Q1 2023 Clorox Co Earnings Call- Q&A
[music].
Yes.
Good day, ladies and gentlemen, and welcome to the Clorox company first quarter and fiscal year 2023 earnings release Conference call.
At this time all participants are in a listen only mode.
At the conclusion of our prepared remarks, we will conduct a question and answer session.
If you would like to ask a question you May press star one on your Touchtone pad at any time.
Anyone should require assistance during the conference. Please press star zero on your Touchtone patent anytime.
As a reminder, this call is being recorded I would now like to introduce your host for today's call Ms. Lisa Berhad, Vice President of Investor Relations for the Clorox Company. Mr. Head you may begin your conference.
Thank you Ron good afternoon, and thank you for joining us on the call with me today are Linda Randall, 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.
Just a moment Linda will share a few opening comments and then we'll take your questions.
During this call we make any forward looking statements seem putting about our 2023. This fiscal year outlook. 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, which has been filed with the SEC and.
In addition, please refer to the non-GAAP financial information section of our earnings release, and the supplemental financial schedule in the Investor Relations section of our website for a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures.
Now I'll turn it over to Linda.
Hello, everyone and thank you for joining us while the challenging and volatile global operating environment, We discussed last quarter persist, we delivered better than expected Q1 results, reflecting the strength of our brands ongoing consumer loyalty and solid execution.
During the quarter, we maintained our unrelenting focus on rebuilding margin by taking additional inflation driven pricing delivering cost savings optimizing our supply chain and implementing our new operating model at.
At the same time, we continue to invest in our brands to deliver consumer inspired innovation with superior value as well as advance our digital transformation to drive topline momentum and position the company for long term success.
Looking ahead, it's still early in the fiscal year, we continue to contend with a number of macro headwinds, which we are proactively addressing and we'll remain agile as the environment evolves.
The factors, we are reiterating our full year outlook.
Nevertheless, guided by our ignite strategy, we remain committed to delivering on our 3% to 5% sales growth target over the long term.
Fundamentals of our business are strong we plan essential categories, and our business is well positioned to benefit from lasting consumer demand tailwind.
I'm confident we're on the right track to generate consistent and profitable growth over time and build a stronger and more resilient company.
With that Kevin and I will take your questions.
Okay.
As a reminder, if you'd like to ask a question. Please press star one on your phone now.
Okay.
Our first question comes from Peter Grom from UBS. Please go ahead Peter.
Hey, good afternoon. Good afternoon, everyone hope you're doing well so I wanted to ask a big picture question on kind of the guidance for the year.
You mentioned that currency is in 17 set.
The EPS and I know there are varying degrees.
On the level of conservatism embedded in this guidance, but just when we when we think about the ability to maintain the earnings range. Despite an FX drag that's about you know about half the size of the entire ranges.
Something that's coming in better to offset that whether it be underlying growth commodity costs et cetera.
Kind of the right way.
Think about the updated currency impact as that starts to kind of be at the lower end of that range. Thanks.
Thank you Peter Thanks for the question on guidance, let me provide a perspective on what I would tell you what it.
At a high level I feel our guidance is very balanced in terms of where we were expected to land the year.
Think about some of the puts and takes of orad as you saw in our prepared remarks, we had a good solid start to the year that exceeded our expectations. What we share with you about a quarter ago as we feel very good about to start the year at the same time, we are dealing with some additional headwinds FX being one but as Linda also mentioned, we've got a couple of supply disruption.
On a couple of our businesses that we're working through and so I'd say good start to the year. We've got a couple issues, we're dealing with but by and large feel like we remain on track I think what's also board Peter as we think about you mentioned inflation I would say inflation is generally playing out as we expected. We said the beginning of the year was about 400.
Of the cost inflation and supply chain, we still expect about that same amount, although I would tell you. When we started the year, we were a little below $400 million, we're a little above right now so it has gotten a little bit worse.
We've been doing through the entire dynamic, we're making the appropriate adjustments to our plans we've done that as a result, we feel good that we're on track for our outlook.
Thanks for that and I guess I, just one follow up on the kind of the organic sales outlook I know previously a lot of the weakness with respect to answering that occur in health and wellness and you were expecting to see continued momentum across the rest of the business in the first quarter. Obviously help enrollment came in better than you were anticipating and it seems like at least from our perspective.
Other segments, but weaker performance just like any thoughts updated thoughts on how to think about the building blocks.
The organic sales outlook from a from a segment perspective. Thanks.
Yes, Peter Youre right as you think about Q1 versus our expectations, our health and wellness segment came in better.
