Q2 2022 Clorox Co Earnings Call - Q&A Session
Yeah.
Good day, ladies and gentlemen, and welcome to the Clorox Company second quarter fiscal year 2020 earnings release Conference call. At this time, all participants are in a listen only mode.
The conclusion of our prepared remarks, we will conduct a question and answer session. If you'd like to ask a question you May press star one on your Touchtone pad at any time.
In English you require assistance during the conference. Please press Star zero on your Touchtone pad at any time.
A reminder, this call is being recorded I would now like to introduce your host for today's conference call Ms. Lisa Bar Houghton Vice President of Investor Relations for the Clorox Company Ms. <unk> you may begin your conference.
Thanks, Michelle good afternoon, and thank you for joining us on the call with me today are Linda <unk>, our CEO and Kevin Jacobsen our CFO .
I hope everyone has had a chance to review our earnings release and prepared remarks, both of which are available on our website.
In addition, with posted a transcript of the pre recorded remarks.
Just a moment Linda will share a few opening comments and then we'll take your questions.
During this call we may make forward looking statements about our fiscal year, 'twenty 2020 outlook and the potential impact of COVID-19 pandemic on our business. 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 forward 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 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 filed with the SEC.
Now I'll turn it over to Linda.
Hello, everyone. Thank you for joining us I hope you and your families are well hopefully you found our prepared remarks helpful.
We faced significant cost headwinds in a volatile operating environment in Q2.
Despite these challenging conditions, we executed well on those factors under our control.
This includes taking strategic pricing actions and driving cost savings.
We're starting supply serving our customers and advancing our consumer centric innovation pipeline.
Demand remains robust across our portfolio and our brands' superiority results are better than during the height of the pandemic.
We have a portfolio of strong trusted brands exposed to demand driven tailwind and we will continue to invest in them, which we expect will fuel long term growth of our business.
While we anticipate this highly dynamic and challenging environment to persist over the near term and have adjusted our fiscal 2022 outlook. As a result, we are confident that we're taking the appropriate actions to navigate this period deliver profitable growth over time and build a stronger more resilient company.
With that Kevin and I will open the line for questions.
Thank you Ms Randolph, ladies and gentlemen, if you have a question. Please press star one on your Touchtone telephone.
Our first question comes from the line of Dara <unk> with Morgan Stanley . Please go ahead.
Hey, guys. So a couple of questions on gross margins just given the magnitude of declines now expected this year.
Can you discuss conceptually how long do you think it takes to try to recover these cost pressures from pricing standpoint. Originally it sounds like you were hoping to make a lot of progress next year at least based on the exit rate in Q4.
But you run the arithmetic now.
The required would require a mid teens corporate price increase even if you assume no demand elasticity just to recover this year's gross margin compression. So.
Clearly not realistic to take that much pricing in one year or so.
Any thoughts on how long it might take to try to recover the gross margin pressure is it a multi year endeavor.
And how do you think about pricing offset relative to potential impact on share and then second just any thoughts around if theres an ability maybe to more aggressively consider your SG&A structure and more aggressively consider ways to lower your.
Fixed cost base just in light of what now appears to be a structurally different.
Cost level in terms of commodities and other cost factors. Thanks.
Hi, Darren this is Kevin I appreciate the question.
Let me start with the expectation for gross margin.
Sure you can appreciate I won't provide a specific outlook beyond this year, but I can't give you some perspective in terms of what we're seeing.
If you look at the work we're doing we believe we're taking the right actions primarily through our pricing efforts and our cost savings program that we continue to be in a position that we can recover costs and rebuild margins overtime.
I do think that's going to take some time given the level of inflation, we're dealing with.
I think youre hearing from us in all of our peers. This is a unique environment with an extreme level of cost inflation.
But we do think we've got the right plans in place to be able to rebuild margins now for us that continue we continue to believe that's going to start this year, we think by the fourth quarter were in a position where we start that process of rebuilding margin.
