Q2 2023 Clorox Co Earnings Call - Q&A Session
In the Investor Relations section of our website for 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.
As I mentioned in our prepared remarks, despite despite persistent macroeconomic headwinds we delivered better than expected Q2 results with organic sales growth in three of four segments gross margin expansion and double digit earnings growth.
Our performance reflects the strength and superior value of our brands strong execution across a broad set of actions and the benefit of some timing shifts.
As a result, we've updated our full year outlook.
During the quarter, we made good progress rebuilding margin driving topline momentum and executing against our ignite strategy to strengthen our advantages and accelerate profitable growth for the long term.
This includes advancing our innovation pipeline delivering cost savings and taking additional cost justified pricing actions, while maintaining record high consumer value superiority.
Overall, we feel good about our progress, but we're relentlessly driving additional improvements as we continue to invest in our brands categories and capabilities.
Looking ahead, we expect the operating environment to remain volatile and challenging and we'll continue using all the levers under our control while protecting the value proposition of our products to recover margin and drive long term growth for our brands and categories.
We are confident that our leading product portfolio and essential categories, coupled with our proactive actions will enable us to navigate this environment and return to more consistent profitable growth over time.
That Kevin and I will take your questions.
Yeah.
Yeah.
Thank you Ms Rendell, ladies and gentlemen, if you have a question. Please press star one on your Touchtone telephone.
And our first question today will come from Peter Grom with UBS.
Thanks, operator, and good afternoon, everyone. So maybe just to start.
When we think about the <unk> performing.
A few things in the script, but just from a from our perspective.
Plus 4% organic versus your original guidance of down low single digits and kind of gross margin coming in 200 basis points or so above that.
Midpoint of your outlook, it's a decent amount of upside versus what you were expecting so can you maybe just help us understand where were the biggest surprises versus your forecast for two items.
Sure. Thanks, Peter So the first thing that I would just start with that and I'll hand, it over to Kevin to walk through the quarter in a bit more detail.
We're doing exactly what we said we were going to do we are maintaining top line momentum, which came in better than we expected and Kevin Waukesha. Those factors, while also doing the hard work to improve margins and so from that perspective, we're feeling good about that balance we're going to continue to be focused on it for the year and Kevin why don't you take them through the details of how the quarter shook out sure Peter I would say in terms of the.
The strength of the quarter, if I think about the top line as Linda said really good strong fundamentals on the business, we saw consumption up 6%.
We held share direct channels in the U S. We continue to grow shares internationally, we delivered a record cost savings for the quarter. In fact, we had to go back and look this is the strongest quarter. We've had in the last 10 years, so really great execution by our team.
Another area I'd highlight is we hit a record case fill rates since the pandemic has begun and so our team continues to make very good progress improving our supply chain operations. In spite of the ongoing disruptions were dealing with and so I'd say for me a business fundamentals perspective. The team has done really good work. This quarter and then also say and you saw in our prepared remarks.
We've had some benefit from some timing shifts one we'd call out is.
Cold and flu season, we saw the season start earlier than we anticipated and we think it's peaked in our Q2 typically you see cold and flu season peak in our in the January February timeframe, which is our Q3. So we think that's pull forward into Q2 some of our our shipments for cleaning disinfecting products. We also had a little bit of merchant timing shifts in.
That's pretty typical moving between quarters. It you won't have any impact on the year, but provided some benefit to the quarter.
And then lastly, as I said cost savings, while it was certainly a record quarter and we're on track for the full year to have a very strong year.
Team was able to pull forward some of that benefit and so collectively the good strong fundamentals of the business plus a little bit of timing benefit were the primary drivers of the really strong performance in the quarter.
Got it that's helpful. And then maybe just a bigger picture question on the gross margin Brian you've obviously.
Have a great strides here this quarter specifically.
Kevin I would just be curious if you could comment on how we should be really thinking about gross margin progression for the next.
