Q4 2022 Clorox Co Earnings Call
So their pricing ongoing cost management and supply chain optimization, our digital transformation and a streamlined operating model we announced today.
At the same time, we're committed to maintaining our category leadership and delivering superior consumer value.
I'm confident that our ignite strategy continues to position us well for the future.
We remain committed to delivering on our 3% to 5% sales growth target over the long term and are on the right path to drive consistent profitable growth over time and create shareholder value.
With that Kevin and I will open the line for questions.
Thank you Ms for MBIA, Inc.
Ladies and gentlemen, if you have a question. Please press star one on your Touchtone telephone.
Yes.
Yes.
Our first question comes from Pete.
Peter Grom of UBS.
Your line is open hey, good afternoon, Hey, good afternoon, everyone. So I guess I'm just kind of wanted to start with a pretty broad question.
On the initial guidance, just kind of given where in Atlanta versus your expectations.
I would be curious Linda or Kevin would you characterize this outlook is conservative.
Is it prudent just trying to understand the comfort and the range I'm just wondering just given what we've seen over the past year.
Hi, Peter Thanks for the question Yeah, Let me talk about our guidance and maybe a few thoughts the first is <unk>.
We view this guidance is balanced, but certainly balanced on what we see today.
You saw in our outlook, we provided a wider range both on the top and bottom line.
And I think Peter what that really indicators. We believe we continue to operate in an environment of heightened volatility.
And I'll be the first to admit I don't think we've done a particularly good job of estimating the cost environment.
And so as we look forward, we're projecting about $400 million worth of cost inflation, our supply chain, we think thats a balanced approach to take at this point, but I'll acknowledge there's a lot of variability there we're going to watch that very closely and obviously update folks as we progress through the year, but we think to start the year. This is the right the right outlook and again the wider.
Brady just speak to the heightened volatility we are dealing with.
Thanks, and then maybe just following up on just the organic sales outlook.
Just trying to understand the confidence around the continued strength across the rest of the rest of the portfolio you highlighted in the release in your prepared remarks that organic sales growth. Excluding cleaning was I think it was up mid single digits or is that kind of the expectation moving forward and if so what kind of gives you confidence that you won't see moderation.
And some of these other categories looking ahead.
Right.
Yes, Peter we feel very good about.
Our portfolio overall as you saw in our prepared remarks, if we set aside that health and wellness sector and if you start with Q4 for.
For the rest of our portfolio our household essentials, our international business.
About 5% organic growth feel very good about the strength of that portfolio.
When you think about health and wellness I would say pricing is playing out very much as we expected elasticity has continued to be below historical level, but we've got a couple of additional dynamics going on in that segment.
We mentioned, we had inventory reductions at our retailers. We saw in April and May and that had a bit of a drag in the quarter as well as we continue to see demand moderation in cleaning and disinfecting behaviors with consumers and we think that's going to continue.
And so if you look at what we saw in Q4 as we project forward to fiscal year 'twenty. Three we continue to expect that to play out somewhat similar.
We look forward, we feel very good about household essentials and international.
Our pricing will continue to perform well now.
I think it's worth noting we have assumed in our most recent price increase we took in July we've assume elasticities revert back to what we saw historically, which means more negative than what we've seen over the previous two price increases.
And we just think that's a prudent assumption to make given the pressure consumers have been under and we expect they'll continue to be under going forward, but overall I'd expect on the bulk of our portfolio.
You'll see favorable price mix in the high single digit range.
And volume down likely low single digits similar to what we saw.
In Q4, and then I think in the health and wellness segment again feel very good about our pricing actions I feel very good about the health of that business. If you look at our home care portfolio. We continue to grow share. We grew share last year. If you look at particularly our wipes business I think we've grown share for the last six quarters and so the business itself is very healthy.
But we have to recognize we expect to continue to see some moderation in consumer behavior and that will play out in the category. So we expect that category to be down, but our business is quite healthy within this category.
Thanks, So much I'll pass it on.
Thanks Peter.
Our next question comes from Andrea Teixeira from Jpmorgan.
Thank you.
Thank you good afternoon.
So I wanted to go back to the <unk>.
So the assumption is on the mind of Switzer plus to your organic growth and I know I appreciate that you had to be.
To provide a wide range.
So you just discussed now that the pricing that is embedded in with something that is a fixed price mix would be about high single so it implies that you're.
Thinking about the range that you have.
Minus six ish.
If you will like five 6% in volumes and then Conversely.
A more healthy environment on the top range. So just to kind of pause here and think why do you.
What are you embedding there.
Mostly on the on the health and wellness the cleaning division that you expect that to be now or you're also embedding declines in India or the components and I have a follow up on the cost side. The $400 million that you were expecting is that based on.