And then fully expect that to continue next year.
If I look at our history. This is the <unk>.
Inflationary cycle, we've gone through in the last 10 years. If you look at the three previous times we've done this.
We've been able to fully price to drive our cost savings program to offset the cost inflation rebuilt margins. It historically it has taken us about 12 to 18 months to do that.
I would tell you, though in this case because of the extreme level of inflation, we're dealing with I expect it to take longer.
So we'll have to see exactly how that plays out in <unk>.
It will also influence the timing and to a certain extent as how the inflationary market plays out that could either extend the timeline or accelerated if we get any tailwind or further headwinds on.
On the cost inflation, but I do think it's going to take several years for us to rebuild margin.
And what's important for US is while we are committed rebuilding margins at the same time, we want to make sure. We continue to invest in the business to maintain the topline momentum.
We have very good momentum on the top line.
You know, we're expecting 3% to 5% going forward and we want to continue to invest to maintain that momentum. So we think the way we maximize value of this company as we invest to maintain that momentum and then at the appropriate price pace, we rebuild margins, which we're committed to doing.
And then in regard to fixed costs and choices. We can make you know one thing I would tell you and we've talked about this a little bit in the past.
As you know we have significantly extended our supply chain through this pandemic both to increase supply availability as well as to be able to increase our ability to meet this elevated demand that as an opportunity for us and so as demand could use a moderate we're going to be able to go after those fixed costs in our supply chain and take those out and that's another reason that gives us.
So we're gonna be able to rebuild margins.
Great and then on the opportunities from an SG&A standpoint, you are looking at given the higher commodity levels here in terms of leveraging congrats polo and they have greater cost savings and offset some of this gross margin pressure as you look out.
Yes, we're going to continue to drive our admin productivity program, we've been doing that for years and will continue to rely on that to help offset the cost inflation.
On track to have another very good year from a cost savings perspective, and you'll see both benefits to cost of goods, but we also drive admin productivity and Youll see us continue to do that going forward, but that will certainly be a key component of our work as we go.
Yes.
Okay. Thanks, guys.
Thanks Dara.
Your next question comes from the line of Andrea Teixeira with Jpmorgan. Please go ahead.
Thank you good afternoon, all and I hope all of you are well.
Are there.
Tasteful third.
Third party contracts that you will anniversary and potentially online already this calendar year or that is more like a consideration in calendar 'twenty. Two 'twenty three I think Kevin you alluded to that supply and supply chain.
And just now to in response to that question.
Or is that something that you'd still want to keep that person could apply even now with more capacity and demand had come alive.
And on the amount of inflation just first a follow up.
And then you are calling now what you are hearing a lot of.
Youre, saying that because it's broad based and it's mostly in logistics and transportation.
That could represent even more than half of the pressure.
Why are the other commodities as well as news and which they have peaks and having food, but is that something that you are seeing more stockholder now and therefore it might take 12 to 18 months that you called out is that the way we should be thinking.
Andrea Thanks for the question.
As it relates to take or pay agreements and as we've talked about this in the past because of the tremendous increase in demand for our products. We quickly started expanding our supplier base, including the use of third party manufacturers. So we can get more product out to meet demand that came at a higher cost, but we thought that was a smart choice to make because we did not want to over.
Invest in our capacity and then as demand moderated we'd end up over capacities under utilizing our facilities and so we made that decision. We have increased the number of third party manufacturers we work with.
As demand moderates as we expect it would we are going to start stepping out of those agreements I would expect that to start this fiscal year and the back half of the year, we'll start stepping out of some of these agreements.
And then the pace as we go will really be driven by consumer demand as we watch demand play out we will pull back on the capacity, we've built up over time to match that demand moderation, but everything we're looking at suggests we will start this year and I think how you'll see that play out in our performance is what will start as youll start to see our inventory levels.
Come down.
