that does include a 1 point headwind. And, over time, we would expect that that wouldn't be the case and that, that would help us return to getting in within that 3% to 5%. The way that I would think about this, as we march through the year, we are expecting, again, lapping two price increases, we are expecting our elasticities to be more normalized as we go through the course of the year. We're expecting trade promotion to normalize as well, and then we're expecting a mild recession in the back half. Those are all of our assumptions in forming that growth. And if those come true, we feel this plan is a very balanced plan, but we'll be watching really carefully as we move through the year. If any one of those assumptions change, and we need to adjust our plan, that could impact both, on the high end and the lower end of us delivering against what we put out there from an outlook perspective.

Linda Rendle:

Sure. So on the marketing spend, as you rightly noted, we've spent about 10% of sales on advertising and sales promotion over our history. And there's times we've spent more than that. This year, we're targeting 11% and we think that's a prudent investment given the pressure the consumer is going to be under from a macroeconomic perspective, the fact that we are coming off of four rounds of pricing, significant price increase, obviously cost justified, but we want to continue to support the consumer as they transition through that. And so we think 11% is the right number. And you have two data points that give us confidence that 11% is the right number. During the pandemic, we took our advertising spending up, even at a time when we couldn't fully supply. That increase in advertising led to stronger superiority ratings for our brands, and that gave us the confidence to take the four rounds of pricing that we took. So we think again, in a time where consumers are pressured and stressed, investing that additional point of advertising makes a lot of sense. And then the second data point I would give you is that we've been on a journey to get to know 100 million consumers in the US, and that allows us to personalize to them, which was part of our IGNITE strategy. We've nearly met that goal, and that has led to a return on investment in our advertising being the highest it ever was. We reached a high point year. So we feel really good about putting that extra point in because we know what we're going to get from a returns perspective in addition to supporting the superiority of our brands. And again, we'll continue evaluate this moving forward. Doesn't mean it will necessarily be 11% the year after. This is really a roll up of what we think our general managers need to best support our brands during this time. And then from a promotion perspective, promotions continue to be lower than they were pre-pandemic, but are ramping up. Our expectation is throughout the course of the year, we'll return to more normalized promotions, so similar to what we were pre-pandemic. And, we've assumed to be fair, though, this year, it would ramp up faster and it hasn't. But based on what we're seeing in the data, we think that's a fair assumption. And again, we wouldn't be targeting going beyond what we were pre-pandemic, but just returning to those levels that we had. And for our categories, that still means the vast majority of our sales are done off the shelf with no price reduction. Most of this is good quality merchandising, targeting the consumer around key price points, et cetera. So we think those in combination are the right level of spend given the consumer dynamics, given what we see from a return perspective and what we think is needed to grow categories and to grow share over the long term.

Operator:

And our next question comes from Dara Mohsenian from Morgan Stanley. Please go ahead, Dara.

Kevin Jacobsen:

Yeah. Happy to take those questions, Dara. Maybe let me start with cost inflation and what we're projecting for this year. Maybe if I step back and just think a little longer term in terms of what we've been dealing with and you folks know fiscal year ’22, a really difficult year given that extreme levels of cost inflation, about $800 million. Last year, we experienced about $400 million of cost inflation. And this year, we're projecting about $200 million. So sequentially getting better, it's moderating, but we're still expecting to operate in a higher cost environment. As we look at that $200 million worth of supply chain inflation, there's really two areas we're predominantly seeing those cost increases coming through. I would say about a third of that we're projecting will hit in commodities. There's a number of items we still see inflating, particularly chemicals, substrate, corrugate and linerboard, we're still looking at rising costs year-over-year. Resin for us, we're looking as a fairly neutral cost. It came down last year, and we're assuming it'd be relatively flat this year. And then we are seeing some cost declines in some of our ag products and diesel. But overall, we think that bucket will be modestly inflationary. And then the other item we're looking at really hits particularly manufacturing and warehousing primarily driven by labor that we continue to expect to be operating inflationary environment. And so those are the primary buckets where we expect to see the $200 million. Now on the gross margin goals this year and the phasing of those -- as you said, Dara, we're expecting to continue to make progress rebuilding gross margin. And you folks know we've talked about this quite a bit, we're committed getting back to those pre-pandemic levels of margin. I think we made good progress last year. We’ve improved about 360 basis points. We expect to build on this this year, expecting another 150 basis points to 175 basis points of improvement. And so by the end of this year, assuming we deliver this plan, we will have recovered a little over 500 basis points of that 800 basis points we lost. Now in terms of the phasing, I'd say, Dara, typically Clorox has some seasonality in terms of our margins. Typically, our fourth quarter is our highest margin. And that's particularly because we do an -- a disproportionate amount of our Kingsford business in the fourth quarter. I think as you folks know, we sold out 50% at Kingsford in the fourth quarter. It's a very business. So that tends to generate our highest margin. And then typically, Q2 is our lowest margin point. One, because we do very little Kingsford as well as we do some, a lot of gift packing on our Burt's business, which is a great activity to drive awareness and trial, but it comes at a lower margin. So you should normally think about our business. Once we've gotten past the normalization and the pricing and all the disruptions, historically, Q2 is a low point and then Q4s are high. So I think it's better to look on a year-over-year basis versus sequentially quarter by quarter. Now in Q1, I expect we'll make good solid progress. Now, not to the same degree in Q4, 560 basis points because we've now lapped that third round of pricing starting now. And so you should expect it to step down the benefit of pricing, but I expect to have a good solid Q1. And then what I expect to do is continue to advance margins on a year-over-year basis and as we said, we're targeting to get to about 41% this year.

Kevin Jacobsen:

Yeah, Dara, I can start with our pricing assumptions. In the outlook, we have not assumed any broad-based pricing in the US similar to the first four rounds we've taken. Now, we will continue to price internationally because of the higher inflation rates we're experiencing there. And we'll also continue to focus on net revenue management activities. But in terms of broad-based pricing, we don't have anything assumed in the US this year.

Operator:

And our next question comes from Filippo Falorni from Citi. Please go ahead, Filippo.

Kevin Jacobsen:

Yeah. Thanks, Filippo, for the question. As it relates to Q4 and you're right, the over-delivery on gross margin versus our expectation. We went into the quarter targeting 40% to 41% gross margin. And as you saw, we delivered just under 43%. I would say for the most part, as you look at the various drivers within gross margin, they're generally in line with our expectation. That was certainly true for cost savings, pricing, and commodities. The biggest variance was our top-line performance and particularly on volume. And so volume only declined 2% for the quarter. We had projected a larger volume decline in the quarter. And as a result of that, had improved operating leverage, that really flowed through the entire P&L. It certainly benefited gross margin, but it also was the primary driver of our very strong earnings performance for the quarter. And then, as we go forward and on your question on cost savings, look, our team did some just terrific work this year. We target a 175 basis points of EBIT margin expansion each year through cost savings. In fiscal year ‘23, we delivered well north of 200 basis points. And that's really a credit to the team and the work they're doing to drive cost out of the system. And I fully expect to have a very strong year this year as well. So I would expect this year, we'll have another strong year that's probably north of 200 basis points. And that's incredibly important because as we said, we continue to operate in an inflationary environment. And for us to continue to grow margin, it's really based on the good work our team is doing both on driving cost savings and driving the supply chain optimization work we're doing. And that's allowing us to absorb that increased inflation and continue on our progress rebuilding margin. So really good work by the team and exceeded our goals both last year and I expect to do it again this year.

