Q4 2021 Clorox Co Earnings Call

Yeah.

Okay.

Good day, ladies and gentlemen, and welcome to the Park company fourth quarter and fiscal year 2021 earnings release Conference call.

At this time all participants are in a listen only mode.

At the conclusion of our prepared remarks, we will conduct a question and answer session.

If you would like to ask a question you May press star 1 on your Touchtone pad at any time.

If anyone should require operator assistance during the call. Please press star zero.

As a reminder, this call is being right.

I would now like to introduce your host for today's conference call Ms. Lisa Farhan, Vice President of Investor Relations for the Clorox Company is Farhan you may begin.

Thanks, Christie and welcome everyone and thank you for joining US we hope you and your families are continuing to stay safe and well before we get started and wanted to let you know that we're making some changes to how we present our results today, Linda will start by providing some overall key takeaways for the year.

Next I'll follow up with some highlights from each of our segments. Kevin will then address our financial results as well as our outlook for fiscal year 'twenty 2.

And finally, Linda will return to offer her perspective.

And we'll close with Q&A.

Now a few reminders before we go into result, we're broadcasting this call over the Internet and a replay of the call will be available for 7 days at our website. The Clorox company Dot Com. Today's discussion contains forward looking statements, including statements related to the expected or potential impact of COVID-19.

These statements are based on management's current expectations, but may differ from actual results or outcomes. In addition, we may refer to certain non-GAAP financial measures. Please refer to the Fort looking statements section, which identifies various factors that could affect such forward looking statements and the non-GAAP financial information section, including the tables that reconcile and non-GAAP.

Financial measures to the most directly comparable GAAP measures both of which are located at the end of today's earnings release, which has also been posted on our website and filed with the SEC.

Now I'll turn it over to Linda.

Thank you Lisa Hello, everyone. Thank you for joining us and physical.

Fiscal 'twenty, 1 was an extraordinary year for clorox and with the pandemic, putting us through the ultimate test of volatility, including rapid changes and consumer demand and significant cost inflation, which was reflected in our Q4 results.

Despite the complexities, we faced we delivered 9% sales growth for the fiscal year on a reported and organic basis, reflecting growth and all 4 reportable segments.

This was on top of the reported 8% increase we delivered in fiscal 'twenty.

On a true your stock basis, we delivered 17% sales growth.

With rising cost pressures, we experienced declines in gross margin, particularly in Q4, resulting and a decrease of 200 basis points for the fiscal year, which we will discuss in more detail.

Fiscal year 'twenty, 1 adjusted EPS decreased 2% to $7.25.

Recognizing the immediate priorities before us and I'd like to reinforce what matters, most long term profitable growth.

With a business that's significantly larger than before the pandemic and a portfolio of trusted brands exposed to more tailwind, we have clarity and our strategic imperatives and I have every confidence and our ability to continue delivering long term value creation for our shareholders.

When I look at fiscal 'twenty, 1 and our performance has shown the strength of our people and brands and products as well as the resilience of our categories. As we worked tirelessly to supply consumers with products across our portfolio.

As a result, we experienced significant growth and demand and strengthened our position amongst global consumers with strong household penetration and supported by higher repeat rates across new and existing users.

The last 12 months have also demonstrated the need to accelerate our ignite strategy to address near term headwinds and capitalize on long term opportunities.

The industry environment remains dynamic with significant inflationary pressure and continuing uncertainty.

And the face of these conditions are top priority as strong execution to mitigate the impact of elevated cost headwinds and continue to improve market share.

The pandemic has also highlighted areas, where additional investments can help us be as agile as possible and the future. We are clear on the opportunities ahead of us to differentiate clorox and build a stronger more resilient and more profitable company.

This includes driving our growth runways, and making investments to enhance our digital capabilities and drive productivity improvements, which I will discuss shortly.

We are confident that strong execution of our ignite strategy will enable us to achieve our 3% to 5% long term sales target and deliver long term shareholder value.

Before I discuss Q4, and our progress against our strategy I'd like to thank our clorox teammates around the world for everything they have accomplished over the past year as well as our commitment and dedication to serving people and communities around the world.

For Q4 faster than expected moderating demand for cleaning and disinfecting products had a pronounced impact on sales growth as we move through the peak of the pandemic and lapsed the unprecedented demand we experienced last year.

The magnitude of this quarter's gross margin contraction was a result of faster than expected sales and moderation acceleration of inflationary headwinds and improvements and supply, which led to a broader product assortment, including the reintroduction of value packs and I'll discuss shortly the actions we're taking to address these headwinds.

Now, let me share a few highlights of our progress on our ignite strategy.

And with fuel growth being a critical focus to help address elevated cost pressures and ensure the long term health of our brands.

Pleased we delivered over $120 million and cost savings and the fiscal year, surpassing our annual target.

Second we made strong progress on our 2025 goal to know 100 million people crossing the halfway mark to our goal this fiscal year, our higher investment and personalization has led to significantly improved ROI.

And it's been 1 of the contributors to increasingly strong payouts driving our confidence and continued investments and our brands.

Third with innovation at the heart of our strategy, we doubled our innovation investments and fiscal 'twenty, 1 and new products were a bigger contributor to our top line, which we expect to continue in fiscal 'twenty 2.

Next as consumers have increased their digital usage during the pandemic, we leaned into digital marketing and commerce, resulting in our e-commerce business nearly doubling and the last 2 years, which today represents about 13% of total company sales.

Finally, we continue to make progress on our ESG goals for.

For example, we advanced our commitment to climate action and submitted our proposal on science based targets for our operations and scope 3 emissions to the science based target initiative and June.

And as a people centric company, we continue to focus on the wellbeing of our teammates and our values based inclusive culture.

I'm, particularly proud that during this trying year, we achieved our best safety score and recorded history with a recordable incident rate of point to 6 significantly lower than the $3.3 industry average.

I'm also pleased and in fiscal 'twenty..1 we continue to have high employee engagement of 87% putting us at the top quartile of Fortune 500 companies.

Now, let me turn to fiscal 'twenty 2.

We expect inflationary pressure to persist along with continued moderating demand as we lap COVID-19 related demand surges and the first half of fiscal 'twenty 1.

While this is reflected in our fiscal 'twenty, 2 outlook, which Kevin will discuss by the second half of the year, we expect to be within the lower end of the range of our long term sales targets.

Like others, and our industry and beyond we are experiencing significant increases and input and transportation cross costs across all categories, and our portfolio, which have accelerated since Q3, and we're holistically and dynamically managing this with a laser focus on rebuilding margin.

We implemented pricing on glad and announced actions on our food cleaning and international businesses. This represents about 50% of our portfolio.

We're also pursuing pricing and additional parts of our portfolio, which will communicate at the right time.

Based on the constructive conversations we're having with our retail partners.

And importantly, the strength of our brands, we feel confident about our ability to execute our pricing plans.

In addition, we will continue to drive our hallmark cost savings program.

We expect sequential gross margin improvements as we progress through fiscal 'twenty, 2 with our assumption for gross margin expansion by Q4.

In terms of market share as we've discussed previously we have experienced some declines due to supply challenges, but have made notable progress.

With strong investments and internal and external production capacity, including additional manufacturing lines and a significant expansion of our production team and June we achieved our highest casteel rates since the start of the pandemic.

I'm pleased to see that in the latest 13 week data ending July 17th we saw market share gains and 7 out of 9 businesses.

Certainly we recognize there's more work to do and parts of the portfolio such as glad trash and we've adjusted our plans to drive market share improvements over time.

Despite these near term headwinds, we remain focused on our long term priorities rooted in our ignite strategy to deliver our long term growth aspirations.