Spar or you're also using the curve as you normally do.
Hi, Andrea and thank you for the question in regard to our sales outlook on organic sales growth.
Of minus three to plus three that assumes very similar to what Pierre and I were talking about good solid performance.
Our household essentials and international portfolio that I expect positive sales growth there.
I do expect our health and wellness segment to be down for the year.
Primarily driven by the demand moderation, we expect particularly in cleaning and disinfecting.
And folks you have to remember if you think about the laps. We have this year last year in both Q1 and to a lesser extent Q3, we had both the delta and omicron variant spreading in the U S and we had very strong performance in the prior year. So we have to lap that in addition to some moderating behaviors as a result of that we think the health and wellness.
This segment will be down in sales for the year, but that's really driven by the category.
Much less know based on the strength of our business just Andrea.
As an example, if you think about Q1 last year very strong performance for cleaning and disinfecting business and in fact, our wipes business on a unit basis that business is up over 50% in Q1 of last year. So we have to lap that.
And you may have seen in my prepared remarks, as a result of that.
We think our cleaning and disinfecting business will be down double digits in Q1.
And why do we think overall sales for the company will be down high single digits, It's really driven by the lap of Q1 in the previous year and then we expect to see strong performance as we move forward.
Mhm and on got it helpful.
Sorry go ahead, and say that on the $400 million worth of input costs. We're projecting this year, we base that on what we expect and not just on spot rates, but looking forward, where we expect commodities.
To migrate over the course of the year.
And as we think about how that will phase into our results, we expect cost inflation to be the highest at the beginning of the year and then moderate as we move through the year.
That's super helpful and just a follow up on that like what is your visibility as you saw like can we use forward curves, but you have some visibility into the first half correct.
We do yes.
So the only thing that you really Morris forward is more the second half.
Yes, I mean I'd be careful that we have visibility to forward curves for many of our commodities, but keep in mind.
The level of volatility that we continue to see while there's.
Many outside resources it project commodity inflation and forward curves I have found in this environment. They are difficult to use as certainty we've seen quite a bit of variability on the services, we use and I think that's true for most folks and so we have visibility to what we believe.
How <unk> will play out over the course of the year, but I'm a bit cautious with <unk>.
Suggesting that we are certainly in the first six months.
Yes, that's fair. Thank you I'll pass it on.
Sure.
Our next question comes from Chris Carey of Wells Fargo <unk> Company.
Your line is open.
Hey, everyone.
Okay.
Hi, Chris can I just.
Can I just confirm.
Just the commentary around sales.
That you expect to health and wellness business.
To be down for the year, but the rest of the businesses to be up I just wanted to confirm these prior lines of questioning.
And then just from a gross margin perspective.
Given some good detail around the makings of the bridge for fiscal 'twenty three Kevin I Wonder if you could perhaps provide a bit more context on the contributing factors between pricing.
Volume deleverage.
$400 million of cost inflation is that all commodities or are there other.
Non commodity cost buckets within that.
Promotional activity with transportation logistics do you see what I'm getting at I Wonder if you could just maybe contextualize some of these key buckets, where you see the.
The most risk or not.
Hi, Chris Yeah happy to provide some additional insights into the where we see the cost inflation occurring and then and our plans to grow margin on your sales question.
So you are correct, our expectations to health and wellness segment will decline this year.
Offset by growth of the rest of our portfolio and again as I mentioned feel very good about the overall health of our business, but recognize.
As both lapping.
The strong performance, we had last year, plus the moderating demand by consumers and cleaning disinfecting that that will have a negative impact on the category for the year.
In regard to the cost inflation, the $400 million I've mentioned is cost inflation across the entire supply chain.
That includes commodities transportation wage inflation, we are expecting broad based inflation across the entire supply chain.
And then in regards to what we're doing to offset that is as you folks know and we've talked quite a bit about this.
Our commitment remains that we intend to get back to a pre pandemic level of gross margin.
We lost about 800 basis points last year and our goal is to build that back over time.
As we've said I think very clearly we don't expect to do that in one year, but we expect to make progress. This year and then we will continue to work at that we're pulling every lever available to us and so Chris do you think about the areas that we're pursuing that will drive that benefit this year for us the biggest lever we're pulling is pricing.
We have executed now three pricing actions two went into effect last year. The third price increase just went into effect last month that will have the biggest benefit we expect on our cost structure. This year and the $5 to 600 basis point range, we expect to get a benefit this year.
A little higher in the front half as pricing built in as we start to lap some of the actions. We took last year it'll start to dissipate a bit.
We're also driving our cost savings program and we expect to have a very strong year. This year. It's.