The strength of cleaning and disinfecting that business outperformed our expectations based on very successful back to school merchandising program primarily.
And then as you said if you look at the rest of our portfolio, we had anticipated stronger organic growth that came in a little bit below our expectations.
Really driven by the supply disruptions in our burts bees, and our glad business unit.
If those two businesses have delivered against our expectations. We would have delivered about 3% organic growth on the rest of our portfolio ex health and wellness, but clearly these are some new issues that we've been dealing with this for the last three years supply chain disruptions are nothing new.
We're dealing with it and these two businesses, we expect to get those worked out this quarter and by the back half of the year I would expect those business or back to shipping.
Back to our expectations so.
I think it will drag a little bit in the second quarter as a result of that and then I expect stronger performance in the back half of the year as we get those resolved.
Got it thanks, so much I'll pass it on.
Yeah.
And our next question comes from Andrea Teixeira from Jpmorgan. Please go ahead.
Thank you good afternoon, everyone.
My question would be on kind of like how you see shipments against consumption and obviously health and wellness was coming in better than anticipated how should we be thinking should we be thinking of retailers, taking an inventory potentially ahead of.
But.
The price increases or anything on that sense and the other ones and how firstly on your point, Kevin about not being able to fulfill some of the other.
Parts of the business and that would have been a better.
Better outcome of 3% like how should we be thinking about consumption against England.
Inventory.
And then as you try to fulfill is that something that you may have missed in terms of.
The SaaS and the.
Seasonal impacts of that going forward, especially of course on call and later as we move into the quarters.
Yeah.
Hi, Andrea Thanks for the question.
Generally we saw in Q1 minimal impact from any type of inventory effects going either way. We did have a couple of businesses that we saw retailers make some inventory adjustments are actually on the other side, we called out vitamins minerals and supplements as one of them charcoal as another and we look at that is very new.
Normal inventory changes no impact to the consumer or impact of consumption, but retailers continue to optimize their inventory levels. We did not see a mismatch between consumption and shipments going the other way, where we see inventories rising at retail.
But we continue to see that's going to be dynamic retailers are making adjustments adjusting to the new volumes, we're seeing in the categories. So we're watching that as we move forward, but again would not be any type of strategic impact it would simply be shifts in timing.
Versus any other type of concern that we would have so at this point, we think we're at about the right inventory levels.
Across all of our businesses and again minimal impact in Q1, and do not anticipate a sizable impacts moving forward in our outlook.
Uh-huh. Thank you Linda and just if I can follow up on the margin Kevin you.
And then there was an impact on volume deleverage this quarter, but as you move forward you are still expecting the 200 basis points improvement in gross margin as we navigate through this $400 million that you called out as being a little bit higher than initial and then FX is that anything that you.
Can comment perhaps in a more pricing that you can use as offsets and I understand of course, you're going to start to lap and have a.
Better.
In the first quarter was a very good start from that perspective, just trying to see the cadence on what to expect going forward.
Sure Andrew and you are correct, we still expect to deliver about 38% gross margin for the full year that would be up about 200 basis points versus year ago.
And as we've said this continues to be a very dynamic environment as conditions change, we continue to adjust our plans as appropriate.
<unk> our plans for the full year I'll just give you. One example, as.
As we've seen the FX environment.
Some more difficult as we talked about and we're seeing higher inflation and number of countries, where we operate we have gone back and adjusted our pricing brands in our international markets. That's an example, where we're going back and making appropriate planned changes to address the changing macro environment and through those changes, where we're able to keep our our plans on track for the year.
Thank you very much I'll pass it all.
Okay.
And our next question comes from Dara <unk> from Morgan Stanley . Please go ahead there.
Okay.
Hi, guys.
So obviously very strong price mix in the quarter at 13%.
You did take pricing later than some competitors and more aggressively at this point in time at least so.
Can you just talk about the consumer reaction that you see.
So far.
The retailer reaction and also just what you're seeing from competitors in terms of price gaps.
And just give us a sense of all sort of what's left to come going forward on the pricing front in terms of increases from here. Thanks.
Sure happy to Dara, So pricing is on track and as you noted we've taken multiple rounds of pricing with a third round in market effective in July .
And we are seeing elasticity is largely in line with our expectations and that has been early in the year slightly favorable to what they were pre COVID-19, but we're starting to see them drift towards our pre COVID-19 elasticities as we had anticipated.
Our categories remain healthy and resilient.
And our price gaps have returned to pre pandemic levels for most brands.
Given the pressures that Kevin spoke about in terms of costs. We are taking an additional round of pricing in December which will be our fourth major round of pricing, we don't anticipate that round to be as deep or broad as the July pricing, which was the largest of the four that we will take to <unk>.