While some pandemic related behaviors may revert over the next 12 months, we continue to believe theres been a shift and behaviors that will advantage clorox longer term, including coding a focus on health wellness and hygiene more time at home as well as increased adoption of e-commerce and digital platforms.

The pandemic also revealed the urgency to upgrade our digital infrastructure and capabilities.

Last year, I brought and chief information and Enterprise Analytics Officer, Chow banks, who has extensive experience and business jet driven digital transformation to conduct a fresh assessment of our own program that was already underway before the pandemic.

With that assessment now complete we are accelerating our transformation through planned investments of about $500 million over the next 5 years to enhance our digital capabilities and drive productivity improvements, including replacing our ERP.

This will enhance our supply chain to better position clorox to meet customer needs.

And efficiencies and support our digital Commerce innovation and brand building efforts.

Prior to the pandemic, we were already adapting our business to differentiate clorox from a digital perspective, we'll continue to invest and ecommerce and digital marketing across our portfolio.

Leveraging data driven insights to engage with consumers and more relevant ways.

Moving to innovation innovation.

<unk> continues to be a key focus area for me and our new Chief growth Officer, Tony Matta, who joined last October.

Tony has more than 20 years of brand building experience with leading consumer companies.

Ensuring we have stickier innovation delivering multi year value, we're driving lasting new product platforms, such as fresh step clean paws, and some cheever, which continue to grow and.

In addition, we're extending innovation by leveraging external partners to create new revenue streams.

We're continuing to support our brands, especially margin accretive innovation with disciplined high ROI advertising and sales promotion and investments to build and strength in consumer loyalty.

We also remain very focused on driving our growth runways to build clorox and to our global cleaning and disinfecting Brent.

We are still and the early stages of a multiyear journey, but continue to believe they can become a meaningful contributor to growth longer term.

And as we execute on all of these initiatives, we will continue to drive the strategic link between our societal impact and long term value creation as we live our purpose and keep our ESG commitments front and center and our decision making every day.

With that I'll turn the call over to Lisa to review our business unit performance.

Linda now turning to our segment results.

And health and wellness Q4 sales decreased 17% for the quarter.

Full year sales were up 8% with growth across all businesses.

And our 2 year stack basis, Q4 sales grew 16% and full year sales grew 22%.

In cleaning sales force were down by double digits compared to double digit growth and the year ago quarter, primarily due to the deceleration of demand across various cleaning and disinfecting products.

On a full year basis.

Cleaning sales grew behind a strong front and half performance.

Well at demand fell faster than anticipated it remains higher than it was pre pandemic with strong repeat rates among new buyers.

Accordingly, our supply and product assortment are almost fully restored which is reflected in our market share improvements, especially in wipes and sprays.

As consumer demand and migrated to more preferred forums and value packs. We also saw a negative impact of price mix, which we expect to continue over the next few quarters.

Going forward, we'll be focused on strengthening our merchandising activities, especially for the back to school period.

Sales and professional products were down by double digits versus year ago period, when we experienced double digit growth.

For the full year professional product sales were up by double digits fueled by an exceptional front half performance.

<unk> started moderating in Q3 and continued into Q4 as customers work through high inventory levels, especially of Clorox 360 electrostatic sprayers.

And the short term, we expect results will continue to be volatile as we lap periods with unprecedented demand.

Longer term this business continues to be a strategic growth area for the company.

As part of our initiative to expand into new channels, we continue to add to our roster of out of home partnerships, including life nation, the world's leading life events company.

Lastly, within the health and wellness segment, our vitamins minerals and supplements business increased by double digits. This quarter. After lapping a double digit decrease caused by a supply disruption related to COVID-19.

For the full year sales were up as well.

Sales growth for the quarter was driven by a strong performance and the food drug and mass channel and E Commerce.

Turning to the household segment.

Q4 sales were down 8%.

Full year sales grew 10% with growth across all 3 businesses.

On a 2 year stack basis, Q4 sales grew 8% and full year sales grew 12%.

<unk> sales decreased by double digits, and Q4, lapping strong double digit growth and the year ago quarter, which was impacted by initial stockpiling.

For the full year sales were up.

Our efforts going forward our focus on managing this the strong inflationary headwinds we're facing.

And as Linda mentioned, we still have more work to do and this business to restore and market share.

Grilling sales decreased by double digits, and Q4 as demand startup moderating after 4 consecutive quarters of strong double digit growth.

For the full year sales.

Sales grew by double digits feels.

<unk> by very strong consumption overall.

Our focus on expanding distribution of our latest innovation Kingsford pellets continued with a nationwide launch building on the product's initial success well. We're also introducing signature flavors made with 100% real spices that will be available and select retailers before labor day, as we gear up for the 2022 grilling season.

This innovation is intended to help our business continue building consumption among wall multicultural millennials and other heavy growers.

Cat litter sales grew by double digits and Q4, driven by continued strong consumption.

For the full year litter sales also grew.

The result reflected strength in e-commerce with fresh step, becoming the number 1 brand online for the first time and positive overall category trends boosted by record pet adoptions during the pandemic.

Going forward, we're excited about our latest innovation fresh step outstretch litter, which left 50% longer than regular litter. Thanks to patent patent pending technology.

And our lifestyle segment sales were down 3% and full year sales grew 6%.

And on a 2 year stack basis, Q4 sales grew 13% and full year sales grew 16%.

British sales were down as demand continued to moderate from an extended period of elevated consumption.

Full year sales grew on top of double digit growth and the prior year.

Despite the deceleration in Q4. This is fundamentals are strong, especially now that our supply is mostly restored.

We're excited about the strong merchandising program, we've put in place this year, including the largest back to college event ever for the brand.

The food business was down primarily due to lower shipments of hidden valley ranch bottle dressings with consumption moderating as consumer mobility improved.

Full year sales were up by double digits on top of double digit growth in the prior year.

The consumer fundamentals for this business are strong with the brand growing market share and household penetration.

<unk> sales increased by double digits this quarter as overall category consumption and begin to recover.

Full year sales were down as category consumption was negatively impacted by store closures.

Masked mandate.

And stay at home measures.

We expect this business to continue to recover as people begin returning to their pre pandemic shopping patterns.

And consumer mobility keeps improving.

We'll build on that momentum with our new lifts to love campaign supported by strong innovation pipeline.

Lastly, turning to international Q4 sales grew 5%, reflecting the combined impact of the Saudi JV acquisition and benefit of price increases, partially offset by lower shipments due to the moderating demand after a period of elevated consumption.

Extended Lockdowns and Canada also contributed to the decrease in shipments.

The results on top of 12% growth and the year ago period, when we saw elevated consumption across our portfolio during the early stages of the pandemic.

Importantly, we continue to expand our global disinfecting wipes business building on the dedicated international supply chain that was developed and 5 months and are making progress launching our clorox expert disinfecting wipes and existing countries as well as new markets.

For the full year.

<unk> increased 14%, reflecting very strong growth for the majority of the year before moderating in Q4.

On a 2 year stack basis, Q4 sales grew 17% and full year sales grew 19%.

Now I'll turn it over to Kevin who will discuss Q4 and full year financial results for FY 'twenty, 1 as well as our outlook for FY 'twenty 2.

Thank you Lisa and thank you everyone for joining us today as Linda mentioned for fiscal year 'twenty..1 we delivered 9% sales growth on top of 8% sales growth and fiscal year 'twenty.

While this is lower than we anticipated and our outlook, we feel good about delivering another strong sales year.

Of course, we continue to manage through an extremely challenging cost environment, which impacted our fiscal your margins and earnings importantly.

Importantly, we delivered another year of strong cash flow, which came in at $1.3 billion compared to a record $1.5 billion for fiscal year 'twenty.