Because we've increased the number of manufacturing nodes, we have in the network that just means we're holding higher inventory levels as we added inventory to all these different facilities.
I think by the end of the year, you'll start to see our inventory levels come down and then I would think in fiscal year 'twenty three you'll start seeing the real benefit of bringing that production back in house utilizing our facilities rather than these third party manufacturers.
And then on inflation.
Very similar what you've heard from our peers, we are seeing inflation broadly across.
All of the inputs within the supply chain.
We're calling out commodities and transportation because by far that's the biggest.
Amount of inflation, we're dealing with for us.
About two thirds of the inflation about one third transportation and resin obviously is the biggest component.
The commodity inflation.
And then on transportation for Us.
I think your question was is it structural or not.
We're seeing it we're seeing it really in two areas. One we're clearly seeing higher rates broadly across the transportation market.
But the other challenge we're seeing is our use of spot carriers as we see elevated demand for trucks and driver shortages, continuing its forcing us to move to the spot market at a greater pace than we've done historically.
We're seeing the premium to the spot market continue to increase their running 50% to 75% higher than primary carriers.
I think over time, if you assume demand for goods moderates over time, youre going to see us be able to move away from those spot carries back to our primary carriers that should significantly reduce our transportation cost.
So while there will be inflation in the market. It is a significant upcharge for us using these spot carriers and that ability to move back will be a nice savings for us over time, and I would expect to see that as demand settles out.
Very helpful. Thank you.
Sure.
Your next question comes from the line of Chris <unk> with Wells Fargo Securities. Please go ahead.
Hi.
Hi, good afternoon or good evening.
I guess I'm trying to understand.
A little bit better.
I hear you on the outlook for gross margins for the full year.
I guess I'm just trying to understand.
Maybe like the moving pieces for the back half.
I guess, if I look at this quarter productivity still coming in a bit light.
Pricing is going to be building raw materials, probably were materially worse than what you thought this quarter.
Manufacturing and logistics definitely worse than operating deleverage, probably worse sequentially worse too.
And I guess.
To really get comfortable with.
How negative gross margins are going to be in the back half I suppose you have to assume that productivity remains fairly muted.
Yeah.
Raw materials, obviously remain negative as you just said, but.
But you're also dealing with some pretty significant operating deleverage.
And maybe that's maybe that's a nod to.
The fixed cost base I'm not sure.
Yeah.
Yes.
Is that is the way to think about that bridge kind of kind of fair and then maybe.
And sorry for the long question, but just as far as the mix goes obviously mix normalizing is a big part of the story. This year as pricing is building you are going to be priced on 85% of the portfolio now and so how does that factor in here I guess, what I'm, what I'm getting at is just.
I hear you on the gross margin pressure, but you have to assume certain things.
Stay pretty bad.
And then just one.
Make sure Im thinking about that correctly.
Sure. Thanks, Chris for the question, let me talk a little bit about how we see gross margin progressing through the year. So.
So we expected last quarter and we continue to expect now that Q2 is going to be our most challenging quarter in terms of margin pressure and you saw that with our margins down about 33%.
We continue to expect sequential improvement as we move throughout the balance of the year.
We continue to expect by Q4, we enter a position where you start to rebuild margins and then we'd expect that to continue into fiscal year 'twenty three.
To your question about what are the drivers in the back half of the year that that will drive that sequential improvement I'd point to a few the first is pricing.
Pricing will continue to build in terms of the value it generates for us as we move through the year.
Q1, It was fairly limited is about 50 basis points of benefit to margin. This last quarter was about 100 basis points I think by Q3, it's starting to approach 200 is probably still a little bit south of 200 and by the fourth quarter I think the benefit will be well over 200 bps to gross margin, so you're going to see that building value from the pricing actions we have taken.
Are the additional ones, we announced today that we will take over the back half of the year in.