Date, and we anticipate that will be leading in many of the categories that we're taking pricing in December and as Kevin said, we're going to continue to be nimble and adjust but at this point consumer resilience elasticity is in line with expectations.
And price gaps, where we would expect them to be.
Okay.
Great. Thanks, and then it sounded like market shares coming in better than expected, perhaps on the cleaning side with the merchandising around back to school et cetera. So can you just talk about what youre seeing from a market share standpoint.
On that side of the business.
Youre expecting going forward.
Sure and maybe I'll just broaden the comment on share overall, we're making progress on share.
But we have more work to do and supply disruptions have been part of that going on in our household essentials business, but we were happy to continue to see the momentum in cleaning as you note.
We've grown share consistently now quarter after quarter and that continued with the strong performance that we had in back to school. As you noted we grew all outlet sharing our four largest businesses. So that's homecare glad food and charcoal, which was great to see but as I've said, many times I expect to grow share in aggregate and we're not quite there yet but.
We will continue to see progress as pricing flows through in December and as our distribution plans continue to take hold but.
But we feel good about the progress, but the work is not done yet on sure.
Okay.
Thanks.
Okay.
And our next question comes from Chris Carey from Wells Fargo. Please go ahead Chris.
Hi, everyone.
Okay.
Hi, Chris.
Ken can I, just maybe ask.
Maybe more of a conceptual question about gross margins.
Kevin I think you noted.
Your commodity or that the cost basket of $400 million was trending slightly below 400 before and now it's trending above 400, So I wonder if you could just maybe.
For some additional context on the complexion of that cost basket, perhaps between.
Commodity and non commodity.
And.
Maybe layering on to that is just the concept of certainly.
There is a view, which I think you've talked about yourselves.
The gross margins of this business should continue to improve at a progressive rate over.
Over the next few years.
Just wonder what you think about the durability of some of these cost increases that you've seen specifically on the non commodity side, which continue to linger and.
And how much pricing do you think you might need to take or cost savings that you would need to execute in order to achieve.
Achieve your longer term objectives on the margin line.
Sure. Thanks, Chris for the question. So let me start with the overall basket.
Cost increases we're looking at it and as you mentioned.
We started the year expecting about $4 million a little below we've updated that with his most recent outlook and we're rolling up to a little bit over 400 million, but generally still in that in that area.
What hasn't really changed for us is a commodity inflation overall it represents about half of that total inflation.
While we've seen a little bit of change by item, we purchased the general level of inflation in commodities is pretty consistent when we thought about a quarter ago. So no real change there we've seen a little bit of improvement on resin prices and then theres a few other areas in chemicals and AG products, they've gone a little bit the other way, but puts and takes but by and large our commodity inflation expectation as <unk>.
And what we thought earlier this year, where we are seeing a little bit higher prices, primarily in logistics and I'm sure you folks are seeing what's going on with the price of diesel that's coming in higher than we anticipated. So we revised up a bit our expectation on logistics cost inflation. So we are still operating.
And generally that $400 million range, but a little bit of higher cost, we're expecting and logistics for the balance of the year.
In terms of how I expect gross margins to face going forward I think this is an important inflection point for us.
As you know margins decline for about five straight quarters, given the tremendous cost inflation were dealing with last year as you recall about $800 million of the cost inflation and supply chain.
We stabilized margins in Q4, they were essentially flat year over year.
You saw this most recent quarter gross margin down about 100 basis points, primarily for the charge. We took on the pine saw recall, excluding that charge theyre generally flat year over year again, and we expect to start growing this quarter.
So on my prepared remarks, we expect 100 to 200 basis points of margin expansion. So I think this is an important inflection point, we're getting back now we're starting to rebuild margin that we've been working on for a while I expect that to continue as we move through the balance of this year. As we said we expect to grow margin about 200 basis points for full year, but I expect that to build starting from Q2 as we move.
Forward.
And then your longer term question, Linda and I and the entire leadership team remain committed to rebuilding margins to pre pandemic levels.
And we said that's going to take well.
It's difficult to predict exactly when we'll be able to achieve that because a lot of that is outside of our control.
I feel very good about the things we control the pricing we are executing our cost savings program and our supply chain optimization work is all very much on track.
But the reality is the cost environment continues to be very dynamic.
At some point I expect cost to rollover these are cyclical commodities.
Difficult to know when that will occur and that will likely either accelerate or delay the time of our margin recovery based on the outside events.
And then on the cost buckets outside of commodities when you look at logistics.