Linda Rendle:

Yeah. On volume, maybe just to take a step back, I think would be helpful and talk a little bit more similar to my comments on household penetration of what impacts volume and then what we believe we'll see over time as we return to more volume based growth from more pricing driven growth. So the big picture on this, we knew we were going to make a volume trade-off with the level of pricing that we took. And certainly that pricing was cost justified. And I think that's the right trade-off given the fact that we were able to deliver the top-line and margin progress that we committed to. And it's only one lever that we look at it, understanding brand and category health. So if we if we look at volume, again, what impacts it? Consumers are adjusting to pricing right now. And we still have two price increases that we will lap here in Q1 and Q2. And so they're still adjusting to what the pricing is. And they're adjusting to pricing well beyond our categories. I think it's also important to note there's an element of cross elasticity here. Everything in their world has changed from a wallet perspective. And they also just came through a pandemic and they want to have experiences. So we're watching that consumer settle out. And what we're seeing in our data is volumes are beginning to improve. You saw that if you look to 52 weeks, our volumes were down more than they were in the latest 13 weeks, for example, so we are making improvement. We still have to lap those two price increases. But from a consumer behavior standpoint, what you'll see is consumers will return to their old routines because those routines were the most efficient and effective for them, and particularly in essential categories, they don't want to have to work harder to do this stuff. So perhaps they've run through the inventory they have in their house, maybe they tried an alternative and it doesn't work as well, and we tend to see those people start to come back. We also saw light users category loss tend to come back again because we reintroduce our products to them through innovation. We use our advertising spend to talk to them about the benefits of the product, we remind them that, and they pick us up again as they send their child back to school or if their family experiences a run of cold and flu in the house. So those moments, we tend to bring those light users over, and volumes tends to grow again. And we've seen that every time we've taken pricing, and that's consistent in categories. I think what's unique for this time is, the amount of inflation our industry and Clorox experienced specifically is unprecedented. We’re certainly not taking this level of pricing. So it really will be about the pace that this happens at. But we're happy with the progress we've made so far. We think we have the right plans in place. We're making the right investments. Our brands are still a superior value versus what they were pre-pandemic, so they're very strong. And we believe over time, again, we will make progress on volumes and return to more volume-based growth moving forward.

Operator:

And our next question comes from Andrea Teixeira from JP Morgan. Please go ahead, Andrea.

Kevin Jacobsen:

Hey, Andrea. Let me maybe start with your shipment consumption question and then Linda can address price elasticity. As it relates to the fourth quarter, I think there's a few things we are seeing, and I'll talk both versus our expectations and on a year-over-year basis. Versus our expectations, as you know, we had anticipated about 3% to 6% organic sales growth, and we delivered much stronger growth in the quarter. That was primarily driven by consumption coming in stronger than we anticipated. So the consumer is still quite resilient and we haven't seen any drop-off in consumption as we look Q4 to Q3 and we expect that we might see some drop-off in consumption, and that didn't materialize. And then the other driver of our performance was Kingsford. And as you know, we talked quite a bit about that last quarter. We were disappointed with the results in the third quarter. We made some changes to our plans. And I would tell you, we're a bit cautious on what exactly we'd be able to accomplish in the fourth quarter. But credit to our team, we had very strong execution. That business grew both volume and double digit in sales, had a very strong performance. And that was the primary drivers to the over delivery. The other element to think about though as it relates to inventory, we think retailers generally have the right inventory levels. But one of the reasons we had very strong growth on a year-over-year basis is, if you think about last year, retailers were reducing inventory levels. And at the time, as we were all getting more comfortable with the resiliency of the supply chain, everyone was starting to take down their safety stocks. And we saw that last year with retailers reducing inventory. And if you think about what's really happening when they do that, what that means is retailers continue to sell to their customers, but they don't reorder from the manufacturers. So they're still selling product and not reordering from us. And so last year, our shipments lagged consumption. This year, as you fast forward, we saw our shipments much closer to consumption because retailers are not adjusting inventory levels. So on a year-over-year basis, that drove much stronger performance. That was particularly true in our home care business where we saw inventory reductions a year ago. We saw, and particularly in wipes, we saw very strong wipes shipments this Q4, which is really now we're shipping in line with consumption, which was not the case a year ago. And that really contributed to very strong year-over-year performance and that 14% growth. And then, Linda, I know she can speak to elasticities.

Andrea Teixeira:

That's helpful. And on the -- just a clarification, the impact of the inventory write-down -- not write-down, but inventory rationalization last year, was it like a low single digit headwind that then disappeared this year or normalized?

Andrea Teixeira:

Super helpful. Thank you. I'll pass it on.

Chris Carey:

Hey, everyone.

Chris Carey:

Just one quick follow-up on the gross margin assumptions. Kevin, you said in the prepared remarks that commodities would still be a bit inflationary. What are those commodities? I know there's always a lag, but I would just be curious where you're seeing that just given the favorability that we can see on this side? Then I have a quick follow-up.

Chris Carey:

Okay. And then just on the organic sales over-delivery, non-tracked charcoal comping, some under shipment in the base, and then stronger consumption, just to make sure I have those. Anything else…

Chris Carey:

…coming up a lot this evening. Okay. All right. Thanks.

Chris Carey:

Okay. Great. Just like a strategic question, Linda, it's interesting how far this whole spectrum on investment has come that, this evening, it's almost like, are you spending enough? And you're talking about higher advertising spending, really strong S&A. And I guess maybe it'd be helpful because, we're getting through earning season now. What's your take on why we're seeing this really significant step-up in investment levels? And it's not just from Clorox. It's from all of your peers, marketing spending, SG&A are just going to levels that have not been seen in a very long time? Is this just a lot of manufacturers saying we need to get volumes going, are you feeling a lot more push from the retailers to get volumes going? Just, what are your thoughts on maybe why this investment cycle is coming together and some of the key drivers and see where it’s going. So just -- I know it's a big question, but thanks for any thoughts.

Chris Carey:

Thank you, both.

Operator:

And our next question comes from Javier Escalante from Evercore ISI. Please go ahead, Javier.

Kevin Jacobsen:

Javier, let me let me see if this helps. If you look at our Q4 performance and I think your question is sales across many different channels. As you saw, very strong growth, if you look at tracked channels, that's true. But what I'd also tell you is some of the areas that are not showing up in tracked channels, we had very strong performance. Our PPD business grew both volume and sales in the quarter. In international, we held volumes and grew sales 14% organically. And then our non-track sales were even stronger than track. So, we're seeing broad performance, not only in tracked channels, but we're seeing it in all the areas where we're selling product. And that contributed to the overall performance of the business. And that's why you'll probably see even stronger results on what you're seeing if you're just looking at tracked channel performance.

Linda Rendle:

Javier, maybe it would be good just to back up again and go through to make sure we go through all the drivers of what drove track consumption versus organic sales, and Kevin just covered part of it. But we do have a fair amount of our sales in non-track channels. It's a little complicated because non-track does not include international PPD, which is why Kevin broke it out the way he did. So, just to break it down, we had Q4 organic sales growth of 14% and we saw track sales consumption of about 7%. So the delta would be what Kevin highlighted. International and PPD are portion of that. PPD grew volume, international held volume. Remember that we're lapping wipes inventory that Kevin spoke about, and that's a portion of it. And then we saw stronger, non-tracked performance in a number of retailers on a number of businesses. And that's across e-commerce and brick and mortar, et cetera. And then in addition to that, we did, we haven't spoken a lot about this yet, but we do always ship some of our Q1 events in Q4, and that contributed to that delta as well. But we do have a strong non-channel track channel presence. And so, yes, that absolutely can move the number. And this is pretty normal for us to have a quarter that is a bit disconnected from tracked channel sales, in addition that you have the fact that we have very strong merchandising in Q1 as we normally do, and we typically ship some of that in Q4. But those are really the -- if you look at those four buckets, those are the four buckets of the difference between the 14% and the 7%.