I am pleased our strong cash flow allowed us to return almost $1.5 billion to our shareholders through our dividend and share repurchase program, representing an increase of about 90% and cash returned to shareholders versus fiscal year 'twenty.

And for a review of our Q4 results I wanted to highlight a $28 million non cash charge, we booked in Q4 related to a third party supplier for our professional products business.

And we've shared previously during the height of the pandemic, we worked with a number of third party suppliers to support us and addressing unprecedented demand and the consumer and professional spaces, we're reducing our reliance on 1 of these suppliers and as a result, we took a charge and the fourth quarter.

Important to note. This non cash charges included in our reported EPS and excluded from our Q4 adjusted EPS as it represents a non reoccurring items.

Turning to our fourth quarter results.

Fourth quarter sales decreased 9% and comparison to a 22% increase and the year ago quarter, delivering a 2 year stack a 13% sales growth.

Our sales results reflect an 8% decline in organic volume and 2 points of unfavorable price mix, primarily in our health and wellness segment and supply improvements resulted in a broader product assortment, including the reintroduction of value packs.

On an organic basis fourth quarter sales declined 10%.

And fourth quarter sales were lower than expected, primarily and our health and wellness segment as demand for cleaning and disinfecting products moderated more rapidly than we had previously anticipated.

While the cleaning and disinfecting category continues to moderate we're pleased to see improving share and increased our ability to supply.

Gross margin for the quarter decreased 970 basis points to 37, 1%.

Compared to 46, 8% and the year ago quarter.

Gross margin results were lower than anticipated largely driven by higher input costs and lower sales.

The year over year change and Q4 gross margin was primarily driven by lower sales, resulting in lower manufacturing fixed cost absorption.

As long as the significant cost headwinds driving about 290 basis points of higher commodity costs.

And 80 basis points of increase transportation costs as.

And as well as a 130 basis points of unfavorable mix.

Our fourth quarter gross margin also includes about 70 basis points of negative impact from a non cash charge I just mentioned.

These margin headwinds were partially offset by about 90 basis points of cost savings and 50 basis points of benefit from our pricing actions and our international Division.

Selling and administrative expenses as a percentage of sales came in at $14.4 per cent compared to 14, 1% and the year ago quarter.

Advertising and sales promotion investment levels as a percentage of sales came in at about 12% with U S spending at about 14 per cent of sales.

Strong investments in Q4 supported our back half innovation program and reflected our continued focus on building loyalty among new consumers.

Our fourth quarter effective tax rate was zero percent.

Primarily driven by a tax benefit from exiting of a small foreign subsidiary, which.

Which was mostly offset by the charge we took to pre tax book income associated with this decision.

As well as favorable return to provision adjustments.

On a full year basis, our effective tax rate was 20%.

Net of all these factors adjusted earnings per share for the fourth quarter came in at 95.

Versus $2.41 in the year ago quarter, a decline of 61 per cent.

Before I review the details of our outlook, let me provide perspective on the strategic investment and Linda discussed.

We are planning to invest about $500 million over the next 5 years to enhance our digital capabilities and drive productivity improvements.

And the replacement of our ERP.

In fiscal year 'twenty, 2 we plan to invest about $90 million and operating and capital expenditures was.

And with about 55 million impacting our P&L.

And the remainder reflected and our balance sheet.

Beginning in Q1 and going forward, our adjusted EPS will exclude the portion of the 500 million investment that flow through our P&L to provide better insight into our underlying operating performance of our business.

Now turning to our fiscal year 'twenty 2 outlook.

We anticipate fiscal year sales to be down 2% to 6%, reflecting ongoing demand moderation, primarily and are cleaning and disinfecting products and the front half of the fiscal year.

In addition to the unfavorable mix and higher trade spending as we moved to a more normalized supply and promotional environment.

We assume these factors will be partially offset by the pricing actions, we're taking broadly across our portfolio.

Organic sales are expected to be down 2% to 6% as well.

We expect front half sales will decline high single to low double digits, as we lap 27% growth and the front half of fiscal year 'twenty 1 during the height of the pandemic.

Additionally, we expect Q1 sales declined low double digits as we moved to the back half of the year, we expect to return to the lower end of our long term sales growth targets.

Of course, we continue to operate and the dynamic and uncertain environment, which could impact our outlook.

We anticipate fiscal year gross margin to be down 300 to 400 basis points due to our assumption for significant ongoing headwinds from elevated commodity and transportation costs.

Which represent nearly $300 million and year over year cost increases.

We expect these headwinds to be more pronounced in the front half of the year, particularly in Q1.

As we expect key commodity cost increases to reduced gross margin by about 500 basis points.

<unk> our assumption for Q1 gross margin to declined 1100 to 300 basis points.

For perspective and <unk>.

Q1, we were lapping a modern gross margin record 48 per cent.

Reflecting over 400 basis points of favorable operating leverage on 27% sales growth and a year ago quarter.

As we mentioned in our press release, we expect sequential improvement for gross margin over the course of fiscal year 'twenty 2 with your assumption for gross margin expansion and Q4.

This is based on our assumption that cost inflation will begin to moderate and we will see the benefits from the mitigating actions flow more fully through our P&L.

We expect fiscal year selling administrative expenses to be about 15 per cent of sales, which includes about 1 point of impact related to our investment to enhance our digital capabilities.

Additionally, we anticipate 50 your advertising spending to be about 10% of sales, reflecting our ongoing commitment to invest behind our brands and build market share.

We expect our fixed school year tax rate to be about 22% to 23% day.

Year over year increase primarily reflects lapping several onetime benefits and the prior fiscal year.

Net of these factors, we anticipate fiscal year adjusted EPS to be between $5.40 to $5 and 76.

As we start fiscal year 'twenty, 2 I'd like to emphasize our priority to address elevated cost pressures from both commodity and transportation throughout the fiscal year.

We are focused on executing the pricing actions, we discussed today, we've implemented or announced price increase on a brags and reps and are taking pricing on our FOUP cleaning and international businesses.

This represents about 50% of our portfolio.

We're also pursuing pricing and additional parts of our portfolio, which we'll announce at a later date.

While it's still early we are confident and our ability to price given the strength of our brands and the constructive conversations we're having with retailers.

Consistent with our net strategy, we're addressing short term headwinds head on with and I have a long term health of our business. We will continue to invest and are brands, including meaningful innovation to drive differentiation, which will help us continue to drive superior consumer value.

We are leaning into our cost savings program and productivity initiatives to help address ongoing cost pressures.

And we're accelerating investments and our digital transformation to drive increased capabilities.

Cost across our supply chain and.

And improved innovation efforts and our brand engagement activities.

And finally.

As Linda mentioned.

Our business is significantly larger than before the pandemic and we're well positioned for the future.

Our global portfolio of trusted brands is more relevant than ever and.

And we're positioning ourselves to make the most of the changing consumer trends, we see we have confidence and our strategic plans and our ability to execute to enable us to continue to create long term value for our shareholders and with that I'll turn it back over to Linda.

Thank you Kevin.

When we open the line for questions I wanted to take a moment to reiterate our commitment to and confidence and Clorox has long term growth and value creation potential which is fueled by our ignite strategy.

We're focused on strong execution and the face of dynamic conditions, including addressing significant cost headwinds and improving market share and.

In addition, we have clarity on the strategic imperatives and execution mandate to differentiate clorox and build a stronger more resilient and more profitable company.

And as we accelerate and execute our ignite strategy, we're confident that will drive and improve performance.

Christie you May now open the line for questions.

Thank you Mr. Randall, ladies and gentlemen, if you would like to ask a question. Please.

Perhaps your Touchtone telephone.