18 months or so in the context of what we're seeing today.
Given the 40% exit rate would.
It would seem that you could have substantial margin expansion on top of the 37% that you're guiding to for this year. If we can we should expect sequential improvement from the 40%.
Into the first half of next year. So just any thoughts on kind of the margin recovery and how we should be kind of thinking about gross margin expansion over the next 18 months or so thanks.
Yeah, Peter what I'd say is I'm, not gonna providing outlook for our fiscal year 'twenty for today I'm going to resist doing that because theres. So much volatility right now we want to get a little further into this year finish the plans, where we're just starting to develop our plans for next year right. Now so it's a little premature to talk about that but what I would say is we feel very good about the progress we're making as you folks know.
We believe this quarter was an inflection point for US we will return to gross margin expansion we've done that.
You saw it in our prepared remarks, we expect to build on that in Q3 looking to get to two to 300 basis points of additional expansion that continue in Q4, and then as you think forward beyond fiscal 'twenty. Three we had a very high level you should expect us to continue to prioritize what we're doing right now which is maintaining our top line momentum and making the investments necessary to do that we're continue.
To work to rebuild margins and we said that will take some time, but that work is underway and we're going to continue to drive our strategic initiatives.
Our digital transformations, our streamlined operating model those will continue to be our priorities, but we will give you a better feel for that as we get closer to fiscal 'twenty four.
Got it thanks, so much I'll pass it on.
Yeah.
And our next question will come from Dara <unk> with Morgan Stanley .
Hey, guys good afternoon.
Good afternoon, just accordingly.
A clarification on gross margins you came in better than expected in both Q1 and Q2 is there some offset in the back half of the year as we think about full year guidance not changing or is it more conservatism just given the volatility out there.
And then secondly, you took some pricing in December any initial thoughts on competitive response.
Seeing any pushback from retailers.
Too early to judge consumer demand, but any thoughts on that front would be helpful. Also just relative to the December increases thanks sure let.
Let me start on gross margin and then Linda can comment on pricing.
As it relates to gross margin as you said, we did over deliver our expectations for Q2, we came into the quarter targeting 100 to 200 basis point improvement we delivered a little over 300. If you look at the drivers of that over delivery I'd point to two items. The first is less operating deleveraging so because of the very strong topline performance and exceeded our expectations.
Volume was only down 10% for the quarter, we had anticipated to be down more than we're expecting more deleveraging. So we received the benefit of that item, which tends to be discrete in the quarter and then we did have some benefit of pulling cost savings forward now we remain on track to have a very good year, we're not changing our full year view of cost savings, but the team did some nice work pulling some of them.
Projects in early and I'm always happy to get cost savings projects started early but that was a benefit as well that will have a bit of an impact on the back half of the year and so I think this is a balanced forecast for gross margins, where you continue to believe we'll get to about 38% on the full year.
Dara you made this comment and I agree, it's still an environment with lower visibility in quite a bit of volatility. So I wanted to see how this fourth round of pricing plays out it's a little early for us to read.
Get another quarter under our belt and see how that's playing out and I think well have a better perspective on the full year, but with that let me turn it over to Linda to talk a little bit more about pricing.
Kevin just mentioned and we execute it that far trying to pricing in early December and as Kevin noted, it's too early to determine.
From a consumer perspective, the reaction I would say to date everything looks in line with our expectations from an elasticity perspective, but again too early we haven't had a full purchase cycle, yet and it's still being reflected in the market as it relates to competition. We did say in this price increase we led for the most part on this round of pricing and while we've seen some category movement in price.
There are other categories, we have not seen competitors moved in yet and we're watching really really closely.
To see what that is going to look like and prepared we're prepared to react if our price gaps get out of line.
Or foreseeing a consumer reaction not in line with our expectations given the full category hasn't moved so too early yet.
To judge that but it is true that some some categories. We have not seen competition moves subsequent to our pricing.
Yeah.