Kevin Jacobsen:

Javier, this one is pretty minimal. What we have left to lap is, the fourth round of pricing that we took for half a year. So if you look --

Kevin Jacobsen:

This year, we had in total, about 670 basis points of total benefit for the year, you should expect a much smaller benefit in fiscal year ‘24 because now we're looking at just half a year on one of our pricing actions. And the fourth round was not as large as the third round.

Operator:

And our next question comes from Olivia Tong from Raymond James. Please go ahead, Olivia.

Kevin Jacobsen:

Sure, Olivia. As it relates to gross margin, as you said, we continue to expect to make progress this year. So our commitment is to rebuild gross margin back to pre-pandemic levels. This year, we're looking at about a 150 to a 175 basis points of progress. And that's slowing from what we delivered last year and is primarily driven by pricing. So we took four rounds of pricing over the last 18 months, and that had a significant benefit last year. It contributed over 650 bps to gross margin. As we look at fiscal year ‘24, as I was just mentioning to Javier, we have fairly limited pricing in the plan. We're going to get a little bit of carryover on that fourth price increase. So it'll have a smaller impact on gross margin. And then we're really able to grow margin based on all the very good work our team is doing on cost savings and supply chain optimization. So in spite of still dealing with about $200 million worth of cost inflation, we believe we can more than offset that through the good work we're doing within the supply chain and continue to grow gross margins. And so while we're making good progress, I'd expect that to continue as we move into fiscal year '25, I expect that progress to continue. The one thing we'll have to look at over time is, we bought these commodities for decades. They are cyclical. At some point, they'll turn deflationary. That's not our expectation this year. But certainly, when that occurs, that'll certainly accelerate the pace of recovery. It's just hard in this environment to predict exactly when that's going to occur. But we feel very good about our ability to rebuild margins back to those pre-pandemic levels, and we know that's going to take some time to get there. But I have to tell you, I feel very good about progress we're going to continue to make this year in spite of ongoing inflation we're dealing with.

Olivia Tong:

Got it. And then on the top-line, as you look towards rebuilding volume as the year progresses, can you talk a little bit about innovation and what role that plays, and in your view, what kind of impact does innovation have on this year versus last?

Olivia Tong:

Thank you.

Lauren Lieberman:

Great. Thanks so much. So just taking a look, [playing our loan model] (ph) and looking at kind of the dreaded multi-year stacks, and -- but looking at the two year stacks on volume and on price mix this quarter in particular, like, all your comments make frankly more and more sense on the things you were lapping and the contribution, for example, for charcoal, to price mix that the inverse probably, I guess, for wipes on health and wellness. I was curious as we look forward, any other periods, because the stacks are messy, that you think should be called out where there is a dynamic of retailers having reduced inventory in the prior year so that we should be particularly keen for differences in shipments versus what we're seeing in tracked channels, knowing there's always on track that we won't see.

Lauren Lieberman:

Okay. Great. And then just in follow-up, I was curious if you could comment on kind of where you stand, I guess, in terms of shelf space or distribution and knowing that and we've talked about several times in the past pre-COVID, there was some, kind of lost shelf space. And now you've had -- as you pointed out in the release, really strong innovation agenda. So I guess, where do you stand on kind of shelf space? How are you thinking -- do you think there's opportunities to be growing shelf space with innovation in ‘24? Is that part of the outlook or not so much?

Lauren Lieberman:

Okay. Thanks so much.

Operator:

And our next question comes from Steven Powers from Deutsche Bank. Please go ahead, Steven. Steven, is your line muted?

Operator:

Yep. Can hear you now. Go ahead.

Linda Rendle:

So we've certainly taken account of the foundation of any year that we plan. We look at what we expect the categories to contribute, and, our assumptions in both as we lap pricing and as we head into what we predict is a mild recession in the back half of our fiscal, assume category rates commensurate with that. And then by category, we're looking at our plans, comparing it to that and adjusting based off of if we see headwinds or tailwinds. We want to make progress over the long term on share. We've built that into these plans. We've built in the fact that we're spending additional advertising and sales promotion, that we have good innovation plans. And that lands us at the total outlook that we've provided. But they're very much grounded in the realities of the categories and what we expect.

Linda Rendle:

That's fair.

Linda Rendle:

Thanks, Steve.

Jason English:

Hey, folks. Good evening. Thank you for [indiscernible] me in, and congratulations on a strong finish to the year. I'm going to totally do it myself, by going back in time to a time where you guys used to give us a log of all your price increases and decreases. And the point there was, there was decreases back in, I think, 2009 and 2010, you had you had some decreases on Glad, on Litter, more recently in 2018, I think you rolled back the prices of Glad. Obviously, all that was accompanied by pretty substantial downdraft in commodities. So my question is, if we get to your point, Kevin, your other downdraft in commodities, because these commodities, to your point, are cyclical, would we expect or should we expect you to roll back some of these price increases that you put through one of the four in the last year or two? Or, in light of the investment you're making, are you trying to manage the business differently? So instead of give back that relief in the form of pricing, you spend it back into the ability of the P&L through lines like A&P and marketing?

Jason English:

Okay. So that actually sounds like you do intend to manage pricing differently than you did a decade ago or so. Last time we came through a commodity super cycle where you didn't just adjust by trade, you actually announced those price increases, you published those price increases, you gave us a log for the list price decreases on the back end of it. And I'm hearing you say now that that's even if clients do come in, that's not the intent. The intent is to manage it differently with trade, flexing trade if we find ourselves in that scenario, and I totally appreciate that you don't see that scenario. That's not what you're calling for in 2024, given the commodity the overall inflation environment?

Jason English:

Understood. Thank you.

Operator:

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

Operator:

This concludes today's conference call. Thank you for attending.

Operator:

Good day, ladies and gentlemen, and welcome to the Clorox Company Third Quarter Fiscal Year 2023 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Ms. Lisah Burhan, Vice President of Investor Relations for the Clorox Company. Ms. Burhan, you may begin.

Linda Rendle:

Hello, everyone, and thank you for joining us. We delivered strong results in the third quarter and made a challenging operating and cost environment, with organic sales growth in all four segments, gross margin expansion and double-digit adjusted EPS growth. Our performance reflects solid execution by our team, the strength and resilience of our portfolio, the superior value of our brands and the relevance of our IGNITE strategy. Based on our strong performance, we're raising our fiscal year outlook. During the quarter, we made great progress through building margin while maintaining top line growth. Net sales grew above our long-term target and we delivered our second consecutive quarter of gross margin improvement supported by cost justified pricing and decade high cost savings. We also made further progress on our IGNITE priorities, investing in our brands and innovation pipeline, while advancing our digital transformation and streamlined operating model to create a stronger, more resilient company. While we're encouraged by our progress to-date, we're relentlessly focused on controlling what we can to drive and appropriately balance both top line and bottom line growth. Looking ahead, we expect the operating environment to remain volatile and challenging. Despite recent moderation in pockets of input costs, overall inflationary headwinds continue to be strong. In light of this and ongoing macro uncertainty, we're watching consumer reactions very closely given the potential for them to come under greater pressure and we are prepared to adapt plans as necessary. Regardless, we have trusted brands and essential categories, which we continue to invest behind. I remain confident that our actions position us well to navigate this environment to deliver consistent profitable growth over time. With that, Kevin and I will take your questions.

Andrea Teixeira:

Thank you, operator and good afternoon, everyone. So my question refers a more on the quarter coming in better than anticipated. And Linda, you and Kevin and the team had highlighted that elasticities can kind of came in better. But of course, you're not lapping and not assuming that's going to continue. So you can -- if you can talk a little bit about that? You called out Kingsford being one that you potentially have to work out the price gaps. Any other area that you'd think would be an opportunity? And regarding VMS, just as a clarification, are you putting the asset for sale or just rightsizing it?