And your first question is from Dara <unk> of Morgan Stanley.

Hey, guys. So 2 questions just first on the 500 million dollar investment program on digital and productivity can you just give us a better sense for why the program is necessary now we've heard the ignite strategy has been working and the last couple of years we've heard.

Historically that you are ahead of the curve and competition on the ecommerce side from you guys and.

Happy with innovation progress so it sounds like there was a review and when you took over and Linda and obviously channel makes a point, but I'm sure you were focused on these areas before also so.

Was this a surprise how did it develop particularly given it's such a large amount and then as we think about the payback is this what's necessary to get back to long term goals at some point.

In theory.

Times of Big spending program can can yield payback above and beyond prior goals I'm assuming at this point, it's more to help return to prior long term goals and.

And then I also have a second question on gross margins if I can come back.

Uh huh.

Sure Dara Thank you.

So why don't we start with your first question you know why necessary now and what's clear is the pandemic has absolutely accelerated consumer digital behaviors and a way that we never contemplated during our ignite strategy and certainly we saw that as a key consumer tailwind for us as we pens that strategy, but we've seen such a rapid movement.

Online by consumers both in the ecommerce space.

And it certainly and in the marketing consumption space that we really knew we need to take a step back and look at the program that we had in place and ensure that it was sufficient for us to deliver as we move forward and what we looked at was across the entire operation.

And I think the other thing that I would note as you know our challenges and fiscal year 'twenty, 1 managing the type of volatility that we haven't been exposed to and the past underscored the urgency to upgrade that digital infrastructure and capabilities and what I want to make clear is this is really not about today. This is about maintaining momentum as we come out of our ignite strategy period.

And Youll see the bulk of the value of this comes after our ignite strategy period, So 2025 and beyond.

And this will allow us to have.

And really real time access to data and information that will help our entire operation move more efficiently and.

And better serve consumer and customer needs. So, we're making first and investment and our ERP, which is the foundation and infrastructure of all of these changes and that's needed and accelerated to build these digital capabilities will have better supply chain visibility across all parts of the supply chain with real time data, which will improve things like procurement and supply plan.

Owning.

It will further enhance the work that you already referenced that we've done on digital and e-commerce and further enhance our ability to do personalization and get more out of that goal and will help us on innovation. So really what this was about was a change in circumstances and the environment of rapid change and consumer behavior that couldnt have been predicted before the pandemic and we.

We're leaning in.

And this is really about building a stronger company with more mentum momentum coming out of the strategy period.

Okay, and then can you just talk a little bit about the yield from.

This how we should think about that in terms of timing and magnitude overtime.

And then second Kevin on gross margins.

When you include the guidance for fiscal 2022, you're obviously experiencing a lot of gross margin compression over 2 year period.

Probably a record amount of compression so.

And just trying to understand your focus on pricing it seems like the magnitude and timing of the pricing is less than what we've seen in the past versus these unprecedented cost pressures. So.

Just wanted to understand why we're not seeing a greater offset through pricing.

Is pricing more difficult in this environment from a retailer or a competitive perspective is it more.

Some of the pressure was unexpected or are there other pressure points on gross margin. How do you sort of think about and help us understand why we're not seeing more of an offset to those outsized cost pressures like we're seeing and some of your peers.

Yeah, John Thanks for the question and let me, let me share our perspective on gross margin if I think about where we were before the pandemic. Our gross margin was just below 44% $43.9.

As we move through the pandemic over the last couple of years. We ended this year about 43, 6 so just a little below where we work until the pandemic began.

As we go forward. It is both win and I talked about and our prepared remarks, we are facing what we're describing is unprecedented cost environment in terms of inflation.

You know just Darfur perspective, as I mentioned before and we're gonna experience. When you think about $300 million of cost increases this year between both commodity and transportation.

That's about a 400 basis points.

Hit to gross margin this year now from.

And our pricing actions, we're taking we think we can offset about 2 thirds of those this year and with you.

The pricing actions, we've announced plus some more we'll announce at a later date and.

And then we expect to fully offset the cost increase going forward because that'll extend beyond fiscal year 'twenty..2 just based on the phasing of these actions, we're taking and so.

And I feel confident will recover these but they'll take a little longer beyond 'twenty 2 and.

And then the other items Dara I'd pointed out you would be aware of as you think about our margin and fiscal year 'twenty..2 there's 2 other items, we had a temporary benefit during the pandemic as it relates to mix as well as trade spending and.

You know from many of our categories, there's very limited promotional activity because of lack of supply.

And we expected that as temporary and expect that to reverse out as we get back to a more normalized promotional environment. So do you think about fiscal year 'twenty 2 I expect about 50 bps of headwind from higher trade spending.

And then also on mix.

When the pandemic hit and we rationalized our production and tried to get as much product out as possible. We ran 35 count canisters and example on white because we could run the most of those.

As we introduce larger sizes as we introduce multi.

Multi packs, which is very good for consumption and trial that'll come and has a lower margin as well so you'll you'll see that positive mix turned negative.

As we get back into a more normal level of SKU offerings and so that's about another 100 basis point hit we're going to see and 22 now both of those are temporary benefits as a result of the pandemic that we expect to unwind and they'll unwind this year.

Get back to a more normalized level.

And so I think what's important as we go through the year and you think about the phasing of our margins.

The biggest challenge, we're gonna faces and the front half.

You think about the cost environment and I highlighted we expect to take about 75 per cent of those cost increases and the front half of the year and then you'll see sequential improvements as we move through the year and turned back to margin expansion I expect ours, we get to Q4 and we start recovering some of these costs that you should see our gross margins back and the low forties and and we're committed rebuilds.

And back to where we were before the pandemic began let.

Let me, let me stop there happy to take any follow ups.

Yeah, just on the timing of pricing it does seem like it's taking longer than it has previously obviously a lot of compression year over year and Q4, almost 1000 basis points.

Not expecting positive gross margin until you get to Q4 of next year. So I'd be curious for your thoughts specifically around the pricing offset I understand their issues like mix and some of the other issues you mentioned, but it does seem like it's taking a long period of time to get price again.

Relative to history, so just trying to understand that.

Yeah, you know timing is related to the commitment that we made at the beginning of the pandemic and we continue to hold fast to which is our absolute number 1 priority was to supply as much of the demand as we possibly could and that continues to be our priority as we headed through Q4, and we made the immediate call to price on glad given what we were seeing and <unk>.

Resin and that will go and markets shortly and we were doing the work.

And the scenes to ready pricing across the rest of the portfolio was needed clearly we're going to need to pull that lever and we are with about 50 per cent announced to date and plans to take additional pricing that will communicate more details around coming up and the future, but it really was about that continued priority of meeting as much demand as we possibly could.

Great. Thanks, guys.

Thank you. Your next question is from Peter Grom of UBS.

Hey, good afternoon, everyone.

My question is just more on the conservatism and the guidance and at this point I know there are a lot of moving parts here, but I think a lot of investors are kind of asking the company being prudent and conservative lowering the bar or whatever term you really want to use to or even better than that flex that.

Even if trends deteriorate from here and is this guidance range still achievable.

And the operating volume is very different and I'm not sure I would necessarily call. There was a revision surgery versus what we've seen in the past, but it would be helpful to get your view on how much flex there is and this guidance should and inflation rise or consumer demand fall more from here. Thanks.

Hey, Peter this is Kevin and thank you for the question.

On our outlook, what I'd say is I don't view this as conservative I view this as balanced.

I think you folks all know we are operating in an environment of unprecedented volatility.

As you think about the changing consumer demand the macro economy as well as how the virus and going to play out.

And so we recognize you know we've been operating in this environment for the better part of the last 18 months and we expect that to continue.