And manufacturing.
There are some of those costs that I think we'll stick when you look at labor I expect those costs will continue going forward, but there is other elements diesel things of that nature I do expect also to see come down at some point and so we'll have to see exactly how that plays out but what I feel good about is we're starting to make progress on our commitment to start rebuilding margins that starts for us this quarter and had it.
<unk> got to continue as we move through the year.
Thanks, Kevin for entertaining all of that just one quick follow up would be.
And the speed for window or Kevin, but the professional business.
Was flat I believe in the quarter, which seems like finally seeing some stabilization I wonder if you could just add some context, what you're seeing in the business and how it factors into your plans for this year. Thanks, so much.
Yes, it was about flat and we take that as a good sign as well we are seeing continued headwinds on that business as it relates to return to office.
And some of the things that affect our janitorial business, but we are seeing.
Some return to office, which is good from a.
A sales perspective, as well as hospitals getting into a more normalized routine where they're using our products to clean in between our procedures et cetera. Now from here, we're focused on ensuring that we have the right sales plans that we're working with our businesses in janitorial services to ensure that they have the right protocols and hospitals as well.
So we expect again over the long term that business to be an outsized contributor to the company.
But certainly I would say at this point, we're happy to see it flat again and hope to return to growing here over the coming quarters.
Okay. Thanks, so much.
Thanks, Chris and thanks, Chris.
And our next question comes from Javier Escalante from Evercore. Please go ahead Javier.
Yeah.
We will have your phone muted.
Alright.
You have myself.
Good evening everyone.
Great.
One business, Brian Kevin and I have a follow up.
Strategically on the business planning.
We looked at retail smelting is kind of data.
Yes.
Hi.
So in that context, what is your second quarter assumptions.
Volume and price.
How are you.
What is normalization of demand versus PCP.
You are right.
Remember quarter, and then I have a follow up.
Sure.
In Q2, and I am not going to give a full detailed outlook for Q2, we've tried to provide some color it would be helpful for modeling purposes.
We do expect top line to be down low single digits on a reported basis and we continue to expect about two points of FX headwinds. So you should exceed them organic sales growth is about two points better.
And then our reported sales which were expected to be down in that low single digit range.
I expect Q2 to general look somewhat similar to Q1, I expect ongoing normalization in our cleaning and disinfecting portfolio now not to the same extent that you saw in Q1, we were lapping the delta variant, but we do expect some ongoing normalization in that portfolio.
And then as we mentioned we've got a few supply chain disruptions. We're working through I think that will impact Q2, similar to what we saw in Q1, and we're going to we expect because those resolved as we move into the back half of the year.
And so overall I think if you look at volume price mix I would not expect to be that different than what we saw it in the first quarter.
So down.
Double digit demand for second quarter.
Yeah, I would expect so because that's probably playing out based on elasticities and.
Maybe a broader point that's helpful to comment on is as you think about the elasticity is in our portfolio.
Generally our expectation when we take pricing based on the normal activities as you don't generate much incremental revenue from that pricing. We are tasting taking pricing to address the cost inflation is not.
Necessarily a source of revenue growth and so I would expect if the.
The last issues play out as we expect I would see volume decline similar to what we saw in Q1, maybe a little bit better because of less demand normalization cleaning disinfecting, but still have volume declines generally offsetting the price mix by generating starting to generate very nice savings to gross margin. I think you saw in Q1, we generated over 500 basis points of <unk>.
Margin expansion through pricing I'd expect to build on that in Q2, because we'll get the full impact of the July price increase plus a modest impact of the December pricing, we're taking as well.
That's great Kevin Morris strategically to Linda.
I'm kind of re familiarizing myself with Clorox and I'm, a little bit surprised about how significant the investment in the ERP is more.
Most of your businesses are U S centric many of your categories.
<unk> completed or is private label. So essentially there is more of a cost issue low cost base.
Hi, Nancy depletion your cost base is getting higher so why do you need that.
Investment in Digitalization Decently now beauty company charcoal bleeds.
Glass backs help us understanding the rationale of that investment. Thank you.
Javier our digital transformation is much larger than just implementing a new ERP, which we need to our ERP as well over 20 years old and Thats. The foundation of how we run our business.
But what we're trying to do is modernize our digital infrastructure too.
Maximize our ability to grow and maximize our efficiency. So the technology. We're investing in is not just foundational then it allows us to move faster on innovation.
Leverage the data the enormous amount of data that we have across our ecosystem to get insights and be able to grow our categories to be able to generate savings by knowing exactly where the costs are in our supply chain and being able to remove the ones that are not value added. So this digital transformation support that 3% to 5% growth we're talking about.