Linda Rendle:

Andrea, I'll take VMS. So as you're all aware, VMS is a small portion of our portfolio. It's about 3% of sales right now and has continued to face challenging market dynamics from a category perspective, what we're seeing coming out of COVID. And then, of course, we've highlighted the performance issues on that business. And we've reassessed that business as it relates to the role it plays in our portfolio. As Kevin highlighted, we're seeing strong results across the majority of our businesses. And we think it's the right step now to look at resource allocation and allocate resources to businesses we think how higher growth potential and therefore, making a bigger focus on profitability in the VMS business. And that's what the team will be laser focused on moving forward. That includes, like I said, moving resources to businesses that have growth potential as well as continuing to narrow our focus on core brands. And we think that's the right role for the business moving forward. Given that, that's what triggered the non-cash impairment, but we feel like we have the right plans moving forward. And as it relates to our portfolio, we're always doing that work with our Board. We'll continue to do that. But right now, we're focused on driving more profitability in the VMS business as we own it today.

Linda Rendle:

Yeah. Certainly, for wipes, that was a business or one of the business most impacted by COVID. And as we noted, in Q3, we were lapping the Omicron variants and then begin to get to a period where we're more normalized from a COVID perspective with wipes. But it definitely has been bumpy over the last few years as we've gone through that. But we've been very pleased with the performance on the wipes business. We've continually grown share quarter-after-quarter for the last well 12 months over 18 months now on wipes. We've regained significant distribution. Our merchandising plans, while lower than they were pre-pandemic are stronger than they have been and that's behind our ability to supply and we are able to fully supply that business now. And we continue to see consumers turn to us in times of cold and flu. Even with a season that was moved up, we saw strong consumer reaction from a cold and flu perspective. So we feel good about the future of that business. We continue to have a good innovation pipeline. And if you look at our shares, they certainly support the fact that what we thought would happen with all the tertiary brands launched did as we return to strong share leadership and continue to grow that share position.

Operator:

Your next question will come from Peter Grom with UBS.

Kevin Jacobsen:

Hi, Peter. Yeah. Thanks for the question on gross margin. I would not look at it as stepping down in Q4. If I look at our Q3 performance, and as you mentioned, we delivered a 41.8%, there's about 1 point of benefit from the one-time items we highlighted. So if I set that aside, it's sort of an ongoing basis, we're a little under 41%. If you look at our raised outlook for the full year, we're now looking at 38.5% to 39%. You can back into the fourth quarter and now suggest we get to about 40% to 41%. So I would say our fourth quarter is very much in line with what we delivered in the third quarter, if I just set aside the onetime benefit we had. And so we expect the good strong performance we delivered this quarter to continue on into the fourth quarter.

Kevin Jacobsen:

Yeah. Peter, as it relates to gross margin, Lynn and I remain committed to getting back to pre-pandemic levels that's work that's well underway, and we intend to get there. I'm going to be cautious about providing in the outlook for fiscal year '24. We're still in the process of developing our plans. So it's a bit too early for that. But I would say at a high level, you should expect when you see our plans, it will be very much focused on the same priorities we've been driving this year. We're going to continue to drive top line growth. We fully expect to continue to make progress, expanding gross margins and rebuilding them. And then we'll continue to advance our strategic priorities. The challenge with the gross margin, I know there's a lot of interest in exactly when we get to pre-pandemic levels is. On the elements, we control, I feel very good about the progress we're making and we've talked a lot about those drivers. I would say those initiatives are primarily on track or exceeding our expectations. But the reality is there's a real impact from the areas we don't control, either supply chain disruptions or inflation. And as I said in the past, I really think that inflationary component will either accelerate or delay our time to recovery, depending on how that plays out over the next 12 months to 24 months. And I frankly don't think anyone's got a particularly good crystal ball right now to predict that. And so we're going to continue to focus on those things we can control. We're making really good progress. I expect that progress to continue in fiscal year '24. But I think it's a little premature for us to make an exact call on where we think we'll be by the end of '24.

Kevin Jacobsen:

Yeah. Thanks, Peter.

Anna Lizzul:

Hi. Thank you very much for the question. To continue the theme on gross margins. I did want to just follow up. Understanding that commodity costs are still a headwind, but directionally keep moving in a better direction and less of a drag on margins here. I mean do you see commodity costs largely stabilizing at this point into fiscal Q4? And then also, do you see a bigger benefit acknowledging that the mix and assortment on margins was a benefit in fiscal Q3, would you expect a bigger benefit on that in fiscal Q4? Thank.

Anna Lizzul:

Okay. Thanks very much. And then just on the mix and assortment part of margins, are you expecting to see a better benefit from fiscal Q3 to fiscal Q4?

Anna Lizzul:

Great. Thanks very much.

Operator:

Your next question will come from Dara Mohsenian with Morgan Stanley.

Kevin Jacobsen:

Sure. Yeah. Thanks, Dara. As it relates to Q4, I'd say the one item I would add to your list and you're exactly right. We expect some moderation in cost inputs as we move from Q3 to Q4. The counterbalance of that is on pricing. We believe Q3 will be the strongest benefit from pricing. As we move into Q4, we're now lapping two price increases, the first two rounds we took. And so I would expect that we'll see less benefit from pricing in Q4, essentially offset by more moderating cost environment. So collectively, we get back to that 40, 41, which is fairly consistent with Q3, seeing a little less inflation and a little less benefit from pricing about offsetting. And then as it relates to Q3, probably the biggest benefit above what we expected is volume deleveraging. We went into the quarter expecting based on elasticities that we would see volumes down in the mid-teens range. And as you saw, our volume was down about 11%. So that stronger top line performance that really drove through the entire P&L. We overdelivered on sales relative to our expectations, but it also contributed to a strong gross margin as well as EPS. So that was really the biggest change versus our expectations. And as I mentioned earlier, Peter, the cost inflation is generally in line with what we expected. That was true for Q3 and we still expect about $400 million of cost inflation for the full year.

Linda Rendle:

Sure. I'll start with the portfolio and then get a little deeper on Kingsford. So from a price gap perspective, the pricing we took a few months ago went generally as expected. And we've seen pockets of price gaps. And frankly, we're still closing some of those, and we've adjusted some of our plans on the businesses where we've had issues. For the most part, our price gaps are in line to where we expected them to be. Kingsford, as you call out is the biggest gap that we have right now as competition did not follow that price increase in full. And that's one that we are making adjustments to our plan, and we have those already beginning to show up in market in Q4. Part of that would be trade related. We're ensuring we have the right merchandising plans to support the right price points, but we're also focused on market baskets with retailers, which is one of the biggest opportunities given the overall basket for the consumer in the drilling space is under pressure with protein prices being up, and of course, the rest of the things that go on the grill. So we're focused on supporting those enhanced merchandising plans, and we'll expect to see that play out as we head into Q4. That being said, though, we are laser-focused on any price gap issues that we have in pockets and we have plans ready to adjust, and we will do that on select other areas of our portfolio where we continue to see gaps. But what I'd say is there's so much noise as prices fluctuate and as promotion starts to come back into the marketplace that we're being incredibly cautious to ensure that we have the right value for our brands and maintain that superior brand value with consumers but not get ahead of ourselves from a trade perspective. And I think that balance has been working, and we'll continue to do that in Q4 and beyond as we manage price gaps.

Operator:

Your next question will come from Filippo Falorni with Citi.