In addition, when you think about our cost savings program. We're on track to have another very good year, but you will see that phasing in a little bit more back half weighted and so in the front half of the year, we generated about 80% to 90 bps of benefit you should see that north of 100 bps in the back half of the year and that's just the timing of the projects how they happen to play out this year.
And then the other item I'd point to is as you look at the cost inflation. We're dealing with Q2 was the most challenging quarter from a year over year perspective, as we get to the back half of the year, while we're still operating in an inflationary environment. The year over year change is much smaller because we really start to see that run up in commodities at the beginning of calendar year 'twenty one.
The ice storm in Texas, and so on a sequential basis in Q3 and Q4 those increases both commodities transportation and manufacturing there'll be a lower hit to margin as we move through the quarters and then finally christi year to your last comment which is spot on as it relates to mix.
<unk> talked about this for last few quarters, we had a temporary benefit during the pandemic when we significantly reduced the number of products, we offered to increase supply.
We are reintroducing, our full lineup of products, including multi packs that does have a mix yet.
There'll be about four quarters of that unwinding that temporary benefit which will go through Q3, the current quarter end.
And by the fourth quarter, we've lapped that and we should not see a mix drag.
<unk> margins as well, so we'll get that benefit.
And then the last one is you mentioned the deleveraging.
Volumes down in the front half of this year there was some deleveraging that impacted margins, but in the back half of the year, we expect volumes to be flat, if not up and so we should not expect that drag either and so those are the elements of how we move through the year and why we expect to see margins building as we move through Q4.
Hey, Thanks, Kevin if I could just squeeze one more in you talked about like $500 million of.
Commodity and transportation expense for the prior $3 50.
The incremental pricing youre going to get some offset but the earnings is coming down more just what.
Is it just everything else in there and just the.
Deleveraging.
On cost.
All of these other things that that are harder to attract beyond the two items that you called out I'm just trying to.
I guess quanta quantitatively complete the bridge. So thanks, so much for that.
Yeah, So I'd say on the $3 50 to 500, maybe just a couple of thoughts so as we've talked that's the increase we're seeing in commodities and transportation, while that's not the entire inflation, we're dealing with that's the bulk of it thats the areas, where we're seeing the biggest year over year increase but as I said, we're seeing inflation broadly across the portfolio as it relates to pricing.
As we've moved from planning to probably 70% of our portfolio to now pricing, 85% and keep in mind, it's not just pricing, 85%. We're also going back and taking multiple rounds of pricing for several of those brands within that 85%, but there tends to be a lag to that and so we're going to incur that extra cost. This year now 500 million we're projecting the.
Pricing benefit will be modest as those pricing actions go into effect in the back half and that's really setting ourselves up to get more benefit as we move into fiscal year 'twenty three.
Okay. Thanks very much.
Sure. Thanks, Chris.
Our next question comes from the line of Camille got through all that with credit Suisse. Please go ahead.
Alright, Thank you a.
Couple of questions I guess shifting to sales.
Rather than margin it looks like it's coming in a little bit better than expected can you, maybe unpack that a little bit more pricing coming through than you had planned maybe the elasticity is lower than you thought.
Or is it just that demand is.
Didn't really moderating at the rate that you that you might have expected.
I will now happy to get started on that one we did when you had a strong quarter Tycho.
We did see a strong quarter from a top line perspective, and really that continues to be the strength of our brands with our consumers and we're seeing that broad based across our categories, where they continue to turn to our cleaning and disinfecting brands our household essentials.
And if you look across our two year stacks across all of our segments.
And in the strong double digits.
From a Q2 perspective.
What we're seeing.
Look at share we're up in the majority of our business units, our consumer value measure, which measures the amount of our portfolio that consumers deem superior is at an all time high of 75%. So all of those investments we've made in advertising and sales promotion innovation.
Executing against distribution as we got supply back in place are paying off.
And demand remains robust.
As we move forward, we're continuing to see long term.