And we expect that value to begin to happen at the end of the strategy period and beyond that to set us up for the next period and then of course from an ERP perspective, you have businesses in over 100 countries. So we'll be rolling out this ERP across the world.
To ensure that we can run our business, but this is much bigger than just putting in the base technology. This is really about digitizing for the future.
Yeah.
Yeah.
And our next question comes from Anna <unk> from Bank of America. Please go ahead Anna.
Hi, good afternoon, and thank you so much for the question.
Wanted to just follow up on pricing you mentioned youre, taking more pricing in December . So it seems that you feel comfortable that retailers and consumers can absorb this additional pricing.
<unk> comment on recent trends are you seeing any bifurcation in consumer appetite for our clorox products with higher end consumers more stable versus lower end consumers trading down or out of the brand.
Yeah.
Yeah.
I would say, our consumer and our categories remain very resilient through the three rounds of pricing that we've taken and the pricing elasticity has played out just as we expected and to be clear that is slightly favorable.
Then it was those elasticities were pre COVID-19, but we're starting to see them drift to more normalize elasticity is as we expected we are not seeing any material signs of trade down from our brands to private label or to other brands.
We're watching that closely and we will adapt our plans if we need to if that changes, but what we are seeing is consumers broadly seeking value type of behaviors and thats happening within our portfolio and we talked a little bit about this last quarter and this is expected. So we're seeing consumers shop more heavily in value channels. For example, so theyre moving to club and dollar.
Now, we're seeing them look for different ways to explore value through sizing. So maybe buying an opening price point, if they just have a low out of pocket availability from a cash standpoint, or theyre trying to get the very best value per ounce, our youth and theyre going with larger sizes.
We've seen things like trip frequency increase where where people are spending a little bit less on each trip, but they are coming more frequently and this is very typical value seeking behavior from consumers at this point and what I'd say is actually our low income consumer in our brands is holding up even more strongly than general population and we've seen stronger household penetration from low income.
Consumers, which is consistent with what we believe.
Is it in this time, the highest value with low income consumer becomes even more important in our brands our superior value.
And that's of course measured with the fact that the largest portion of our portfolio is deemed superior by consumers.
Than it ever has before since we began measuring it that we're in we're in a very good spot. We expect the December price increase to go largely as the last three have gone, but we're monitoring it really closely we will expect the environment to continue to be bumpy and we'll expect consumers to continue to have more stress put on them, but given the categories. We compete on household.
<unk> everyday products that they need we feel very well positioned to be able to take another round of pricing.
Great. Thank you that's very helpful and just as a follow up given that you've exited.
Certain private label contract how do you feel about your inventory levels going forward.
And I think you're talking about our contract manufacturing agreements is that right.
Right Okay.
Yes, Youre exactly right. So as you may recall, we increased the use of contract manufacturers during the pandemic.
Help meet the increased demand for our products. We see that was temporary normalized we have stepped out of those agreements. We did at the end of last year.
And then what we've said is we've been holding higher safety stock inventory levels to help build more resiliency into our supply chain.
Through the ongoing disruptions were experiencing.
As those disruptions start to level out our expectations, we're going be able to bring inventory levels down as we have more reliability in our supply chain.
I would say the supply chain is getting better from where we were a year ago, but by no means are we back to pre pandemic level.
A level of normalcy in the supply chain.
And so what we're seeing on inventory right. Now is we're starting to do just what we said which is we're starting to bring inventory levels down. If you look at where we landed Q1 on a year over year basis, we've been able to reduce inventory levels by about $30 million.
And so you probably saw that our our cash provided by operations is up part of that is is our ability to reduce inventory levels.
And then also helped on the cost side as we have less product to move around less warehousing fees and we're not storing that product.
And so we've we started to reduce inventory levels I expect that to continue this quarter and then we're going to really continue to watch the supply chain and as we have more confidence in our ability to respond to consumer demand and we expect less disruption, we see them all to work that down even further but we're starting to make good progress there.
Okay. Thanks, very much for the color.
Sure.
And our next question comes from Jason English from Goldman Sachs. Please go ahead Jason.
Yes.
Hey, good afternoon, or good evening folks thanks for sneaking me in.
A couple of questions.
Also on gross margin.
<unk>.
First you indicated you expect gms to be up 100, 200 bps this quarter.
Let's just take the high end of the range that would imply around 35%, which would be a 100 basis points below what you actually did this quarter. Historically has done a lot of seasonality, maybe youre talking about pushing through more price. So.