Kevin Jacobsen:

Sure. Hi, Filippo. As it relates to Q4, I won't give a buy line forecast for the fourth quarter, but you should expect that the price benefit to margin we saw in Q3 is a high watermark this year. And then now as we really start lapping that second price increase, you'll start to see that pull back. I'd say more in the range, somewhere in that Q1 to Q2 range, generally in that area. So we'll see that start to step down. And that should continue to play out that way for the next three quarters until we fully lap the last round of pricing we took in December, it will continue to step down in value over time. And then your question on list price changes, I think you may have read in our prepared remarks, we do not have any additional large scale pricing in our plans for the balance of this fiscal year. We will continue to work on place back architecture (ph) changes. And then we'll evaluate we're developing our plans for '24. So we'll come back to you in August and we'll share more details about our plans about how much would be pricing and how we would execute that pricing is a little too early to have that conversation. What I would say though, maybe longer term is, I think as we get through this inflationary cycle and we get back to an appropriate level of margins, I would expect us to get back to a more normalized level of how we grow the top line, which is more volume dependent and we'll continue to focus on innovation, consumer trade-up and some price back architecture be much more volume driven than price mix driven and so I think you'll see that evolve over time. But we're still very much in the mode where it's being more driven by price mix and I expect that to continue for another three quarters until we lap all this pricing.

Operator:

Our next question will come from Lauren Lieberman with Barclays Capital.

Linda Rendle:

Sure, Lauren. So on share overall, we were happy to maintain share in aggregate, and we grew share in five of our nine businesses and continue to grow share in the growth markets around the world. That being said, of course, our goal is to grow share and I've been transparent about that, that we're not satisfied into that zone, but we are really pleased to see given the level of pricing that we've taken that our shares have held up. And of course, we are talking about dollar share, and if you recall, earlier, we were growing volume share pretty steadily as pricing had fully taken hold in our categories, and that was something that we were looking at, too. So Lauren, we're balancing both of them. Our focus is usually on dollar share as the primary metric that we want to focus on. We think that convey as well our overall superior value and how we think about consumers thinking about value in the category and dollar share is a better representative of that. But again, we are watching volume and unit share to see how consumers are making decisions, et cetera. The good news is that because the categories have mainly moved in line with us with some exceptions, Kingsford being notably, you're seeing adjustments in volume share that in some places are larger, but most of the time in line and just have to do with normalizing price gaps. So we watch it, primary metric is dollar share. Happy to see where we are and happy to be growing in five to nine businesses, but the work is certainly not done yet.

Kevin Jacobsen:

Lauren, I'd say a few things on volume. I think one thing that continues to benefit is, as you know, is we chose to use contract manufacturers mean that significant spike, so we did not overbuild our facilities that allowed us to, as volume moderated we were able to set those agreements down and not be left with a lot of unused capacity internally. And so I think that's benefited us. I think -- as I mentioned, I think to Filippo, as we move forward now, depending on where pricing goes in fiscal year '24, but given the pricing we've taken, I would expect price mix to continue to moderate and the volume declines to moderate as well as we cycle through this pricing. And so as I said, short of any future pricing being taken, I think we've probably got a three more quarters or so, we're seeing price/mix driving the top line to a greater extent of volume. But I think that will level and balance out as we look further out into our fiscal year '24 and so I think that's when we get to a more steady state of volume. And what we try to do is be thoughtful about ensuring we're building our manufacturing capacity to be in line with these plans and not getting ahead of ourselves. And so that's the work we've been doing with our supply chain team to try to make sure we don't end up in a position where once we get to the steady state, we've got too much capacity in our facilities. I think we're in pretty good shape, but that's something we continue to evaluate and continue to adjust our plans. But certainly, it's something we're keeping a close eye on.

Kevin Jacobsen:

Yea. Sure. Thanks for the question. As it relates to our digital transformation that program is very much on track. As you know, it's a five year program, and we plan to spend $500 million, no change in our expectation. We are seeing a little bit of a shifting between years. This is the second year of the five-year program. We started the year out, expecting we spend about $150 million, $90 million of OpEx, about $60 million of CapEx and that $90 million equates to about $0.55. We have now raised our total spending to about $160 million, so from $150 million to $160 million. And that's just a little bit of shift in timing between years. We're not changing the overall expected spend as a result of pulling a little bit of that forward into fiscal year '23, we've raised our expectation about $10 million and that's that $0.07 you mentioned, Lauren.

Kevin Jacobsen:

Thanks, Lauren.

Olivia Tong:

Great. Thanks. Good morning. My first question is on advertising and your view on reinvestment levels, especially with A&P up pretty substantially in Q3. So we certainly saw some nice acceleration following the gross margin improvement. So just wondering on your views going forward if gross margin continues to recover ahead of your expectations, where do you think advertising goes? And then just a follow-up on that. This is the biggest increase in advertising margin that on a year-over-year basis in quite a few years. So can you talk about where the incremental spend was and your view on the ability to generate the same level of ROI on that spend versus what you're going and expectations were?

Olivia Tong:

Got it. That's helpful. And then I just have a few specific questions on Kingsford. If you could just remind us first where Kingsford margins stand relative to company average. And then obviously, a lot of pricing this quarter. How much of that pricing acceleration that you saw in Q3 was driven by Kingsford versus the other brands where you saw competition in follow (ph) pricing?

Olivia Tong:

Sure. Would you mind just giving us a sense in terms of Kingsford relative to company average then? And then also, how much of that pricing acceleration that you saw in Q3 was driven by Kingsford versus other brands where you did see the competition follow your pricing?

Olivia Tong:

Got it. Thanks so much.

Chris Carey:

Hi, everyone.

Chris Carey:

So I'm just digesting a lot of the questions on this earnings call around sequential momentum in gross margin, which was great. It sounds like the underlying momentum will continue into Q4. I guess the question I want to ask is just philosophy on investment, right, because of this gross margin trajectory continues and you don't materially step up spending, you're going to be looking at a very, very significant year of earnings growth in fiscal '24, right? And I know you're not going to comment on fiscal '24, but certainly, this is the reality when you flow through these gross margins to the model. And I think these questions on investment are well taken and where you want to spend. But if 10% of sales is the right number, then it would imply that you're going to be spending an enormous amount on S&A? And I guess, just maybe help us understand where the types of areas where you might want to lean in, if you're now clearly over delivering on the gross margin line? If not an advertising? Are there areas of SG&A that you felt like have been underinvested in that you have opportunity over the next four to six quarters as if you look at the normalization of the P&L over the next couple of years? And just connected to that, there's been this target of 13% estimate as a percentage of sales out there. Is that still a relevant target over the near to medium term? Thanks, Rendle.

Chris Carey:

Okay. Thanks for that. That's a very fair just on the -- just one quick follow-up on Olivia's question. The way I understood it was, did Kingsford atypically contribute the pricing in Q3. And as such, to get back in Q4. I'm not exactly sure that's what you meant, but that was the question I had. So I figured it ask you as well. Thanks so much.

Chris Carey:

Okay. Thanks so much.

Operator:

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

Linda Rendle:

Hi, Javier. I'll start just with a reminder of what our digital program entails and how we're thinking about it. And then if there's any specifics we want to provide, Kevin can talk about the specifics of the spend for this year and how we're thinking about it moving forward. So we're investing, as you know, $500 million to transform our company digitally. And this, of course, is putting in the right technologies, including a new ERP, but it really is around changing the processes and the work that everyone at Clorox does to be faster and simpler. And we see this supporting both our top line momentum as we put in place innovation capabilities, better access to consumer data to drive insights and speed of decision-making as well as efficiencies as we have the ability to look across our supply chain and make decisions that reduce costs. This investment is on track. I think Kevin highlighted that to begin with. We'll see differences year-to-year. We're in the second year of the program, but the team continues to be on track implementing against that. What we've said is, most of the investment is upfront, but you get the majority of the benefit as you start to exit our IGNITE strategy or in 2025. And that's because you're putting all of those capabilities and technologies in place and changing how the entire company works and operates. And then we continue to be on track for that. This is a very high-return project for us. When Kevin and I evaluated this, we looked at the return and we track that project by project to ensure we're getting that return, and we continue to be on track to deliver good value on this over the long term. As it comes to specifics, we talked about in our release that we are about to implement the first region of our ERP coming up this calendar year. That is on track. -- as well as some of the other technology improvements that we've made. And of course, we have paired that with an operating model change that is also on track and in fact, a little bit ahead from a cost savings perspective this year as we were able to implement some of those changes faster. But those two things in combination are really about being fast, simple and more cost effective company that we -- that we want to be and to develop the type of resiliency and strength we can to weather whatever comes our way, another pandemic or whatever else the macroeconomic or geopolitical environment throws our way.