Tailwind that will continue from a play perspective, which gives us confidence in getting to that 3% to 5% protocol that we've spoken about and returning to that in the fourth quarter.
And I would note some of the businesses in our household essentials were up even after a strong Q2 year ago. So if you look at our Brita business food business glad all up off of a strong quarter a year ago and again, it's behind the fundamentals innovation and the fact that consumers continue to turn to trusted brands.
Okay, Great and then to clarify maybe comment Kevin.
You know it takes 12 months I think you said it takes 12 to 18 months to offset cost inflation. In this instance, because there's so much more profound is likely to take several years does that does.
Is that several years to get back to kind of your run rate of the mid forty's on gross margins or where you maybe suggesting something else.
Yeah, I'll be a little cautious about providing an outlook beyond this year, but as long as I have said in the past we are committed to rebuilding margins getting back to you that that sort of mid Forty's range. We were before the pandemic began and as I said I do think it's going to take longer than what we've historically been able to do in terms of timing to recover margins at 12 months to 18.
Just because of that.
The sheer magnitude of the inflation, we're dealing with it's.
Three to five times any previous inflationary cycle. So I would expect that timeline to be extended but again keep in mind. There's a number of items, we don't control that will impact the timing of how quickly we recover margins, where you just have to see how that plays out.
I think we're gonna be in a better position to estimate that I'd like to get a few more quarters under our belt and see how the inflationary environment plays out, but I think as we prepare for fiscal year 'twenty three will be in a better position to provide our perspective on the timing of that.
Okay, great. Thank you.
Thank you.
Our next question comes from the line of Lauren Lieberman from Barclays. Please go ahead.
Great. Thanks, Hi, everybody.
I wanted to just talk a little bit about working through inventory because last quarter. I think we had talked about use of cash flow with weak and the inventory in finished goods in particular was up and Thats how we.
It came to this all of that the realization around the external supply and estimating what was going to happen in terms of consumer demand.
Inventories grew again sequentially so.
I know you talked about volume, hoping you get you know get to up volumes by the end of the year, but I tried to talk about how you think that working through inventory, if there's particular categories, where the overcapacity.
It's more or less severe because to linda's point their businesses. There they are growing year over year in volume.
And the degree to which some of these external supply contract.
It's easy to exit versus being contracted for certain amounts of supply for a different amount of time. Thanks.
Alright. Thanks for the question, let me talk a little bit about inventory and where we're at and then where I see that going over the next several quarters.
We ended the second quarter with about 65 days of inventory on hand across our enterprise typically before the pandemic, we were carrying about 55 days and so we have built inventories.
We built inventories for two primary reasons.
First we have taken up inventory levels broadly across our portfolio to try to help us manage through the ongoing supply chain disruption.
This helps ensure if we have disruptions in our ability to secure transportation or we have suppliers go down for any number of reasons that theyre going down we have inventory in the system, where we can continue to ship and meet demand and so we think it's smart in the near term to invest some additional working capital to have a higher inventories across the network.
We do think at some point as the supply disruptions start to work themselves out we're going to be able to take that down.
Other area that we built up inventory as it relates to extending our supply chain through additional third party manufacturers as I just mentioned as you add more nodes to our network. We are holding inventory in many of those locations and so we have a number of additional locations throughout the world, we're storing and accounting for inventory.
So I think this will play out as I just mentioned, we will start stepping out of some of these supply agreements for the back half of this year as demand is moderating and we set these out that we could step out of these and we felt it was the right time to do that we will start stepping out of those this year and as I said I expect by the end of this year Youll start to see inventory levels come down as we start consolidating our manufacturing base.
<unk>.
As it relates to taking inventory levels down that we have right now to manage the supply disruptions much of that is going to be driven based on when we feel comfortable that we can count on supply chain and then we can count on trucks, arriving we need down materials being available we need it.
So we're going to have to see how that plays out but I expect to start making progress. This year and then I expect overtime in 'twenty three we continue to make progress.