Why would gross margins go down sequentially, what's the incremental headwind that you expect to be weighed on our results in the second quarter.
Yes, Jason Thanks for the call I would say in terms of driving gross margin accretion and to your point 100, or 200 basis points of what projecting.
We continue Jack project pretty strong performance on cost savings I expect pricing to build from Q1 and Q2 as I mentioned earlier and then in terms of headwinds we continue to face a very difficult cost environment. We had over 300 basis points of headwinds in Q1, I expect another challenging quarter in Q2 from cost inflation.
Seeing the same thing in logistics and manufacturing and as we mentioned we've got a couple of supply chain disruptions that we're dealing with in the second quarter and Thats also going to be a partial drag on margin as well as we worked through those which we expect to get resolved by the third quarter.
And then probably the last item I'd highlight.
Is volume deleveraging, we do expect volumes to be down in Q2, and as you know there is some manufacturing deleveraging associated with that so when I look across all of those drivers. The good news is we expect to be at an inflection point, where we start rebuilding margins this quarter and I expect that to continue.
Within the puts and takes we expect about 100 to 200 basis points this quarter.
Okay.
Ah recall expense goes away to so you had more price less recall expense.
And gross margins go lower.
I'm missing something here and this is Kevin on the <unk>, Yes, there is.
Yeah. The only other thing the only other item I would highlight is there is seasonality of our business Q2 tends to be a lower quarter, because it's the lowest quarter for kingsford business, which is a nice profitable business and so typically Q2 is a lower quarter for us in a normalized environment and.
And we would expect that this quarter as well.
Okay, and then the manufacturing and logistics.
I hear you loud and clear on logistics, you can't refute that we all see diesel prices.
But I think many of us were expecting at least the manufacturing component to flip to a tailwind as you exited some of those co man is repatriated volume.
And at least my expectation was that would be a powerful mitigated to some logistics, maybe you can unpack that for us or are we just overestimating the tailwind of unwinding some of that incremental cost or is it that logistics have really stepped up that much higher.
Materially.
Outpacing those benefits.
Yeah, Jason I would say I think you're overestimating, the valuable and winding those co pack agreements that was a nice benefit but it was less than 100 bps benefit to <unk>.
Logistics and manufacturing as we stepped out of his agreement. So it nicely helps contribute to rebuilding margins, but by no means was that a significant driver to the margin challenges we've been dealing with over the last.
Six quarters or so.
That's helpful. Thank you so much I'll pass along.
Sure. Thanks, Jason.
And our next question comes from Kamil Gosh for Awhile up from Credit Suisse. Please go ahead Camille.
Hi, guys.
Can you talk a bit about the operating deleverage was given how much volumes are declining and certainly understand the justification for taking pricing, but we're seeing some big declines in volume can you maybe balance the try.
And to capture inflation on the cost side versus how much of a drag it might be on the.
Manufacturing deleverage side.
Sure.
It's interesting when you think about the manufactured deleveraging typically you would expect to have a bigger impact for the volume decline, we talked about being down 15%, what youre seeing though here that mitigates that is as you know we stepped out of those contract manufacturing agreements that we brought that volume back into our plants and so our plant production volume is not down to a degree youre seeing our shipment cases.
We're essentially just turning off those co Packers and Joy Minimises the volume deleveraging, we're seeing in our facilities and I expect that going forward.
Okay, Great and you mentioned in your.
A press release or your prepared remarks on distribution gains is that are those gains over the course of this year and how does the distribution maybe compared to 2019.
Sure. So we've been able to grow total distribution points for eight consecutive quarters now.
And our team is doing the work on both restoring the base. If you will remember we rationalized assortment at the beginning of the pandemic to be able to produce as much product as we possibly could so part of that is restoring back to some of the distribution that we thoughtfully removed on our own in order to run efficiently, but then most importantly, we're gaining distribute.
<unk> on the innovation programs that we have in place.
It had been able to continue that that trend is moving in the right direction. So we're really happy about where we are from a distribution perspective and continuing to invest in innovation. So that we can continue that trend moving forward.
Okay, great. Thank you.
Thanks.
And our next question comes from Lauren Lieberman from Barclays. Please go ahead Laura.
Great. Thanks.
First question with Jeff.
The level of pricing at a total company level.
12%.
Sitting here opening up all my models and I don't think we have any other.
U S leasing companies or companies, who report geographically in HPT.
Put up that kind of pricing.
So I.
Linda first of all as you put through another round of pricing in December .
Why is it that you are so confident that well start to see some share wobbles and you commented on the elasticity.