I would say, that's certainly true and in the front half of 'twenty 2 and then.

And our hope is and will start to see it.

Level out a bit and the back half and get to a more normalized environment and so you should expect ongoing volatility in the front half the white Peter we tried to account for that as we provide a bit of a wider range and our outlook and what we would normally provide at this time of year and we just think that's prudent to recognize that the level of durability, we have but.

But I would describe this as a balanced forecast based on everything we're seeing today.

Okay Super helpful. And then just quickly just maybe a point of clarification on Sarah's question or your response to <unk> question.

Returning to <unk> to 40% and Q4 does that mean that you don't expect to be above 40% gross margins until Q4, I just want to make sure I'm thinking about that and the model correctly.

Sure So Peter the way, we're envisioning this playing out over the course of the year as I mentioned in my prepared remarks, we expect Q1 to be down about 1100 to 1300 basis points.

Primarily driven by the cost environment and talk.

About more about that and a moment and and we expect sequential improvements as we move through the year and by the fourth quarter, We will turn to margin growth and then what we expect is by the fourth quarter. We've got margins back into the low forties was our expectation going forward and 23 and why I'm not providing an outlook today I would say on margin we fully expect it to.

And you expand margins and remove into fiscal year 'twenty 3.

Okay, great. Thank you Super helpful Best of luck.

Thank you.

Thank you. Your next question is from Wendy Nicholson of Citi.

Hi, a couple of questions first of all with the amount of money you're spending on the new digital ERP investments.

And what's your expectation for kind of capital allocation potentially to step in and support the stock and buy back stock here because I know your leverage is still really low compared to your peers, but then Linda kind of stepping back aside from near term.

The guidance for 2020 to gross margin.

I've covered the stock for 20 years and I have to go back literally 20 years to find a 40% gross margin for the company and I totally get that we're in a weird period with Covid and.

And you made a commitment to not raise prices and I think that's great, but I I I do I think it begs. The question is there something structural and the business you know when you mentioned higher promotional spending I mean, this does not seem like the time to be investing and promotional spending when you also raising prices and you've got so much commodity inflation. So.

A year and do your job as the new CEO do you think a mid Forty's gross margin is the right number and this really is a temporary blip or is this a sort of hey, we were maybe maybe over earning on the gross margin line and low forty's or even high Thirty's is really where we're sort of more normally possession and I'm sorry for the long question, but.

The guidance for a 40% gross margin just seems crazy to me.

Sure Wendy I'll start with the second part of the question and then I'll hand, it over to Kevin to talk a bit more about capital allocation on your first question.

So what we're seeing and you said it it's absolutely and extraordinary environment and if you look at all of the factors combined and what's contributing to our gross margin and.

And I hate to turn a little bit, but it's really the perfect storm, where we're lapping incredible sales growth and things like operating leverage.

We are lapping promotional levels being down and and I would argue promotional levels for us our strategic you know we've always viewed that investment just like we do our marketing dollars and helps us build trial and helps us expose consumers to things like innovation and that's going to continue to be important in the future and it's why we want to put that money back and the <unk>.

And to ensure as we have you know record setting innovation coming into the marketplace from a topline perspective that we're able to support it with those dollars and then of course, the cost environment, which I think we're seeing broadly and it's not just a clorox issue, but certainly an industry problem. So all of that is happening at once and what that.

That leads me to is this is not actual issue. This is a temporary issue, albeit and extraordinary 1 and we're managing with discipline and I think the good news for us as we've managed albeit not the steep.

But certainly environments that have happened like this over time and what we do with go to work and execute and we're going to do it just like that and the past, we're going to take pricing and youre going to see much more price income from US now as it starts to pick up and we've improved supply and we've spoken about we're going to put our cost savings machine to work with a mandate to our team to remove any cause.

And that are possible and the system and and that's what they're focused on every single day right now.

And and we're going to take it 1 day at a time and execute it but I feel confident and our ability to get back to what Kevin spoke about and get back to those margins. It's just not going to happen. This year again, we will see improvement and Q4 and continued improvement as we move through fiscal 'twenty 3 but we do view this as a temporary issue.

And when do you on capital allocation you know I'd tell you, there's no change and our priorities in terms of how we're going to allocate our capital and as you know our first priority will continue to invest and our base business and that includes our digital investments both win and I spoke about that today and.

And so if you think about where we were last year, we ramped up investments and our base business, both investing in innovation and <unk>.

And brand building as well as investing and increasing production capacity within our supply network.

Primarily focused on increasing and wipes capacity and.

And so as we move into fiscal year 'twenty, 2 as we've gotten through some of those investments and our facilities you should see our our capital spending return down more and our normalized range of 3% to 4% of sales and we typically operate you should expect that this year.

And then we will deploy a certain amount of capital towards others technology investment and the way I see this $500 million playing out is about 60% of it will flow through our P&L and about 40 per cent of that will flow through our balance sheet and.

And if you think specifically about fiscal year 'twenty 2.

We're gonna and that's about $90 million was about $35 million flowing through our balance sheet will deploy cash.

And then afterwards backed and the base business will continue to look for ways to return excess cash to shareholders.

Last year, we generate a tremendous amount of cash through the pandemic and we returned almost $1.5 billion I suspect this year because of the challenging cost environment and the reduced profitability will return closer to somewhere between $700 million and $900 million.

Between our dividend and our share buyback program.

And I'd also highlight if you look at our dividend program with a recent increase we announced back in June.

And have an average annual increase of a little over 7% over the last 5 years and that puts us in the top 3 different peer group. So I think we have committed to continually returning excess cash to our shareholders and we've operated fairly high levels and are peer set and you should expect us to do that going forward.

Okay, that's great and just on the digital investment what's the.

Sort of payback time timing for that I mean, when should we start to see whether this investment was worth it if you will bottom line.

Yeah, what do you think thanks for that question. So this is really and investment in that and our future you'll start to see some of that payback late and our ignite strategy towards the tail end of it but this is really about setting up the company to be prepared to succeed over the long term and so.

So, we'll invest and 500 million over the next 5 years, you should see and investments starting our return starting late night period late 'twenty 4 'twenty 5 and then really accelerating as we get beyond ignite and then when he our commitment is we'll continue to update folks exactly when our progress and both both our investments and the returns we're generating on that investment.

Great. Thank you so much for the color.

Thank you Wendy.

Thank you. Your next question is from Chris Carey of Wells Fargo Securities.

Hi, everyone.

Hi, Chris.

I wanted to understand.

And made some comments intra quarter about the health and wellness business normalizing from something like that.

$700 million or below run rate.

Which which clearly played out this quarter.

But that business could it could grow from that over time and and I am curious your thoughts on on timeline and that trajectory from from where we are today with what you think is going to be day baldly over that time period, whether that's professional getting back in stock and some of your businesses and promotional spending or the pricing.

And and.

I guess underlying that question as well.

And of course that the health and wellness business has really tough comps and the first half but.

You know the household business also has pretty difficult comps and you know the grilling business is normalizing and.

Just trying to get a sense of if this trajectory is playing out and health and wellness.

What do you kind of see and your household business for the first half of the year.

I guess back of the envelope math would just suggest that you kind of need to see some improvement on a stack basis, there and and.

And whether I'm thinking about that correctly and then it should have a quick follow up.

Sure, Chris I'll start with cleaning and I think this is absolutely a dynamic time for cleaning and given all of the volatility.

But there were 2 things that we set at the beginning we.

We believe that this was a change and consumer behavior that would be long term and the evidence continues to support that that is absolutely the case.

So if you just look at some of the consumption numbers, even though it did decelerate faster than we expected and vaccination rates picked up at least until we got to the point we are today.