Okay, that's great. Thanks, and if I can sneak in one more.
Linda you commented on markets with Linda Eddy senior hallmarks, I apologize it that market share improvement where.
When you're in shelf available on shelf availability has improved.
And that's certainly true in categories year over year, but there is certainly also categories where shares at least as far as we can see in Nielsen are down versus where you were in 2018 2019. So I'm just curious to be more constructive than you kind of look further out whats the whats the bogey how do you think about.
Where are you wanted to be in terms of share what's the right gauge of kind of success in claiming share positions.
On a year over year progress is important but if you kind of look back a little bit further.
Shares are still soft in certain categories on a multiyear basis.
Hi, Lauren Thank you I'll build on that so overall I would say from a market share perspective, we are feeling good about where we are returning to pre pandemic share levels in aggregates and then growing in the majority of our businesses and continuing to make progress even if you look at the last four to five weeks.
<unk> share growth in the human experienced in the first half of the year, but that being said, we absolutely need to continue to make progress and our goal is to grow share in that they're super clear about that and we continue to be focused on that we want to win and we want to win in our categories that doesn't mean, we will always win in every category at all times there'll be ups and downs as theirs.
Competitive spending.
Innovation launches and timing, but in aggregate, we are focused on growing market share in our categories, winning with our brands.
And although we've made great progress I point to glad is a great example of growing a great glad trash air.
After a long time of being flat to slightly down, but our innovation is working pricing is working et cetera, we're going to continue to make progress against that portfolio and and we intend to grow market share.
Great. Thanks, so much.
Thanks Mark.
Our next question comes from the line of Kevin Grundy with Jefferies. Please go ahead.
Hey, good evening everyone.
Two questions for me, Kevin I'm, sorry, I'm going to beat a dead horse here, but I'm going to come back to gross margin, but it's actually a little bit differently.
I guess like others on the call I'm kind of wrestling, a little bit with some of the commentary around the recovery sort of clears your crystal ball may be today, but.
But.
A little bit more structural and I guess, what I'm, where I'm coming from with this when we chatted in November .
You sounded pretty good about an 18 to 24 months recovery. So what has changed dramatically over the past three months to make you a lot more cautious on the cadence of that recovery and I guess as I'm kind of looking at the quarter and I think this was an earlier comment I mean, the commodity piece certainly dire but maybe.
Not drastically more dire than we had modeled the manufacturing logistics certainly worse.
So just taking those those pieces together.
What has changed in your mind, what has changed internally for the company that makes you significantly more cautious on the pace of the recovery of the ability to price and offset it with productivity.
Yeah. Thanks, Kevin.
Couple of thoughts on the ability to price I feel very confident in our ability to price we've executed pricing on 50% of our portfolio quite successfully through the second quarter. We still have some work to do over the balance of year to get to that 85%, but many of those conversations with retailers have already occurred so I feel very good about the work of the team and our ability to take the necessary pricing.
And Kevin as I mentioned earlier I feel very good about the work we're doing on cost savings woke me another good year.
What we are saying, though just broadly inflation is getting more difficult sitting here today, we now think theres $500 million worth of cost inflation.
Three months ago, we thought that was $350 million.
Seeing that level of inflation that we're continuing to deal with that just means we've got more work to do on pricing cost savings and what to see how long that takes I think it's prudent.
To think about the time to do that and how you expect it to be longer than what we've done historically and so I. Just think is driven by increasing inflationary environment, we're dealing with and knowing that it's going to take some time to work through and.
I think Kevin as I said earlier, what I think is most important to make sure. We continue to stay balanced we have topline momentum we're going to continue to invest to maintain that momentum and then we're going to rebuild margins at the appropriate pace that allows us to do both and so we're going to continue to.
To be very focused on doing both in doing both well and we think that's how we're going to maximize the value of the company and so I think looking out a couple of years and expecting recovery over that period of time seems reasonable, but obviously I think over the next few quarters, we'll get more visibility to be able to update you as we learn more.