Not seeing trade down so is it just the consumers are using are consuming locked at this point and that the elasticity you're seeing.
Because you are suggesting it's not about it's not about share loss.
But elasticity.
Albeit in line with your forecast.
Yeah, Lauren on pricing I think it's very difficult to compare across companies because everybody has different portfolios and to your good point have different global portfolios, but what I would say and I think this is important if we look category by category for us our pricing is in la.
<unk> with the categories that we compete in around the world. So as I mentioned earlier, our price gaps are about what they were pre pandemic, which would of course.
Imply that pricing has been about equal across the competitive set that we have in our specific categories and countries. We.
We would expect although will lead and many of these price increases that that would continue that when our price gaps with largely be in line, but that is something that we are looking at with eyes wide open on our plan that we might have to make adjustments. If that is not the case coming out of the fourth round of pricing in December but largely we believe that will be the case that our price gaps will continue.
While noisy in the short term as people adjust we will continue to be what they were pre pandemic and then our elasticities are holding exactly what they thought they would so they've been slightly favorable to pre pandemic, we're starting to see them drift towards historical levels, which is what we expected.
So we're seeing consumer behavior in line with our expectations and what elasticity really is in these categories as consumers adjust their behavior. So they are not trading in our case in our categories to private label.
But they are maybe making a trash bag last a little bit longer by making sure its fall all the way.
They are delaying their purchase cycles, a little bit and trying to stretch what product they have and thats typically what we see in our categories people don't just exit them in full but they try to find ways to get a bigger bang for their buck.
And that's consistent with the behavior, we're seeing and we don't expect that to change for the fourth round of pricing, but to your very good point, we are going to watch it very carefully and we're ready to make adjustments to our plan if we need to to ensure our price gaps are in line and our business continues to remain healthy with consumers.
Okay.
Thank you for that and I guess.
Recognizing how strong the aggregate sales growth is.
Out of doubt.
I guess and the elasticity in line with expectations as we said several times.
But at what point does the.
The rate of volume decline something that is more than you wanted to see.
Because.
Striking right we've had lots of companies that we've seen a lot of pricing, but no. One has had the volume decline of this magnitude is striking so at what point does that become problematic that.
If you werent in the position of having the benefit of bringing production back in house, that's supporting the margin Obfuscating any kind of degree of volume deleverage.
But then it would be a bigger problem and so as we look forward.
I think that's just an important question to think about your sensitivity to volume declines or lack thereof.
Yeah, we're focused really on three big buckets Orin, we're focused on ensuring we maintain top line momentum, which is of course in parts sustained by selling a certain amount of volume at a certain price.
We are laser focused on rebuilding margins over time, and as Kevin and I have reiterated we're committed to growing margins over the long term and returning them back to pre pandemic levels and then most importantly, the foundation of all of that is having healthy brands and so you can pack. We are looking incredibly closely at all of the <unk>.
Or metrics to see and ensure that we remain in a good spot and here's what we see to date, but we'll be watching this moving forward, we have the highest consumer value rating on our records since we've measured it with 75% of our portfolio teams superior by consumers and increasing superiority in countries around the world as we've measured it.
<unk> progress on share growing share in outlet and our large largest four businesses international looks really strong.
So I don't think from a category perspective, we're not underperforming and we're seeing similar types of activities.
From our peers given our price gaps have remained the same.
Innovation is working in these categories and people are continuing to look for that for a source of value so that the consumer fundamentals.
<unk> continued to remain strong we expect volume losses part of pricing and we expect over time, we'll start to build some of that volume back as behavior normalizes.
But really where we're keeping an eye on that trifecta and managing that very carefully and of course that third bucket is all what it hinges on in La and we're looking at it all the time to ensure we continue to offer that value to consumers and to date, we do.
And we'll make adjustments if we don't and if it does get to the point, where those metrics start to erode in a place where we don't feel.
The long term ability for us to grow and grow margins is there then we will make adjustments, but for now I feel very comfortable with the three rounds of pricing in the fourth we have planned for December based on what we're seeing from the consumer.
Okay, great. Thanks, so much.
Thanks, Laura.
And our next question comes from Stephen Powers from Deutsche Bank. Please go ahead Steven.
Well, thank you very much.
So you can stay on the topic of pricing and maybe just two.
Okay.
Clean up from my own mind.
Earlier discussion.
I guess.
I'm just curious.
Some of the cost justification.
As for the price increase of course random in December .
Just given that it sounded like the overall cost inflation outlook for the year was round about the same especially on commodities in the first quarter gross margin.
Take out the recall impact came out a couple of hundred basis points above your original outlook. So.