And you still see a very strong 2 year stack of growth, So and Q4 that was over 20% for cleaning business, but also if you look at consumption that's been up in the range from 25% to 30% versus pre pandemic levels. So we really are seeing that behavior would be sticky with consumers of course, we're lapping incredible growth and those businesses.

Is and frankly demand that we couldn't supply early in the pandemic.

So what youre seeing is a normalization, but as we said a significantly higher run rate moving forward and we expect that to continue exactly where that will net out is still unknown and I think theres a lot of unknown is moving forward and Delta certainly isn't unknown cold and flu season et cetera, but we have continued confidence that this will be a long term trends.

And that we can grow off and will provide us the opportunity to accelerate profitable growth and as we talked about raising our sales target to 3 to 5. This is a portion of that so continued confidence there again I would say, though as we look to the first half and as we lap 27% sales growth overall for the company for cleaning and disinfecting and for our household business.

And we won't expect to deliver accelerated results versus that period, but as we start to lap in the back half is when we get to the low end of our sales algorithm and seeing both cleaning and disinfecting and and our household business contributing positively to that.

Okay, yes, thank you for that.

Kevin did you have some per year.

Just had 1 quick follow up.

Just 1 day.

The health and wellness margin and.

And the quarter.

I appreciate it.

You know there was some mixed dynamics and boy.

And deleveraging, but.

Obviously, it was quite low.

And well below our model and.

Any perspective on.

Can you expand just on what exactly is occurring and that business and it.

And how we should be thinking about the margin trajectory there going into fiscal 'twenty 2 and.

Perhaps why why that's going to be and prove thanks so much.

Yeah, Chris as it relates to margin or health and wellness segment I would highlight a few items..1 is as I mentioned, we took a charge as it relates to our PPD supplier that impacted and health and wellness segment and that was about 11 points in terms of margin that was non cash that won't continue going forward.

And then also keep in mind, we're lapping 85% growth.

And the Q.

Q4 of prior years, and where we're lapping a big year over year number as well as we're dealing with increased costs. So I think it goes back to what we're talking about.

We're dealing with a very challenging cost environment and the very near term and that's going to pressure margins, but we do think this is short term. We continue to have tremendous confidence that we're gonna be able to expand margins as we get to the back half of fiscal year 'twenty 2 and then on into 'twenty, 3 but we have to recognize it and the very near term is going to challenge margins you saw that and the fourth.

And you'll see that and the first half of this year 'twenty 2.

Okay. Thanks, so much.

Hmm.

Thank you. Your next question is from Jason English of Goldman Sachs.

Hey, good morning folks or good afternoon, I guess and where you are a couple of quick questions first real quick on on cash flow and have you given free cash flow guidance, if not can you and.

You've got this target out there of a free cash flow conversion and as a percentage of sales of 11% to 13% as you as you migrate away from GAAP and start excluding things should we expect that ratio to move lower or for you to move to the lower end of that ratio.

Yeah, Jason on cash flow as you rightfully said, our target is 11% to 13%.

We've done very well against that target. If you look at fiscal year 'twenty. The height of the pandemic, we delivered a little bit over 19% in terms of cash flow as a percent of sales and another good strong year in fiscal year 'twenty..1 we ended up at 12, 9% I would say this year given the challenges on the cost environment I expect we're going to be at the low end of that range and so I think.

11%, if not slightly below that but that's really a reflection of the more challenging cost environment.

Long term, we have tremendous confidence that we continue to deliver net 11 and 13% going forward.

That's helpful. Thank you.

And.

And Linda and I know, you're pleased with the market share progress.

But if we look at it versus pre COVID-19 levels.

Particularly for your cleaning segment.

Baltimore was cleaning spray cleaning waves, it's only gotten worse versus 2019 for last couple of months.

Is this the reason that your your your progress and pricing is so slow.

Is it to try to sort of reset some price gaps and become more competitive to correct market share or is it in fact due to like the service levels, you mentioned and the really the need to restore them first before you are able to start to push through pricing with retailers.

Thanks, Jason and I would say I'm very pleased with our share results given the environment that we have we're seeing significant increased competition and we had a supply challenges given the unprecedented demand and were making and my view great progress so share up and 7 of 9 businesses. If you look at the latest 13 weeks, we widened our share.

Our GAAP and wipes back to double digits, and growing and that's with significantly new competitive entries.

And the category, we grew a bread and 8 share points.

We have a very strong start to back to school and and that program is working well continued strong kingsford share growth after.

Many quarters in a row of share growth and Kingsford and.

And you've heard my commitment and I continue to stand by it we remain committed to growing share and we're focused on that and fiscal 'twenty, 2 and headed and absolutely the right direction and I have also called out places where I'm not as happy I'm still not happy on where we are and glad we have work to do there we're focused on the fundamentals and executing and its really is completely unrelated to pricing Jason price.

And really has to do from a timing perspective with ensuring that we had the supply and then going back and are working with our retail partners to ensure that we could implement the new plans and place that really is the only reason why we delayed that we will of course do the very important work you call out on price gaps as we move forward and that will be important but given the incredible cash.

Environment, we see across the industry, we would expect to.

And to see categories move and we'll move along with them and then we will do the work to go back and ensure that we're in those right gaps.

And then and then you know the other piece I would add Jason is our brands have never been stronger and that was our goal exiting fiscal year 'twenty, 1 was to be and a stronger position to grow off of this new significantly higher base. If you look at our household penetration repeat rates are a consumer value and as you know we measure the per cent of which our portfolio is that.

And as deemed superior by consumers that's at a record high at 70%. So we feel fully confident and our ability to take pricing with the consumer and then of course they'll be met with great marketing spend and innovation to continue to support that demand.

Thank you I'll pass it on.

Thanks, Jason.

Thank you. Your next question is from Kevin Grundy of Jefferies.

Great. Thanks, and good morning, a couple of questions on your outlook. So first just from an organic sales perspective.

Expecting down 2% to 6% My question is perhaps for Kevin what is embedded in that for category growth building on some of the prior questions. You say I'm pleased for the most part with some of the market share improvement. So is that reflective generally and what you expect for the categories that you participate in albeit against some some difficult year over year comps and the first half of the year.

<unk> and.

And then a little bit longer term or I don't want to belabor. This but maybe I'll just kind of play it back and you tell me if I'm hearing this sort of correctly the longer term margin restoration now for this company and Linda I think to an earlier question. You said you don't see this as a structurally lower margin business. Kevin I think you kind of alluded to this is probably a multiyear journey, though to get back to.

Down materially this year some improvement in fiscal 'twenty, 3 but probably not getting back to what we'd be quote unquote normal sort of margins for this business until fiscal 'twenty 4 'twenty 5 maybe you can just confirm that and then I have a quick follow up on pricing. Thank you.

Hey, Kevin and thanks for the question. So on the 2 on organic sales growth you know our assumption and the -6 and -2 is it will see modest category declines as we see demand moderate coming out of the pandemic and then that'll be partially offset by share growth broadly across our portfolio and so that's embedded in our assumptions.

Our organic sales growth.

And then on margin restoration.

I would tell you is we are committed to recover and the cost inflation, we're experiencing this year and as I said between our cost savings program and the pricing actions, we're taking and the phasing of those pricing actions.

That will extend beyond this fiscal year and so.

And I see this more as a short term issue, but medium to long term I I have confidence and our ability to get back to that.

<unk> gross margin number I'm going to resist providing a gross margin outlook for fiscal year 'twenty..3 it's just too early to do that and there's a lot of moving parts.