Okay. Thanks, Kevin just a quick follow up for Linda can you just comment on expectations of potential risk around trade down in your categories. Given this level of pricing and a handful of categories, where you have higher private label exposure and then I'll pass it on thank you.
Sure Kevin.
Generally if you look at our categories, we don't really have very high private label.
Exposure is concentrated in a few categories and in those categories. We have a very strong share position in house for many years.
And I, just turn to the facts on the strength of our brands. So I spoke about earlier, the fact that our superiority rating by consumers is at the highest its ever been so 75% of our portfolio teams superior by consumers.
If you look at the trends on private label through the pandemic private label continues to not make progress on share.
Consumers are turning to trusted brands.
Starting this entire time, we've been investing in those brands through advertising and sales promotion and a really terrific innovation program that.
We're continuing to see the benefits of all of the innovations. We've launched are off to a strong start and we launched two new innovations this quarter with more coming in the back half.
So when I think about where we are our brands are in a better position than they were pre pandemic and really then even at the height of the pandemic and so we feel confident in our ability to take pricing. We are watching very closely the impacts that inflation will have on consumers I think theres a lot of unknowns in that but if you look back.
We performed during times of economic stress for our consumers given the fact that we're in household essentials categories.
We tend to fare pretty well our categories they are well.
And we would expect that to continue.
Other thing I would note is that we are seeing pricing generally in line with what we've taken in the category. So private label is moving as well and we expect our price gaps to be about what they were pre pandemic and pre pricing and that will also help us.
As we move forward, so I feel as confident as I can given the strength of our brands and our ability to execute these price increases again, we're going to watch consumers carefully as we go through this period.
We think we're in a good position to pass through these price increases and continue our momentum on top line.
Very good. Thank you both good luck.
Thank you thanks, Kevin.
Our next question comes from the line of Jason English with Goldman Sachs. Please go ahead.
Hey, good afternoon folks thanks for putting me in.
A couple of quick questions.
<unk>.
The gross margin contribution from price a little north of 200 bps in the fourth quarter is that could reflect like sort of full price you're going to have all the price increases in the fourth quarter or are there more to come as we get out to fiscal 'twenty three.
Hi, Jason on pricing.
I won't comment on pricing in fiscal year 'twenty three let me just talk about our plans this year.
As we've said we've implemented 50% we've got some more work to do some of that will go into effect. This quarter Q3, but we have some additional pricing actions that go in place in Q4, and so as I said north of 200 bps in the fourth quarter would not be the full value because you won't have the full Q4 impact from some of those pricing actions, which would suggest as we get.
Into fiscal year 'twenty, three you'll see that continue to build.
And then we're going to we're going to remain open. So we're going to continue to evaluate the cost environment.
We stand prepared to take more pricing if necessary. If that's what's required to recover margin I'd say, it's too early to make that call. We wanted to see how we think inflation is going to play out as we get through this fiscal year and then based on that we'll make decisions on 20th repricing, but that's something we'll certainly consider.
Understood.
And Linda pre Covid there were none.
Your business lines that were suffering from some market share losses, whether it be from some branded competitors are private label.
It's obviously encouraging to see the recovery and the growth that you are now experiencing.
But it's coming on on a much more subdued rate of price you're seeing most of the categories no other words its coming on.
Price gaps going down so your value proposition is improving your market share is getting better.
You mentioned trash bags. It's a great example, you can see it.
How much of your market share, but what do you think is coming from that and is part of what's happened here a bit of a permanent rebase and your pricing architecture, and therefore permanent rebase in your margin structure.
Jason I think.
I think thats true in the data and what will be true over the coming months as pricing settles out in the categories that they are definitely going to be variability in terms of price gaps etcetera, but.