Is there is there.
Something I'm missing in there or was the price increase contemplated in the original and the original outlook for the year.
Just if you could help me help me there that'd be great.
Sure, Steve Let me try to provide a little more perspective on pricing and what we're trying to accomplish with our pricing.
As you know from some of our previous discussions we're not pricing just looking at the cost environment right now, but this is.
Pricing to recover the cost inflation, we've dealt with over several years.
If you look at the last two years plus what we're projecting this year, it's about one $5 billion of cost inflation to our supply chain.
All else being equal that's over 20 gross margin points, we have loss through cost inflation over that period of time.
That's what we're working to build back now pricing is a very important element of that we don't expect to recover it all through pricing. That's why we're also driving our cost savings program, we are working to optimize our supply chain.
And so this this fourth round of pricing was always contemplated in our outlook.
It is part of the actions, we're taking to rebuild the margins because of the cost inflation not only this year, but the cost inflation, we've been dealing with over the last 36 months.
And we think this is a necessary action again, along with all the other actions, we're taking that put us in a position to start rebuilding margins. This year and I'd expect that to continue as we move into fiscal year 'twenty four.
Okay. Okay.
Is there is there I mean.
Side of the.
FX driven pricing in overseas markets is there additional pricing contemplated in the current year outlook, we should also be contemplating.
Or is it I'm just trying to get a sense for what point were incremental to your plan.
Yeah Yeah.
Yes, Steve So we always have the December price increase plans, but we are taking some additional brands than we had originally planned and contemplated in the outlook and at this point, we're going to continue to take pricing over the course of this long range plan till we get to the place where we were at fault margins and that'll be a combination of cost savings and pricing and supply chain.
Optimization and and of course, hopefully seeing some of these commodities rollover in the out years, but at this point, we don't have any additional pricing to to speak about here, but we will keep you updated as we take additional rounds and if you recall, we talked about our price pack architecture, playing a bigger role moving forward and those actions we have.
<unk> been working on for the last 12 months to 18 months and we're going to start to see those have a bigger impact in the back half of this fiscal year and anticipate year 'twenty four.
Okay.
It makes good sense I appreciate it thank you very much.
Thanks, Steve Thanks, Steve.
And our next question comes from Kevin Grundy from Jefferies. Please go ahead Kevin.
Great. Thanks, good afternoon, everyone.
Linda I wanted to come back to market share.
And potential trade down risk I guess just first.
I'm trying to reconcile a bit some of the differences that we're seeing in the scan data versus your comments the Nielsen data would suggest youre, losing share and more than half of your portfolio.
Then I also send it took note about your comments about youre not seeing any material signs of trade down from your brands or the private label and that seems a bit inconsistent with what we're seeing in the Nielsen data as well.
Pivot label is picking up share in bags, and bleach and wipes and dressing et cetera. So.
My first question is just that maybe just some overarching views on what you might be seeing the differences in tracked versus non tracked channels.
Sure My comments on market share against growing our outlet share.
Our largest business is obviously contemplates beyond what you can see in Nielsen, but what you see in Nielsen is consistent with what we see in tracked channels.
And what I've said is there's a bunch of factors going on here you have pricing you have demand normalization and then you have things like assortment normalization that are still going on as that the impacts from the pandemic are getting flushed out what we can say with confidence is there is no material trade down due to pricing.
We are seeing in private label in our categories. In fact, what we're really seeing is some of the third tier brands being squeezed, where we're growing share in private label is growing share in categories, but we don't see a trading between our portfolio given the pricing that we're taking but you are seeing things like assortment normalization continue and those can have an impact in individual categories.
All of the data that we see looking at both tracked and non tracked channels. We don't have any material trade down to private label.
Okay.
I guess it would not be terribly surprising if that were to be the case I guess, particularly in your categories right, where we're not seeing as much in personal care you don't see it as much in beverages, and we're not really seeing it in alcohol. So is it your expectation that we that you do not see it in your current planning as Youre thinking about category growth rates, So elasticities and sure that's not currently embedded in your outlook.
Look.
That's correct, Kevin we do not have a material trade down to private label.
Included in our outlook and that is consistent with how we performed if you look at 2008 private label did not make any material share progress in our categories.
And we're anticipating much the same and in this environment.
Okay very good I'll leave it there. Thank you very much I appreciate it.
Thanks, Kevin.
This concludes the question and answer session.
Now I would like to now turn the program back to you.
Thanks again, everyone I look forward to speaking with you again on our next call in February until then please stay well.
This concludes today's conference call. Thank you for attending.
The host has ended this call goodbye.