Kevin Jacobsen:

Sure. Hi, Javier. As it relates to the spending, what will happen is the $500 million is the cost, the investment to put these new systems in place. I think through the end of this year, we'll be a little less than halfway through that spend. So it will be somewhere around $230 million, $240 million. And then that will continue as we complete the program over the next three years. That's the one-time investment with this in place. Now there are all ongoing maintenance costs, which we have in our legacy systems now that when those get shut off, there will be ongoing maintenance costs for a cloud-based system that we'll continue to pay. But the $500 million is the cost of the investment in this technology to get it put in place.

Linda Rendle:

As you would expect, given the elasticities of what we spoke about and the fact that our pricing is generally in line with category pricing, category volumes were down, and we've absolutely expected that to be the case. If you look at dollar sales, so if you look at consumption, high-single digits in our categories, which continues to show the strength and resilience of the consumer in our categories. Given we compete in Essentials, this is something that we expected. We're watching really closely as the consumer continues to react to pricing and as they continue to react to the macroeconomic environment. But right now feeling very good about the category position that we're in and consumer response to pricing. Generally, we would expect over time as we begin to lap category pricing and see category volumes return and get to that place where you see low-single digit growth in our categories from a volume perspective over time. We are certainly not at that point right now. as we have nine more months to lap pricing. And then, of course, we'll see what plays out from a commodity perspective and any required pricing that happens in the future that would also impact that. The only other thing that I would say as it relates to pricing and you think about volumes. We're not seeing that type of trade down either as it relates to consumers making choices for private label, et cetera. That's been pretty steady. As we highlighted earlier, our shares in aggregate, are flat. We grew in five of nine categories. We have seen private label increase share a bit in some of our categories, but it's not coming from us. It looks like it's coming from other brands and that there is a simplifying of the category, and it all relates to the value that we offer consumers 76% of our portfolio is still deem secure by consumers. We've continued to invest in that. So volume is what we expect in the categories. And again, we expect that to bounce back over time as we continue to invest in innovation and advertising and in category growth plans with our retailers.

Linda Rendle:

Sure. Yeah. On Household penetration is still very high for the Clorox portfolio. We're still in about nine out of 10 homes, and as we spoke about last quarter, household penetration is something we expect to decline in a time when you take extraordinary pricing. But that's not a clock phenomenon. It is a category phenomenon. And what you see is people using those more price sensitive behaviors. They're letting a trash bag, fill longer. They're stretching their time in between cleanings they're doing those things to make their wallet stretch, and that results in usually category penetration declining and we are seeing that. What I would say, though, is we see no difference in our brands versus the category, and we would expect over time to rebuild category penetration as we rebuild volumes.

Linda Rendle:

Thanks, Javier.

Stephen Robert:

Very thanks. Actually, it's a good lead in. I just wanted to pick up on that household penetration discussion. Last quarter, we were talking about it. And I think the framing was that you were looking to rebuild household penetration over the course of 2024 and then looking longer term, obviously. Just in response to, I think, to Lauren's question earlier on volume growth, Kevin, your response, if I heard it correctly, you emphasized stabilization of volumes. So I just want to marry you kind of tie those two things together and make sure I'm grounded in the right takeaway because if we're rebuilding household penetration over the course of '24, I think that implies positive volume, whereas you emphasized stabilization of volume. I know it's maybe splitting hairs, but just wanted to think of -- just kind of understand how you're thinking about it? Maybe it's a progression over the course of '24, but just -- so I don't walk away the wrong impression. Thank you.

Stephen Robert:

Okay. Thank you very much.

Operator:

Your next question will come from Jason English with Goldman Sachs.

Linda Rendle:

Yeah, Jason. It's very dependent on category the consumer behavior. But what I would say is we noticed big buckets of the following

Kevin Jacobsen:

Yeah, Jason. The two questions, I think the first question you had was onetime benefits in the quarter. We had two. The first one was on trade spending. We have a normal process at the end of the second quarter. We evaluate our trade spending accrual. In this case, we're not seeing the promotional environment increased at the rate we expected. So we reduced our trade spending accrual. That was a onetime benefit in the quarter. . And then the other onetime benefit was one of our competitors had an out of stock in our dilutable category. And so our Pine saw business saw a pretty nice performance, double-digit growth as a result of that out of stock. Now the combination is back on shelves. So we don't expect that to continue back to a more normalized level of competition. So those two items are the ones we highlighted is fairly unique for the quarter that we don't expect to continue into Q4. That generated about 2 points of top line benefit and about 100 basis points of margin benefit for the quarter. And then on unit economics, yes, we're in mean rebuilding gross margins and we are going to be. We expect to be a much larger company than we were before the pandemic. We went into the pandemic with a little over $6 billion in sales. As you know, we're seeing a little over $7 billion right now. So you would expect gross profit to be higher because as we rebuild gross margins, and we are a bigger company that will generate more gross profit. So ultimately, we expect that to occur as we rebuild margins over time. But as Linda said, we think that's a multiyear journey to get there. We'll have to see how much progress we make in '24, we're developing those plans right now. But that is certainly our intent is to rebuild gross margin and have the results or the impact of gross profit as it relates to a larger company.

Kevin Jacobsen:

Thanks, Jason.

Kevin Grundy:

Great. Thanks,. Good afternoon, A couple for me, a cleanup on the SG&A, Kevin, I apologize if I missed this. It looks like your SG&A on an underlying basis, ex the digital moved up about 50 basis points from your prior guidance. What's driving that?

Kevin Grundy:

Got it. A couple more for me real quick. Just to walk from like the 14.5% this year to 13% ambition longer-term understanding it's going to take some time to get there. But sort of broad brush strokes, what gets you from 14.5% this year to 13.5% over a reasonable amount of time?

Kevin Grundy:

Got it. Thank you, Kevin. One quick follow-up, if I can. I was going to ask on trade promotion and it kind of came up end of your response. Again, like from our perspective, hard to gauge sort of order of magnitude with the decision to take down the accrual. But I think like collectively everyone on the call would think promotion levels moving higher and not lower, and I guess, particularly in your categories. So I was going to -- a question for both of you. I was going to ask Linda just how you're thinking about freight promotion risk around that? Are you starting to have those conversations already? Are retailers starting to push already? They see what's going on with resin and inflation more broadly. They see what's happening with this gross margin start to inflect. Are you starting to get more pressure there? And Kevin, maybe you could just jump in and sort of comment on the decision to take down a trade accrual with the likelihood the trade promotion is going to move higher over the next 12 months? And then I can pass it on. Thank you for that.

Kevin Jacobsen:

And then I would just add as it relates to the trade accrual specifically and Linda said it well, which is it's not that we expect tradesmen to go down. It's just not growing at the rate we expected. We -- before the pandemic, about 25% of our product was sold in some form of promotion. In our most recent quarter is at 20%. And if I look at Q3 a year it goes at 19%. So it is increasing. We expect that we get back to more of that pre-pandemic level faster. And so the reduction in accrual is just recognizing it's not as growing as fast as we had anticipated, but we do expect to continue to increase.

Kevin Jacobsen:

Thanks, Keving.

Linda Rendle:

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

Operator:

Good day, ladies and gentlemen, and welcome to The Clorox Company Second Quarter Fiscal Year 2023 Earnings Release Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Ms. Lisah Burhan, Vice President of Investor Relations for The Clorox Company. Ms. Burhan, you may begin your conference.