But what we have not seen as a material change in our price gaps in aggregate in the categories. There are some pluses and minuses, depending on pricing implementation timing, but that really isn't what we're seeing driving the strength in our brands. The majority is attributed to good execution. So we're seeing distribution increases returned to merck's, although lower than pre COVID-19 levels.
Yeah.
As well as our strong innovation plans, taking hold so as we look at the drivers we're seeing the majority of that share.
Driven by factors that are within our control versus price gaps et cetera. Again. This is going to play out over the next few months, but we do not expect price gaps to be a driver of our performance moving forward, we expect for them to be about what they were pre COVID-19 .
Not what our intent is our intent is to win through innovation. Our intent is to went through brand building.
And continued spending on advertising and sales promotion and investing in our categories.
Got it thanks I'll pass it on.
Thanks, Jason.
Our next question is from the line of Peter Grom of UBS. Please go ahead.
Hey, good afternoon, everyone. So I guess my my.
The bigger question is just do you feel like that is enough flex in this guidance that gives you comfort or should give investors comfort that this is really it in terms of negative revisions and then I guess just following up on the commentary on phasing in previous margin in the back half of the year I know you've mentioned a few.
<unk> and sequential improvement in Q3.
Can you maybe help us directionally in terms of how much improvement in Q3, because down 200 basis points is quite a bit and then Kevin I think.
Previously as we exited the year was returned to the low <unk> in terms of gross margin. So just like any thought around the rate of improvement that we should be expecting now as we exit the year. Thanks.
Yeah. Thanks Peter.
Let me talk about your question was on the plan overall I think we have a balanced outlook for this year I feel very good about the areas we directly control rather that's our pricing actions are cost savings efforts are the work we're doing the innovation, but I also recognize we are operating in an environment that is much more volatile and so not.
Not knowing exactly how inflation will play out.
Consumer demand.
I think the outlook, we provided as appropriate you'll also see that our outlook ranges are a bit wider than we might normally provide at this time of year. We also think that's appropriate given the level of volatility in some of those areas. We don't directly control. So overall I feel like we provide a good balanced outlook for the year that allows for some variability.
Across a number of different drivers and.
And then as it relates to phasing.
I would expect as I said progression through the year starting in Q3 right now we're looking at Q3 margins probably in the mid thirties building.
Building on where we landed Q2 and then previously we had anticipated we'd be in the low forties I expect with the increased level of inflation, we likely finished the year in the high <unk> and then we would look to build on that as we move into fiscal year 'twenty three.
Got it. Thank you so much I'll pass it on.
Sure. Thanks Peter.
Our next question is from the line of Linda Bolton Weiser with D. A Davidson. Please go ahead.
Hi, Thank you so I actually have a question that's not on gross margin.
Just wondering in your.
Business have you experienced.
Any issues.
Issues with the EPA labeling your competitor Helen of Troy, Yeah, two shipments so they can reuse some labeling.
As for EPA regulation changes are you experiencing that or do you expect to experience that in your in your brenna business. Thanks.
Hi, Linda I know, we do not have that issue and maybe I'll just take an opportunity at a point to what's going on in <unk> right now because I think it's a really great story.
Brett has been a terrific success over this pandemic as people have turned to.
Filtered water can meet their needs and I think it's twofold. One people are spending more time worried about their health and wellness and drinking more water is important and second they're thinking about their impact on the planet through sustainability. So Brett has been a business that has very very strong double digit.
Growth we've grown share.
Five points in the last quarter and if you look at our household penetration is the highest it's been in eight years. So feel really good about the future of this business. Our innovation pipeline is strong and it's one that we plan to continue to accelerate moving forward, but we don't have any of those issues holding us back from any pay perspective.
Great. Thank you very much.
This concludes our question and answer session Ms. Randall I will now like to turn the program back to you.
Great. Thank you. Thanks, everyone. We look forward to speaking you again on our next call in May and until then please stay well.
And this does conclude today's conference call you may now disconnect.