It's been more difficult over the past two years given the work we've been doing to try to keep up with demand.
As demand is moderating and we've been working on our supply chain, we have more opportunity to drive cost savings within our supply chain.
Expect to have a very strong year this year and that 150 to 175 basis point range.
And so those would be the two biggest drivers of helping us rebuild margin and then that's going to be offset by ongoing cost inflation, both in commodities manufacturing logistics.
And then you may have seen it Chris in our prepared remarks, but the other item I'd point out is.
While we expect to improve gross margins, we're talking about 200 basis points. This year.
I think youll see that build as we move through the year, we're going to be most challenged in Q1.
Given the decline in the top line and that has an operating deleveraging impact on margins and should we expect our gross margins would be about 35% in the first quarter, but they are not expect to build as we move through the year with expectation, we're gonna be approaching about 40 basis points by the time, we get to the end of the year.
And for perspective, we've lost about eight margin points last year, our run rate as we get through the year. We think we'll put about half of that back on as we move into fiscal year 'twenty four and again, we remain committed to continuing to pursue margin expansion beyond this year.
Yeah.
Thank you very much for that Kevin.
This is a this should be a quick one.
The health and wellness declines you are expecting.
Can you just.
For a quick comment on the professional business clearly.
Quite challenged this year are you expecting that to continue or as we nor.
Normalized sales base.
That business to get back to growth next year. Thanks rollout.
Sure Chris on our professional products Division I'd say overall, we expect modest growth I think that will build as we move through the year as we get past some of the comps and we get back to sort of a new level of performance.
And particularly as you think about Occupancies and professional environment starting to pick up we think over time, we'll get back to growing that business and likely in the back half of this year and then growing overall for the year.
Okay. Thank you very much.
Thanks, Chris.
Okay.
Our next question comes from Camille.
Waller.
Of.
Credit Suisse. Your line is open.
Alright. Thank you everybody can you talk a bit more about the streamlining program and maybe more specifically what youll be doing differently.
How we should be thinking about what impact it may or may not have in the short run on on topline and when.
When we think about you raising your long term algorithm of 3% to 5% on the on the topline in.
In the context of what where we are now seeing is there something we should be just thinking about in terms of your ability to achieve that over the long run.
Sure Heiko.
I'll start with the streamlining.
So this is our next step and one of our strategic choices connected Julia our ignite strategy, which is to re imagine work and back when we released our strategy in 2019, we articulated that we want it to be a faster and simpler company and this is the next evolution in that were already a pretty efficient company, but we think we can be.
Even more efficient.
And these changes will help us meet that algorithm that sales growth target of three to five and growing profitably over time as we return our margins.
Margins back to their pre pandemic state and what we're really trying to do through this model is get closer to the customer and closer to the consumer so that we can anticipate their needs better move more quickly and have the entire organization focused on the business unit priorities.
Having end to end visibility.
We expect to implement this beginning in fiscal year 'twenty three.
<unk> up here.
And at the end of Q1.
We expect to save $75 million to $100 million over the two years that will implement that's that will be an annual savings once we haven't fully implemented and we over time. The combination of this with our digital transformation will really set us up for that goal of of.
Having an organization that moves much faster much more simple and will support getting we're targeting about 13% as a percent of sales from an M&A perspective, what those two initiatives combined over time.
Got it and this is Seth.
Your typical productivity savings I'm, sorry about that but you're right in your gross margin bridge you often give the benefit of savings. This is separate and additional correct. That's.
Right now this is incremental to that.
Great sorry.
So you want to move to the question on long term three to five.
Okay.
You've seen that so.
On a three to five.
We still remain committed to that and we see line of sight to that but it's not going to be linear to get there and Kevin did a good job articulating what some of the factors are that we're dealing with in the short term and it really has to do with demand normalization and laughing COVID-19 impacts.
Back a year ago, we thought that Covid was that.
The worst of it was behind US before we entered fiscal year 'twenty. Two we thought inflation was transitory and that has turned out to be a much longer headwind that we're facing.
And if you look at what we experience from covered last year as Kevin said, we had two of the biggest COVID-19 wave, both delta and omicron impacting our business. So we have to lap that.
Get to a more normalized state we expect that to happen over the course of fiscal year 'twenty. Three we have some other businesses that are doing some normalization kingsford is a good example is one of our fastest growing businesses and that's normalizing.
But really health and wellness is the biggest portion of that and as Kevin articulated we expect a broad portfolio to be growing and.
And we expect health and wellness to be down next year as a result of this normalization that as we look at what we delivered for example in Q4, our businesses for organic sales growth perspective, ex the health and wellness segment grew 5% so well within our algorithm. If you take a step back and look at the last three years, our businesses in aggregate averaged 5% CAGR.