Linda Rendle:

Hello, everyone, and thank you for joining us. As I mentioned in our prepared remarks, despite persistent macroeconomic headwinds, we delivered better-than-expected Q2 results, with organic sales growth in 3 of 4 segments, gross margin expansion, and double-digit earnings growth. Our performance reflects the strength and superior value of our brands, strong execution across a broad set of actions and the benefit of some timing shifts. As a result, we've updated our full-year outlook.

Linda Rendle:

Sure. Thanks, Peter. So the first thing that I would just start with, and I'll hand it over to Kevin to walk through the quarter in a bit more detail, we're doing exactly what we said we were going to do. We are maintaining top line momentum, which came in better than we expected, and Kevin will walk you through those factors, while also doing the hard work to improve margins. And so from that perspective, we're feeling good about that balance. We're going to continue to be focused on it for the year. And Kevin, why don't you take them through the details of how the quarter should go.

Operator:

Our next question will come from Dara Mohsenian with Morgan Stanley.

Andrea Teixeira:

So I wanted to go back to the top line outlook improvement. So I think that probably, as you mentioned, it's a function of price elasticity or maybe the pull forward of shipments at this point. And is that the reason why you also did not raise guidance as much as you could have given the beat? Is that something that perhaps the retailers took more shipments ahead of the price increase in December and therefore, you can see some of that pull forward corrected in the third quarter fiscal? Is that how we should be thinking?

Andrea Teixeira:

And with the fourth quarter price increase, just a fine point, I'm sorry, the December price increase, the fourth round, can you remind us again how much would be the average pricing that you're getting to the beginning of the third quarter as we enter the third quarter?

Kevin Jacobsen:

Yes. Andrea, what I'd say, in terms of elasticities, our expectation is elasticities for this December round of pricing would be very similar to what we saw in July, which is consistent with our historical levels of elasticities. You might remember in the first few rounds, we were seeing lower elasticities than historical levels. Consumers were less price sensitive. But now that's really reverted back to historical level elasticity.

Kevin Jacobsen:

Yes, say, Andrea, we don't comment on -- specifically on elasticity. And as you can imagine, they're quite different by category, by geography. And so it's something we don't comment publicly on the elasticities of the brands.

Kaumil Gajrawala:

Can you talk a bit about supply and about inventory? You mentioned that fill rates were great. Maybe just a little bit more on your ability to supply through your variance, maybe digging into the categories a little bit? And then how do you feel about trade inventories as well as maybe inventories in the pantries?

Kevin Jacobsen:

I wouldn't say normalized me. I think that's probably overstating it. We are still dealing with supply chain disruptions. I would just say the frequency of those disruptions has definitely gone down. But I would not say we're -- I wouldn't describe it as a normal environment.

Kaumil Gajrawala:

Got it, better than before, but not normal.

Operator:

And we'll hear next from Chris Carey with Wells Fargo.

Kevin Jacobsen:

No, the volume deleveraging will be based on the pricing. And as Linda mentioned, the pricing is pretty broad-based across our portfolio. So as we take our fourth round of pricing, there will be an element of volume deleveraging because of the elasticities on those price increases. That will impact the third quarter.

Christopher Carey:

Okay. All right. Great. Just 1 quick follow-up still on the gross margin front. This was a nice sequential improvement in the manufacturing and logistics clients, certainly relative to where we were, right? And so have we reached the end of this headwind? Can we start thinking about manufacturing and logistics normalization and maybe even it turns to a tailwind for your gross margins at some point in the back half of next year?

Kevin Jacobsen:

Yes, sure, Chris. I would say, as it relates to manufacturing and logistics, our expectation is it will continue to be a headwind this entire year. So we think it's -- as you saw in our remarks, $400 million of supply chain inflation. About half of that is in commodities. The other half is in manufacturing and logistics. Now we do think it moderates as we move through the year. And so we think each quarter, it'll be less of a hit than the previous quarter, but it'll be inflationary for the entire year, and that's factored into our outlook.

Operator:

And our next question will come from Jason English with Goldman Sachs.

Linda Rendle:

Sure. Jason, there was really 2 factors in Professional. One, which is a more midterm issue and then one that was a very short-term issue. That affected professional last quarter. And I'll start with that one, which was our Pine-Sol recall and that impacted Professional. We have a fairly large business in Pine-Sol in Professional, and we'd expect as we bring that distribution back, that just to be a short-term impact.

Operator:

Our next question will come from Kevin Grundy with Jefferies.

Kevin Grundy:

I appreciate the color. If I could just 1 very quick follow-up, and I think you kind of touched on this a little bit. Are you starting to hear from retailers at all just given some of the moderation in commodities that they'd like to see more on deal here, more trade promotion?

Linda Rendle:

Kevin, what you're seeing in the latest data is what we see from a Q2 perspective in that promotion is still below where it was pre-pandemic across our categories. It's higher than it was a year ago in our categories, but definitely lower than pre-pandemic. And what we're hearing from retailers, which you would expect, is how do we continue to keep our categories healthy.

Lauren Lieberman:

Great. First thing I wanted to ask about was the performance in household, because the volume growth was pretty striking. So just curious if you could tell us a little bit more about which of the businesses had volumes up and if there was any of the merchandising attached to that or kind of what was going on there. Because, again, to see volume up with pricing as strong as it is, is pretty notable.

Kevin Jacobsen:

Yes, Lauren, I think you'll have 2 impacts. Now we're starting to lap the first round of pricing we took last year. So you're starting to see some of that first run of pricing drop off as we get into the back half of our fiscal year, and it's being replaced with his fourth round. So it's not as clean as another round of pricing being added. I think in aggregate, this fourth round was larger than our first round. So in aggregate, you'll see a little bit more benefit from pricing, and you see a little larger hit in terms of the impact to volume from elasticities.

Linda Rendle:

Yes, Lauren, this is a fundamental thing we're really focused on. And one of the trade-offs you do when you take the level of pricing that we're taking in the categories is you trade off some household penetration in the short term in order to do that.

Operator:

And our next question will come from Olivia Tong with Raymond James Financial.

Linda Rendle:

Sure. Glad was a business we were up in sales this quarter. We actually grew share from a trash perspective. So we're really pleased with the performance of Glad through multiple rounds of pricing. We're seeing strong performance in the market, and that's really behind our innovation program that we've spent a lot of time talking about, whether it be the addition of colors and sense, our focus on value there. Our work on distribution across the retailer base is paying off, and we feel good about where that business is from a trash perspective.

Olivia Tong Cheang:

Right. And then just following up. I know you mentioned a couple of times, it's too early to read too much into the December pricing. But just overall, are you seeing any bifurcation as far as pack sizes or willingness to stay with branded versus private label with high-end consumers versus low-end?

Linda Rendle:

Sure. As we've said, it really is too early to judge December's price increase at this point. But maybe I'll speak, Olivia, to the broader sets of price increases and just what we're seeing on average and what we continue to expect to happen as December gets fully reflected in the marketplace.

Operator:

And our next question will come from Javier Escalante with Evercore ISI.

Kevin Jacobsen:

Javier, let me see if I answer your question on shifting. So as we mentioned, in Q2, we had some benefit of shifting of some merch activity. And as I said, that's pretty typical that you'll see some merch events shift between quarters out of Q3 into Q2, and that was across a number of businesses. And then more specifically, we're seeing the benefit of an early start to cold and flu season in Q2 as it relates to our Health and Wellness portfolio. But maybe say a little bit more on what your question is. I'm not sure that gets to the question you're asking.

Linda Rendle:

Yes, I'll jump in on that one, Javier. So you are noting a few categories that have very strong untracked channel performance. And particularly in litter, our business in club, that was up due to some strong merchandising activity we had and actually some of the shift that we experienced from Q3 into Q2. So that's what you're seeing in the difference between the tracked channels and what we're talking about from a volume and sales performance in household.