But embedded in our assumptions right now is you'll see a moderation and the commodity environment as we get through the end of this calendar year and of that commodity environment moderates as we anticipate plus the pricing actions, we're taking and you'll see us start to rebuild margin.

And then continue into fiscal year 'twenty 3 and.

And Kevin I'm I'm sure you've seen this before but if you go back and you look at some of our previous pricing actions over the last decade. We've we've done there's 3 other times and in all cases, what you saw was a margin decline and the year when the commodity costs Spike and then we went and I wanted to rebuild margins and subsequent years and and most recently in fiscal 18, if you recall.

We had 9 straight quarters of gross margin expansion following our pricing actions and so.

My expectation is you'll see something similar where we will start in Q4, and and I will continue on and up to fiscal year 'twenty 3.

That's helpful. And then a quick follow up is just and I think the comment was your price and 50% of the portfolio.

And I guess I suppose maybe some questions on why the delay and in doing that but setting that aside I guess and on understanding some of the past competitive dynamics and what's the probability of pricing on the remaining 50% understanding there has to be a cost justification, but difficult to envision many categories, where there's not.

Talk about the decision there and whats going on price gaps versus private label game theory versus the competition why not moving on the other 50% or maybe sort of some further color on expectations. There and then I'll pass it on thank you.

Sure you out and the 50% you know as we said I think and an earlier answer and in our prepared remarks.

It means we've announced pricing of about 50% to date and we are planning additional pricing that will speak a little bit more once the details are in market and really there were you know considerations across how we would do that at what credit categories, and what time and and we really took it category by category starting with that first principle that I spoke about which is we had to ensure.

And we were in the right supply position as a starting place before we did that and as we've brought supply back online we've opened more and more of our categories share.

Looking at that and then of course, we're doing the really important work to look at each category look at the dynamics, our position and that what our innovation and marketing plans look like and balancing that across every 1 of the categories. Because what we're really here to do is maximize the long term on this and what we want to ensure is that pricing is a part of that way that we were.

Restore margins, but also that we don't give up the opportunities we see in front of us to accelerate overall long term profitable growth and that's the balance we've gone through and every category, but I think what youre going to see from US as this all nets out is that we're taking.

A very prudent stance on pricing it'll be a meaningful contributor to gross margin expansion as we move through the year and as Kevin said, we have all confidence that as we move beyond that we'll be able to restore margins with pricing is an important part of that.

Okay very good. Thank you both good luck.

Thanks, Kevin Thanks, Kevin.

Thank you. Your next question is from Lauren Lieberman of Barclays.

Great Thanks, and good morning.

And I was hoping if you could just give us a little bit of color to the degree you have it on where you think retailer inventories currently stand and same for <unk>.

And PPD and any research, Dan consumer pantry, and I know you've built and the the.

Category correction and the first half, but I'm, just curious where you stood on retail inventory levels and particular in PPD.

Sure Laura and broadly as we look across retail inventories given the good supply progress that we made in Q4, we have largely restored inventories across the bulk of our portfolio. We do have some additional work to do on that.

And the broader assortment, a few packs and cleaning and disinfecting here and there and still have some work to do on Kingsford and food, but largely I would say on the retail side inventories are restored we'll see how that plays out of course as Delta takes on et cetera, you know how those inventories continue to progress as we go through the first half of the year, but largely and a good spot now.

And the professional business. It is different so if you look at the front half of fiscal year 'twenty, 1 we had a 70% increase.

And sales for our professional products business and then we had a.

A big drop off of that and our back half.

As we've talked about and both sets of results and what we've uncovered is they're just looked like there was a lot of inventory in the professional channel given that that front and have that experience and it's not just our inventory, it's actually inventory across all manufacturers and that that network is primarily supplied by distributors.

And so having visibility into each point of that supply and we do know and we realized there was more inventory there. So that means as we lap that 70% growth and the front half of fiscal 'twenty, 2 and we start to weigh down that inventory. It is gonna be bumpy and the short term continue to have strong confidence and our ability to grow PPD and you look at the 2 year stack growth it's 35%.

Sales growth, but I think it is going to be bumpy here as we lap this front half I'm, having the inventory and the system, and then and laughing and incredibly strong first half and last year.

Okay. Thanks, that's Super helpful. And then I had a question about variety you talked about how obviously during the height of the pandemic to increase throughput.

Rationalization and the.

Smaller packs and particular now, bringing some of those value pass back in and and larger sizes.

Did you consider using this as sort of an opportunity to history to intentionally kind of streamline mix as everyone. And then just net revenue growth management, but ways to actually improve the profitability of what you do choose to merchandise.

Because I would've thought that that could also give you a bit more flexibility and particularly as you go into this cost environment.

Yeah, absolutely and we.

You've spoken about adding net revenue management more aggressively to our toolbox to deal with margin moving forward and that is absolutely. The plan. So 2 things 1 as we brought skus back into assortment. We did just that Lauren we did not bring back the full assortment and we took the opportunity to simplify which helps us and many.

Areas and and the cost lines and P&L, but also from a retailer perspective, optimizing their mix and leveraging their store shelf space as well as online mix and the right way. So you will see a smaller assortment. Our goal was to ensure that we had share of assortment right button full knowing that distribution points might come down and we're certainly seeing that play out but your appointment.

Going forward is exactly right and.

And to use more net revenue management tools, which would include things like Assortments and getting the mix right to drive margin over time and all of our business units are developing plans to use that as a bigger lever moving forward.

Okay, Great and then Kevin if I can sneak in 1 more I did have a question for you and the charge this quarter.

Related to the PPD supplier and that does it.

Helpful to better understand what was underlying that cause I think.

If it was you discussed paying up for supply, which obviously given the commitment that the company made to supply and these critical products to our net.

A tough time.

And is important but I'm just not true I'm curious if the charge piece of this like why that choice would effectively be excluded from results and I know this is backward looking but I think it's just helpful to get that perspective.

Yeah, sure lore, and happy to talk about the the charge we took.

As we mentioned and we took a $28 million charge and the fourth quarter and this was related to a P. P D supplier.

And what does it related to us very early and the pandemic when we saw the unprecedented increase in demand.

We invested to help scale this supplier up to help increase their ability to supply product.

And so what we've done now is as they've done that they've had some challenges more recently and we made a decision we're going to move away from them and so what we're doing here is we wrote off the investments we've made and that supplier, which was really done and help scale them.

Back when the pandemic first began and at this point, we've moved up our business away to other suppliers. So we think we're in good shape going forward from a production perspective and.

And then we excluded this is a non reoccurring non cash item in terms of the charge we took in Q4.

Okay. Thanks, so much.

Thanks, Lawrence Thanks, John.

Thank you. Your next question is from Stephen powers of Deutsche Bank.

Hey, thanks very much.

Linda and maybe Kevin as I listened to the discussion on the strategic investments that we started with and that it makes good sense to me logically I'm not debating the business case at all but.

I guess I'm not clear.

Clear on why were adjusting out those investments from recurring EPS.

And I know we've talked about this moving to adjusted earnings last quarter and I get the rationale to provide investors clarity.

But the other 1 time gain or charge for impairment I think that's that's different than what I'm hearing which is backing out strategic investments.

For a pretty long time 5 years after after years and years of not doing so so so just why are these why are these investments different from.

What I perceive.

You guys have been doing proactively for the last.

Several any number of years to get you into position and where you are now.

And some of it seems almost normal course and evergreen for Clorox. So I guess just more clarity on why these particular investments are unique and different enough for you to consider them.

Non non recurring and worthy of adjustment that would just help philosophically on this idea of adjusted earnings.

Yeah, Steve This is Kevin and thanks for the question and you know what.

I'd say about these investments a couple of thoughts 1 is just in terms of the size and investment. So as we mentioned $500 million over 5 years is a big investment for us.