Over that period of time from our growth. So we are in a period of normalization. That's the biggest factor, but we remain confident in our ability to deliver that three to five and are really happy with the strength of our brands right now 75% of our portfolio deem superior by consumers pricing is going as planned.
And we anticipate that it will continue to go with plans.
In the early insights that we have as we've implemented our fairground in July .
And what we're just watching really closely is the consumer and watching this environment for them.
And we will make adjustments to our plans as needed, but we're heading into the period with strong brands rebuilding margins. So that we can continue to invest.
And we're just going to be as nimble as we can to react with a really volatile and changing environment.
Okay, great. Thank you okay.
Okay.
Our next question comes from Jason English Goldman Sachs.
Your line is open.
Hey, folks thanks for letting me in.
Thanks, Kevin.
Kevin the $400 million of incremental cost pressure I think you said, it's not just commodities, but its supply chain as well.
Can you confirm that.
Yes, I think many of US myself included were expecting to see a very big offset com as you as <unk> in sourced a lot of the product.
It does that $400 million include that offset or is that also captured somewhere else.
Hi, Jason Yeah. Thanks for the question the $400 million doesn't include supply chain inflation broadly across the entire supply chain not just commodities and so that will be we're looking at increased transportation cost increased wage cost we.
We have built in these savings as we've exited these contract manufacturing agreements. We've now stepped out of all the agreements that we intend to step out of.
It is contributing to our growing gross our plan to grow gross margins this year.
And so really our pricing actions are cost savings plus stepping out of these arrangements are all contributing to offsetting the cost inflation, we're dealing with.
Beyond the cost inflation, though the other item impacting manufacturing and logistics is volume deleveraging. So as we're taking quite a bit of pricing volume will be down for the year that does have some negative impact on manufacturing logistics, but it's being offset to a certain degree by the exiting of those co pack agreements. So that is all included in our bridge.
Understood that's helpful.
And gosh I have a lot of questions, but I'm afraid I'm going to have to burn one on a simple modeling math question, because I bloated up my model here and I'm still having a hard time getting down to your EPS that you've guided to despite seemingly getting like the gross margin those spend levels right.
Interest expense is the last variable like what are you assuming on interest expense and do you have a sharp uptick coming with them.
Maybe with the higher rates.
We don't Jason we just recently refinanced our debt maturities coming due over the next several years and so this last quarter, we called $1 $1 billion of debt refinance that at a slightly lower interest rate a modest savings in terms of interest expense.
The other thing I might point to on a reported basis. If you look at other income and expense.
Typically we have about $30 million to $40 million worth of charges related to intangible amortization.
And then related to the operating model redesign we talked about today, we baked in about $35 million worth of restructuring charges that will show up in other income and expense as well. It's about 20 sensors. Our estimate so that may be something else you you'll look at it in your model.
Thank you I'll pass it on.
Thanks, Jason.
As a reminder, if you do have a question. Please press star one on your Touchtone keypad.
And we have a question from Debra.
Most simeon.
Morgan Stanley .
Your line is open.
Hey, good afternoon guys.
Good afternoon can you can.
Can you talk a little bit about pricing from here, obviously, you've implemented some pricing this summer that hasn't been realized through the P&L yet so that's to come but as you look going forward are there plans for any incremental pricing just given the gross margin compression over a three year period, even with with the rebound.
We expected in this upcoming fiscal year and how do you think about that line item going forward in terms of price increases versus maybe mixed pack size changes et cetera.
Sure just a reminder for everyone.
Just implemented our third significant round of pricing in July and that is flowing through now to your point.
And is on track to our expectations and that was our largest a price increase of the three that we have taken over the last 12 months.
And it's on track.
We do anticipate taking additional pricing as part of our plan and that will come in different forms whether that'd be truckload increases our price pack architecture, which will start to begin in more earnest in fiscal year 'twenty three as we've discussed before.
And what we're watching right now is the reaction to July it's too early to tell that is just hitting the market now and we'd want to get through a purchase cycle, what the consumer to see how they're reacting and as Kevin highlighted.
<unk> seen our historical.
Price elasticity is not play out over this last year, they were slightly better than that historical elasticity that we had experienced but we're expecting that to return in fiscal year 'twenty three so elasticity slightly worse and better in line with what we saw pre COVID-19.
Given the level of pricing and given what's going on with the consumer.
So we would anticipate they will they will continue to be on track our categories remain healthy, but we're going to watch that very closely and we will adjust any plans that we have.
As needed to address that but largely we expect to continue to use pricing as a lever to grow gross margin not only through July but through the course of the year.