Linda Rendle:

Yes. This is a category that certainly has had the biggest swings as consumers change their behavior as we went through the height of the pandemic, and we're still lapping. We're still normalizing, given Omicron happened last Q3, and we're in the process of lapping that right now. What I would say is if you look at this last Q2 versus pre-pandemic, our volumes are still higher. So in aggregate, people are still cleaning more.

Anna Lizzul:

I just wanted to follow up on the cost side. You're still seeing cost inflation, but you noted in your prepared remarks that cost inflation has moderated slightly on a sequential basis even though it's still higher year-over-year. I was wondering if you can give some more color on which inputs are moderating and how quickly those are coming down versus the ones that are still headwinds. And then could you also remind us how quickly you expect some of your raw materials come down in your P&L relative to when you see spot prices for those raw materials decline.

Kevin Jacobsen:

Yes, I'm sorry that you would ask that question. Well, it really varies by commodities. In some cases, we hedge. And so in those cases, you may have 9 to 18 months before we see the impact of a changing commodity environment play through our cost structure. In other cases, we have contractual relationships with our suppliers that delays those changes. So it's really hard to give you an enterprise answer how quickly that plays through. It is a commodity-by-commodity discussion based on how we set up those relationships with our suppliers.

Stephen Robert Powers:

On the household penetration topic, I guess the question is how much recovery at this point is anticipated for -- within the remainder of your outlook for fiscal '23? Is that something you expect to see some sequential progress rebuilding in the next few months and quarters? Or is that more of a fiscal '24 and beyond objective?

Stephen Robert Powers:

Yes. Okay. I mean, is there an assumption that you -- you may go backwards sort of as we get into calendar '23 before you go forward again? Or is it more hold-the-line?

Stephen Robert Powers:

Okay. Okay. And then you talked about promotional intensity in the category. And right now, it seems pretty rational, benign, constructive. I guess, is there, at all, in the base plan, an element of increased promotion as you go through the next couple of quarters? Or is that also more steady state as a base case?

Operator:

And this concludes the question-and-answer session. Ms. Rendle, I'd like to now turn the conference back to you.

Operator:

And this concludes today's conference call. Thank you for attending.

Operator:

Good day, ladies and gentlemen, and welcome to The Clorox Company First Quarter and Fiscal Year 2023 Earnings Release Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Ms. Lisah Burhan, Vice President of Investor Relations for The Clorox Company. Ms. Burhan, you may begin your conference.

Operator:

[Operator Instructions] Our first question comes from Peter Grom from UBS.

Peter Grom:

And I guess, I had just one follow-up on the kind of the organic sales outlook. I know, previously, a lot of the weakness was expected to occur in Health and Wellness, and you were expecting to see continued momentum across the rest of the business.

Kevin Jacobsen:

Yes, Peter, you're right. As you think about Q1 versus our expectations, our Health and Wellness segment came in better, behind the strength of Cleaning and Disinfecting. That business outperformed our expectations based a on very successful back-to-school merchandising program primarily.

Operator:

And our next question comes from Andrea Teixeira from JPMorgan.

Andrea Teixeira:

And just if I can follow up on the margin. Kevin, you mentioned then that there was an impact on volume deleverage this quarter. But as you move forward, you're still expecting the 200 basis points improvement in gross margin as we navigate through this $400 million that you called out being a little bit higher than initial and then FX.

Kevin Jacobsen:

Sure, Andrea. And you're correct. We still expect to deliver about 38% gross margin for the full year. That would be up about 200 basis points versus a year ago. And as we've said, this continues to be a very dynamic environment.

Dara Mohsenian:

So obviously, very strong price mix in the quarter at 13%. You did take pricing later than some competitors and more aggressively at this point in time at least. So can you just talk about the consumer reaction that you're seeing so far, the retailer reaction and also just what you're seeing from competitors in terms of price gaps? And just give us a sense of also what's left to come going forward on the pricing front in terms of increases from here.

Linda Rendle:

Sure. And maybe I'll just broaden the comment on share overall. We're making progress on share, but we have more work to do. And supply disruptions have been part of that, going on in our Household Essentials business.

Christopher Carey:

Can I just maybe ask maybe more of a conceptual question about gross margins? Kevin, I think you noted that your commodity -- or that the cost basket of $400 million was trending slightly below $400 million before, and now, it's trending above $400 million. So I wonder if you could just maybe offer some additional context on the complexion of that cost basket, perhaps between commodity and noncommodity?

Linda Rendle:

Yes, it was about flat, and we take that as a good sign as well. We are seeing continued headwinds on that business as it relates to return to office and some of the things that affect our janitorial business.

Javier Escalante Manzo:

I have 2 questions. One, business planning for Kevin. And if I have a follow-up, to Linda, more strategically on the business planning. If we look at retail [ sourcing in this kind of data ], we see volumes weakening, so it's high teens.

Kevin Jacobsen:

Sure. Javier, on Q2, and I'm not going to give a full detailed outlook for Q2, we've tried to provide some color to be helpful for modeling purposes, we do expect top line to be down low single digits on a reported basis. And we continue to expect about 2 points of FX headwinds. So you should assume organic sales growth is about 2 points better than our reported sales, which are expected to be down in that low single-digit range.

Kevin Jacobsen:

Yes, I'd expect so, because that's probably playing out based on elasticities. And maybe a broader point that's helpful to comment on. As you think about the elasticities in our portfolio, generally, our expectation when we take pricing based on the normal elasticities is you don't generate much incremental revenue from that pricing. We are taking pricing to address the cost inflation. It's not necessarily a source of revenue growth.

Anna Lizzul:

I wanted to follow up on pricing. You mentioned you're taking more pricing in December. So it seems then that you feel comfortable that retailers and consumers can absorb this additional pricing. If you can comment on recent trends, are you seeing any bifurcation in consumer appetite for Clorox products with higher-end consumers, more stable, versus lower-end consumers trading down or out of the brand?

Anna Lizzul:

Great. That's very helpful. And just as a follow-up, given that you've exited certain private-label contracts, how do you feel about your inventory levels going forward?

Anna Lizzul:

Right.

Operator:

And our next question comes from Jason English from Goldman Sachs.

Kevin Jacobsen:

Yes, there is -- yes, the only one, I would say -- the only other item I would highlight is there is seasonality in our business. Q2 tends to be our lower quarter because it's the lowest quarter for our Kingsford business, which is a nice profitable business. And so typically, Q2 is a lower quarter for us in a normalized environment, and we'd expect that this quarter as well.

Operator:

And our next question comes from Kaumil Gajrawala from Crédit Suisse.

Kevin Jacobsen:

Sure, Kaumil. It's interesting, when you think about the manufacturing deleveraging, typically, you expect to have a bigger impact for the volume decline we talked about, being down 15%. What you're seeing though here that mitigates that is, as you know, we stepped out of those contract manufacturing agreements, so we brought that volume back into our plants.

Kaumil Gajrawala:

Okay. Great. And you mentioned in your -- I can't remember if it was a press release or your prepared remarks, on distribution gains, is that -- are those gains over the course of this year? And how does the distribution may be compared to 2019?

Lauren Lieberman:

So first question was just the level of pricing at a total company level, 12%. I was just sitting here opening up all my models, and I don't think we have any other U.S.-facing companies or companies who report geographically in HPC who put up that kind of pricing.

Linda Rendle:

Yes. Lauren, on pricing, I think it's very difficult to compare across companies because everybody has different portfolios and to your good point, have different global portfolios. But what I would say, and I think this is important, if we look category by category for us, our pricing is in line with the categories that we compete in around the world.

Operator:

And our next question comes from Stephen Powers from Deutsche Bank.