The vast majority of that investment will go towards arent, replacing our ERP system. So I think this is pretty typical for large ERP investments that you typically do only once every 20 years or so to isolate that so people can understand the investments, we're making there versus the underlying performance of the business and then the other aspect on this investment and Linda mentioned it is.

This investment really is about the future of the company much more sales and what's gonna do to benefit our ignite strategy through 2025, and so we're making some pretty significant investments here, both and replacing our ERP as well as upscaling, our digital capabilities that really will start to benefit us as we move beyond 2025 of our ignite strategy. So we thought it is.

Appropriate there'll be able to isolate these and help folks understand our underlying operating performance, which has been pretty volatile as well as the investments, we're making really set the company up for the long term.

Okay, Okay, Okay fair enough.

You talked a little bit about this already but the building blocks.

Kevin from.

The double digit declines and the first quarter to achieving the low end of the long term algorithm and the back half can you just talk a little bit more about this.

Microphone and benefit the bridge from 1 to the back half and and really.

Where your confidence.

It comes from that.

The 3.3% plus will be kind of achievable in the back half and.

And extrapolating forward.

Yeah. Thanks, Steve. So if you think about the top line you know the front half of the year, we said, it's gonna be much more challenged a bit.

Portion of that is we're lapping 27% growth. So we had record growth and the back half or excuse me the front half of fiscal year 'twenty, 1 and we've got to lap and as a result of that and we expect our business to be down high single low double digits I think when you get into the back half of the year and we get back to more normalized comps and we think we've gotten through the bulk of the demand moderation.

And that we expect and the front half of the year that gives us more confidence and we're gonna be and a more normalized operating environment with more normalized comparison periods that we should be back and that 3% range or so.

Linda and I continue to have tremendous confidence and the opportunity for the extra point of growth.

And a little bit of that is getting hidden by the comps were going through and the normalization and so that's really a short term issue for us that we think plays out over the next 6 months, but as we look to the back half of year and we think we get to a more normalized environment. Then I think you'll start to see the benefits. We've been talking about that we continue to see going forward do we think is really a medium to long term opportunity.

Okay, great and.

If I could squeeze 1 more clarifying and you're in your release, Kevin There was a line about unfavorable price mix.

Driven by supply and improvements that led to the reintroduction of value packs.

Assuming that that's all mix.

But you know, but it does say price mix. If there was a price component to that could you just talk about that or was it.

Right, but it was essentially mix.

It was essentially mix in terms of the headwind and it was favorable price and because we continue and a price and international So we had about a point benefit and price within that price mix as it relates to the international pricing and we're doing that the rest of it was about 3 points of negative mix and.

That mix was I'd say twofold, Steve is certainly as we talked about reintroducing additional skus, but the other item that we're seeing is as we now have life's back and supply consumers are changing and more convenient forms. So during the height of the pandemic when we couldn't supply whites and increased our bleach sales and less convenient for them.

And now that we can produce wipes consumers and moving back into the more convenient form of of of wipes versus using bleach. Ultimately that's good for consumers. It gives them and more preferred solution, but that comes at a slightly lower mix for us. So a combination of a day of.

Conversion within our product families as well as introducing additional skus and we get to a more normalized environment.

Understood. Thank you very much.

Sure.

Thank you. Your next question is from Andrea to share out of J P. Morgan.

Thank you so even though I wanted to follow up on your comments on glad bag.

Hoping you can comment on why it's taken so long to recover even after your main competitor is narrowing and described scalps and leading and prices increasing I believe twice already.

Is that because you always lag on utilization and competitors and private label caught absolutely, especially from Covid.

And following up on <unk> question, you had committed to keep prices and in fact during the pandemic, but what do you need to see now that your capacity is back on track and vaccinations are off are you still thinking.

And we need to narrow those price gaps in particular for the value proposition in that category.

And in particular and large accounts backs for full glad trash and then I have a follow up question on commodity forecasts income.

Sure so on glad and easy.

As you look at Q4, just to set the backdrop sales were down double digits, but we lapped very strong double digit growth and Q4 of last year and we had a 2 year stack of glad on of 9% sales growth and the fiscal year was up low single digits. So overall from a sales perspective, we were happy with where we landed really if it's a share.

Disappointment that I continue to have and we want to grow market share and particularly in a category like trash where see the share trends improving so we were down about <unk> 9 points and the latest 52 weeks down from <unk> 5 points and our latest 13 and down 4 and the latest 4.5 so definitely trending in the right direction behind improving distribution.

And getting the fundamentals right et cetera.

And when it came to pricing.

You know again, we announced pricing.

Back in the fourth quarter, it's being implemented now.

So and and and we took a larger first round and then what we saw in the marketplace to take.

Into account, what we saw from the category.

And we're evaluating that again, if and additional price increase is warranted.

But we feel like we've made the right move on glad and again, we'll continue to watch that and.

Innovation continues to work incredibly well and glad and we're committed to that program moving forward to differentiate our bags, but what we're really focused on right. Now is end market execution, ensuring we have the right distribution at every retailer and.

<unk> pricing flawlessly and.

And then getting back to merchandising, which will be important in this category. So again. This is less of a comment overall in terms of sales, but more around winning and the market ensuring that we have plans to grow share and the future.

That's fair, Thank you and a question for <unk>.

Kevin is really like what are your guidance and bags and poor gross margin in terms of is that fair to say the guidance and that's why you're announcing pricing, which is the 50 per cent of the portfolio and then in terms of rising are you baking in raws and to stay as a spot or you are actually using a forward curve too.

Basically swapped in and out.

Or in other words, if he gets better from here and you take more pricing there was upside to your guidance.

Yeah. Thanks, a J for the question as it relates to how we thought about commodity forecast we have projected out what we believe is the commodity environment over the course of the year. So we're not using a spot rate.

And our fundamental assumption is we will see commodity costs continue to increase in fact, we think this quarter and we will see that peak and then begin to moderate in the fall late calendar year.

Commodity costs will start to moderate and continue in the back half of the year and so this is and I think I mentioned on 1 of the earlier questions.

We anticipate about 75 per cent of the commodity cost increases were projecting for the year, we're going to see and the front half of the year. This is going to be the most extreme comparison period and just to give you maybe a little bit of additional information help dimensionalize. It.

Do you think about resin, we're projecting over 100 per cent increase and the cost of resin and the front half of the year. So that that's the type of environment, we're dealing with.

And so that's and a difficult environment to recover that type of margin compression and the time and it's rising but we do think we're positioned well to recover that over time, but.

But right now we're projecting for the full year, what we think where commodity land. So any change and that will certainly update you as we learn more.

Yeah.

And if I can squeeze and just 1 question on inventory and the pantry is there any anecdotal evidence that you've heard from your base.

And basically what customers are saying that consumers or even your market studies.

That consumers have a lot of and from Korea, and bleach and particularly to your point earlier that they're using it relates to this and class a and and that is true what dynamic or just consumption. It's 2 remains unabated from your commentary before it was just a question and I'm, having them switch back from branded as you.

Supply and warm.

Yeah, we don't have any evidence from consumer studies or from retailers that there's excess pantry inventory across any of our categories, where there was pantry loading that happened early in the pandemic for example on glad those things have already reversed themselves out and.

What we're just seeing is continued elevation of consumption and the cleaning categories as you articulate but lower than levels at the height of the pandemic, but really we don't see this as a pantry loading issue.

Thank you so much that's wrong.

Great. Thank you believe that's the end of Q&A. Thanks again, everyone for joining US we look forward to speaking with you again on our next call in November and until then please take good care.

Thank you. This does conclude today's conference call you may now disconnect.

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