Okay. Thanks, and then just a detailed question the streamlined operating model.
Savings do you have embedded in guidance in fiscal 'twenty three is that savings more likely to play out in fiscal 'twenty four.
Is there a decent chunk of it in fiscal 'twenty three.
Hi, Dara as you may have seen we are projecting $75 million to $100 million of savings over the next 18 to 24 months.
We're expecting about $25 million worth of savings this year as we begin the program and then that'll continue into fiscal year 'twenty four.
And in terms of sort of modeling it as youre modeling both the the onetime restructuring charge typically those charges come first or expect more restructuring charges in the front half of the year and then the savings start to occur in the back half of the year and then continue into next year.
Thanks, Thanks, Yep. Thanks Darren.
Yeah.
Okay.
We have a question from Kevin Grundy of Jefferies.
Your line is open.
Great. Thanks, good afternoon, everyone.
I wanted to pick up on trade down risk Linda I think you mentioned a handful of times about how the consumers' behavior and we see that right.
Increasingly I think across the categories as we look at the syndicated data for Clorox, we're seeing private label pick up share across all of your key categories trash bags bleach wipes salad dressing charcoal.
Et cetera, I think are notable nuance with this has also been the price gaps have narrowed given some of the timing in terms of when you have moved versus private label as well. So we've seen some of the share loss.
Share gains for private label price gaps have narrowed.
For clorox versus versus private label, which is a bit perverse and I think Kevin you.
<unk> also made the comment that you expect with some of those pricing price gaps will return to more normal levels. So that is to suggest that the price gaps.
Iden, which then in theory for a more more price conscious consumer could could perpetuate some of the share issues that you've seen in your portfolio. So that's all sort of a big windup, Linda I guess for how worried I guess, how did you contemplate what youre seeing with the consumer and some of these dynamics as you've pulled together the outlook.
Maybe just comment updated thoughts on trade down risk, where you are with price gaps, where you think youre going to land et cetera. Thank you.
Sure Kevin Thanks for the question.
So maybe we start with your private label share question and talk a little bit about what we're seeing there and we can get into that.
<unk> piece around what does that mean and what are we seeing more broadly in trade down.
We've spoken about before the dynamics as you look at any time period in scanner data right now it's difficult to parse out because you have many factors depending on the category normalization the timing of pricing, which you already hit on which is exactly right.
Supply normalization et cetera, So I would caution that looking at any small portion of time to get to a conclusion, one way or the other you have to get in to a bit of the nuances as it relates to private label in our categories.
A good portion of that is the timing gap in pricing. So we've seen private label go a little faster than some of our categories.
You call that out and it's true in trash and bleach in particular and wipes. It is more about normalization and so wipes in that time period for Q4.
Private label grew five share points, we grew six so it is not coming from us.
And if you look at charcoal. Another example, where there's a different nuance we grew share I'll all outlets.
As consumers move to some channels and bought some larger sizes, even though we were down slightly in Lula. So I think again just speaks to the dynamic nature of what we're experiencing right now and Youre right as we return our price gaps tomorrow normalized levels, which we continue to expect.
And as we implement our July price increase that is in market now again as a reminder, is our largest price increase we do expect to be back to more normalized price gaps and youll start to see that flow through in share right.
Right now we have very strong volume shares for example, we expect that to translate to dollar share as that flows through.
Your larger question on trade down.
Not seeing any significant trade down as it relates to trading into private label given the dynamics I just covered I think that's clear that there are some other things going on there, but we are seeing some trade down within our own portfolio for example than we would've anticipated and expected us and we're working this is part of our sales plan. So for example, we're seeing consumers.
Move to some opening price points, they still want the branded player but they are you don't have a lot of out of pocket and so they are buying a smaller size. We're also seeing consumers trade up to larger sizes to get the very best price per ounce.
And we're working with retailers to ensure our assortment is right to capture that we've seen that in other times oven inflation and recession and so we've been proactive about addressing that with our retailer partners to ensure that we have the right distribution and of course as you know we are widely distributed across all channels, so already as consumers move.
And ensure that they have the right level of value. So at this moment, what I would say is we are seeing some change in consumer behavior. It's largely what we would anticipate we are not seeing a big change into private label at this moment again, we're focusing on the things that we can control here and sharing our innovation program continues to activate in the market we continue.
To spend on our brands will to spend 10% of sales on advertising and sales promotion next year and we're proactively working with our retailers on tailored shopper plans to ensure that we're offering the right value for the moment, depending on where the consumer is and it's something that again, we will watch very closely and we'll adjust our plans as needed if it is.
Starts to go in a different direction.
Okay very good thanks Linda.
Thanks, Kevin.
Our next question comes from Lauren Lieberman.
Barclays investment bank.
Great. Thanks, so much. Thank you I had two sets of questions. The first thing is just on the SG&A and as Youre talking about targeting.
The lower ratio over time in this.
Kind of restructuring program that you're initiating it.
Just.
It strikes me that if anything it has felt like perhaps clorox has been more on the side of under invested not over invested the company has been.
You made a hallmark of kind of running lean go lean with our program and that's been an approach and so.
Is there anything in media.
It felt like part of the problem has been being to lean.
That hasn't afforded you the visibility you have needed the flexibility needed in yet part of this plan going forward is to get more lean on SG&A. So I would just be curious on reactions to that and then I have a question on cash flow. Thanks.
Sure Hi, Lauren.
As we think about just our investment in and how this fits into the overall picture that we're trying to drive with ignite and we were really clear and ignite that we needed to be simpler and faster that was a key choice that we made under the headline of re imagine work and we also said we needed to invest strongly in our business and we took that another step further when we.
We announced the technology transformation that we're undergoing.
And the $500 million investment, we're making in that program.
Over the next several years and.
In addition, we've continued to invest strongly in our brands we.
We've invested in innovation and innovation is a larger contributor than it was in the prior strategy period. So I feel like we're making all the right investments to ensure that we have strong brands with our consumers and that is playing out in our consumer value measure and we expect to play out over the mid to long term and share certainly this quarter wasn't the share performance, we wanted to deliver but.
We feel like we're headed in the right direction, but when it comes to this piece and what we want to do with the operating model, we want to make sure that we are always operating as efficiently as we can and putting the dollars where they matter in our business to ensure that we can grow our brands and we believe very strongly that we can be more simple and fast and that will help support that.
3% to 5% growth rate that we have and restoring margins we want to cut down on decision time, we want to ensure that the technology. We put in place through our digital transformation is supported by a structure that enables it and uses it as fast as we possibly can to ensure that we're closer to the customer and closer to the consumer. So I think when you step back and take up.
Balanced view, we are making investments in the right spots, where we think they have the highest ROI and we're ensuring that we take all of the necessary actions to reduce costs, where we think that ROI is lower and we can operate more efficiently.
And I just want to be really clear I think on your point on choline choline was not a company initiative that was an international initiative and that was very effective for international to ensure that we have reestablished the cost base of international to get to the appropriate level to grow off of and you can look at our international performance was very strong this year and that was supported by getting that REIT structure.
Underneath the business in order for it to grow.
So again as.
As I step back Lauren I think we have investments in the right place and we are doing everything that we can to restore margins in places, where we have a lower return on that investment.
Okay, great. Thank you that's that's excellent color.
Mike My next question was just on on cash flow. So.
I was curious if theres any Kevin cash flow metrics, you could articulate that you're targeting for for 'twenty three.
And just in terms of inventory write up of inventory days are still quite high.
And I'm just curious as you think through obviously a lot of this is going to be tied to cleaning a lot of this is tied to exiting the external supply contract.
How should we be thinking about inventory days and what's.
Whats the right level right, you still know kind of low <unk> and you know that.
Generally higher than where you were pre COVID-19. So just how that flows into the gross margin recovery story in 23 or beyond thanks.
Yeah. Thanks, Lauren for the question, maybe I'll start with the inventory then I'll get back to cash flow and our expectations. This year.
As it relates to inventory I feel good about the progress we are making if you look at the fourth quarter, we were able to reduce inventory sequentially about $50 million from where we landed in Q3 now part of that was what we talked about earlier as we exited the third party manufacturing agreements.
And in many cases, we maintain raw materials or finished goods to these facilities were able to consolidate those manufacturing nodes and reduce our overall inventory levels.
So we made good progress there I expect this year will continue to make progress on inventory now that assumes that we see more normalization of the supply chain Lauren as you know we've talked in the past we've had to hold higher inventory levels to prepare for the ongoing disruptions we're dealing with.
Our expectations of supply chain will still be challenged but certainly not to the degree we've experienced over the last 12 to 18 months as a result, we're going to be able to pull down our inventory levels broadly across the enterprise and so I would expect us to continue to make progress I'd like to progress I saw in Q4, I expect that to continue in fiscal year, 'twenty, three which should contribute to reduce.
Overall working capital.
And then I think more broadly about cash Lorne I think this year version of last year I think in terms of cash provided by operations will be in that $7 million to $900 million range now before our margins were under pressure, we will generate about $1 billion. So I do expect it to be lower than our historical levels because of the reduced profitability.
<unk>.
We're expecting this year.
And then as it relates to Capex as you know, we target 3% to 4% per year now we've been a little above that in previous years that we've been making some investments to increase our production capacity for the most part we're through those investments we have one last plant we're working on where as you may know, we're preparing to open up a second letter facility.
We will bring online this year, so we've got a little bit more capital spending there, but I expect we'll be in that 3% to 4% this year and probably about the midpoint of that range.
And so what that means is when you think about our free cash flow goal, we target 11% to 13% I expect this year will be low will be below that goal probably high single digits.
As we've got some reduced profitability and then over time I expect that to build that back as we improve profitability.
Okay, great. Thanks, so much for all the detail.
Sure. Thanks Lauren.
We have a question from Olivia Tong of Raymond James.
Your line is open.
Great. Thanks, Good afternoon, Kevin.
You had mentioned earlier that price elasticities have continued to come in better than you expected, but your outlook assumes that that doesn't continue at I think go back to historical levels. So to the extent that you do have some favorability there versus expectations. How do you think about what you do with that because it flow through to the P&L or is there are there.
Projects that you want to do to drive some returning you'll free up some funds to return to spending.
And then just on.
On the gross margin overall 200 basis points expected for next year, So 20, or so a quarter of the way back sound like you're expecting another quarter in fiscal 2004. So is that the way that we should be thinking about the mechanics to get back to where you were before I'm just sort of like Ratably.
For the fourth the fourth the fourth.
Yes.
Sure I'll start with that your question on price elasticity. So if we were to experience better than what we expect which again is more normalized price elasticities.
To historical pre Covid, then that would be something that we would first of all to flow through and of course, that's because we've made all the investments that we feel we need to make at this time in the year, we're investing in advertising we have the right promotional spending from what we can see and of course, if there was anything that were to change that we needed to address then we would consider that.
But we would leverage out of the way to to flow through.
And I just want to make sure I'm really clear on that but we'll of course have to see given the environment is so volatile. If there was anything else to come up we would consider it but that would be the first thing we would look to do.
And then Olivia on your question on gross margin and the pace of the margin recovery.
As you mentioned our expectation is we're going to improve gross margin about 200 basis points I think important though as we expect that to build as we move through the year and as I said earlier, our expectation is we're going to be close to a 40 gross margin. When we end the year. So on a run rate basis I expect to make fairly good progress this year and be in a position we've recovered a good portion.
And of that margin decline and then I expect that obviously to continue into 'twenty four with the actions. We will take now part of the timing of our pace of margin recovery will be dictated by inflation.
I would tell you we are not waiting for cost deflation is our path to margin recovery, we're pulling every lever available to us.
Between pricing cost savings the operating model changes, we talked about today and we will continue to do that going forward, but obviously, what the direction inflation goes could either accelerate or decelerate that margin recovery.
In this environment, it's hard to look beyond this year with a strong perspective on where costs will be next year and so that's something we're proud to see how it plays out a bit this year to make that call Joe.
I think we're making solid progress this year on our commitment to rebuild margins, we're pulling every lever available to us.
And I think.
A bit difficult to pick the exact time period, we'll build it back I think some of that will be influenced by the external cost environment as.
As we move through the year, we'll certainly update you as we're thinking about the pace of that change.
Got it Thanks, and then my follow up is on your thoughts around your trajectory on market share.
Perhaps could you talk a little bit about what private label capacity looks like and specifically in the health and wellness businesses.
Obviously, a lot of pretty aggressive pricing consequently.
Or degree of volume degradation.
Associated with that so to the extent that consumers can first person from a stomach this much.
In terms of pricing just kind of curious how you how private label capacity and their ability to.
Step in books.
As you consider these pricing.
Thanks.
Okay.
Yeah, Olivia I can't speak to capacity outside of our own network, but I would just say I don't think there's a capacity limit or in our categories. You know that's not as we have spoken about.
In terms of what capacity exists there, it's just timing and money.
And we create differentiation of course on the unique products et cetera that we offer.
But what I would really returned to you is what we're seeing in terms of the performance of the health and wellness segment in our cleaning business in particular pricing is going as planned and we are seeing lower than historical elasticity to this moment again, we are expecting that to be in a more normalized.
Elasticity as we move into fiscal year, 'twenty, three but what we're seeing in private label is more about pricing timing than anything else. If you look at volumes. There volume shares are actually down and we are growing volume share in that last quarter, and we expect that to translate to dollar sales as pricing flows through beginning this.
This month or excuse me last month in through this month and the remainder of the quarter. So you know the shares were not what we want them to be at this moment I always want to talk about the fact that share is something that we hold ourselves to and we knew quarter to quarter, that's going to vary, but we think we're making the right progress the evidence of that would be our Q4.
For absolute share is higher than our Q3 share was so we made progress on the absolute share number although it was down slightly versus a year ago.
We made sequential improvement from Q3 to Q4 and again I highlighted a few of those areas that were due to pricing timing.
And then some other factors, where we grew very strongly for example in wipes and private label did as well.
<unk> six points they were up five points from a share perspective, so I don't see any health issue at this point in our home care categories are cleaning categories.
Elasticities again are playing out as we define and I think really as we look to this.
We will expect demand normalization to be the biggest contributing factor.
And that elasticity will largely play out as we expect again, we will watch that very closely but this is more about demand normalization than it is about any.
Any trade down to private label at this point.
Yeah.
Got it thank you.
And we have a question from Steve powers of Deutsche Bank.
Your line is open.
Hey, great. Thank you and good afternoon, I guess picking up on that.
Threat of demand normalization Linda.
I guess I'm curious as to how you actually.
No about or have gone about defining what re normalized demand looks like in categories like wipes or cleaning and disinfecting more broadly and maybe how that compares to pre pandemic levels.
And as you.
As you talk about that maybe you could.
If possible.
A bit more on the expected pacing to get there embedded in the outlook.
I get the base your comparisons are going to create a lot of year over year volatility, but as the normalization process that you're envisioning is that something that happens all the way through 'twenty three does it happens faster such as the headwinds or are skewed heavily to the first half in the back half is more normal.
How should we think about that.
Yes, Steve.
On demand normalization.
Certainly are lapping impacts from Covid, but we're seeing changes in more normal behavior coming from consumers and we're trying to understand when are we at a new normal and it's more about laps versus where at that new normalization state we.
We saw as Kevin and I said, a couple of times, we're lapping Delta right now where wipes were up from a unit basis, 50% and our last Q1, and we did see a bump in Q3 as well and so both of those will be left that will have to get through so we're talking through fiscal year 'twenty three we would expect that normalization.
We are still seeing consumer behaviors, if you look at buy rate.
Et cetera, enhanced and we're still seeing people care about.
Cleaning and disinfecting elevated but definitely lower than it was at the height of the pandemic, but higher than it was pre COVID-19. So what we're trying to gauge is when does that new consumption pattern aligned to that desire from consumers, who have a heightened state of awareness of cleaning and disinfecting and get into a more normalized routine and the other thing we're going to see.
How this plays out.
Is cold and flu consumers.
Consumers have not experienced a normal cold and flu season since Covid started so how will that reinforce consumer behaviors and we'll experience that.
At the end of Q2 and through Q3, so we'll be watching that very closely and then of course, we're in a COVID-19 wave right now.
And so we're watching that dynamic as we lap last year's Delta waves, So I would say.
We are watching this throughout the year and we'll give indicators of when we start to see that more normalized demand, but were looking something between where we were pre COVID-19, which we we continue to be above that and you know what it looks like in a more normalized state when people are more aware and have a heightened concern, but yet or getting into a new set of habits and routines and well.
Keep you updated as we see that when we anticipate being in a more normalized state, but as you can imagine given what's going on with Covid.
Etc. It is difficult to pinpoint exactly when that will occur.
Yes, okay.
That's all fair.
Just one other question if I could going back to the new operating model I guess I was just curious for a little history on when the initiatives that you've you are rolling out here in 'twenty three 'twenty four when when those were when those begin to be contemplated.
Just a little bit of history on how these decisions were made and.
Has this been planned for a while is this something that.
It was more of a recent initiative just a little color there would be helpful. Thank you.
Sure Steve.
This really relates back to the strategic choice, we made in ignite to re imagine work and we wanted to be simpler and faster and we always contemplated ways. As you would expect you expect us to operate efficiently and be removing costs wherever we can on that we're always looking at the choices across the ecosystem to say are we getting the best return on our investment are there ways to do.
Things more effectively and efficiently we did that as we unveiled our our digital transformation program, which we really needed to accelerate given the increase in digital behavior behind the Pandemics, we moved that up and as we evaluated the environment that we see now we want to accelerate the progress we wanted to make on re imagine work by.
Making a more structural change so that I would say it's at this moment that we think it's the right time to do that we've got to a bit more of a steady state. When it comes to supply chain is still very challenged and we're still having forced measures et cetera, but it's more manageable and we think this is the right time to take it on but it's really a continuation of that.
Vision, we laid out in 2019 to be faster and simpler.
Okay. Thank you very much.
Thanks, Dave.
Yes.
This concludes our question and answer session Ms. Randall I would now like to turn the program back to you.
Thanks again, everyone for joining us and look forward to speaking you again on our next call in November until then please stay well.
This concludes today's conference call.
You for attending.
The host has ended this call goodbye.