Thank you.
And our next question will come from Andrea Teixeira with Jpmorgan.
Thank you good afternoon. So I wanted to go back to the topline outlook improvement. So I think that's probably as you mentioned and as a function of.
Price elasticity on maybe the pull forward of shipments at this point and is that the reason why also did them.
His guidance as much as you could have given the beat is that something that perhaps the retailers to more shipments ahead of the price increase in December and therefore, you can see some of that pull forward corrected in the.
The third quarter fiscal <unk> is that how we should be thinking.
Andrea I would say overall I feel very good about where we're at from a top line perspective, and as you saw we narrowed our range and we moved it to the top half of our range from an organic perspective, we're now targeting flat to up 3%.
If you look at our performance.
For the first half of the year organic sales growth is a little over half a percent. So thats success suggests much stronger performance in the back half of the year and so the outlook I think really reflects.
Good start to the year, but it.
It would project acceleration in the back half of the year in terms of organic sales growth.
Really driven by again good strength in the business plus the ongoing impact of the pricing actions. We're taking I think if you look at the range right. Now you can do the math. It suggests the back half would be anywhere from flat to up 5% on an organic basis.
And we've got still a fairly wide range in the back half the year and I think that reflects exactly what Linda was just talking about there is some uncertainty about how this fourth round of pricing will go and so we think it's appropriate to maintain a bit wider range until we see exactly how both the consumers react to this this round of pricing as well as what we see from other manufacturers in terms of if they choose to follow or not.
And then with the fourth quarter price increase.
Final point.
I'm sorry, the December price squeeze the forefront can you remind us again, how much would be the.
Average pricing that you're getting to the beginning of the fourth quarter as we enter the third quarter.
Yes, this fourth round with a bit more moderate than we had taken in July . If you recall July was the largest of the four price increases. This one was around mid single digits and fairly broad across the portfolio, but more moderate than we had taken in the past and.
And again <unk>.
Too early to judge on on what the pricing looks like and what the impacts are but this one was definitely more moderate than what we saw in July and if you look at July the elasticity is exactly in line with our expectations across categories.
So we would expect our models to continue to hold in December but its dynamic out there and consumers are certainly facing a lot of inflation in their broader basket. So we're watching it closely.
That's helpful.
So the meat.
Mid single digits, plus high single in general like on average you're probably running around mid teens and then so that implies at the midpoint of the range.
The slide you're looking at 2.5, you're probably looking at unless this is Ronnie.
Around 12 are seeing is that the way Youre motto model calls for the second half.
Yes, Jay what I would say in terms of elasticity or expectation is elasticity for this December round or price can be very similar to what we saw in July which is consistent with our historical levels of elasticity.
You might remember in the first year round, we're seeing lower elasticities and historical level consumers were less price sensitive.
But now Thats really reverted back to our historical level of elasticity and then I would say on the back half be a little careful because we do have some shifting as we talked about between quarters I think maybe a better way to look at that if you try to take out the noise of some volume shifting between Q2 and Q3.
Q2, we had 4% organic sales growth you.
You saw in my prepared remarks, you may have seen we're projecting 2% to 3% growth organic sales growth in Q3 over that six month period, we're looking at organic sales growth a little over 3% and so clearly an acceleration of where we've been based on the fundamentals of the business. We're talking about but consumers continued to be resilient our categories have been shown to be resilient to date.
And I think that's reflected in raising our outlook.
And then lastly, this is about Samsung right. If my math serves me right on average on all the categories.
Yes, Andrew we don't comment on specifically analysts disease and as you can imagine are quite different by category by geography, and so it's something we don't comment publicly on the elasticity of our brands.
Okay. Thank you I'll pass it on.
And our next question will come from Camilo.
<unk> <unk> with credit Suisse.
Yeah.
Hi, everybody.
Good afternoon evening for us.
Can we can you talk a bit about about supply and about inventory.
I mentioned the fill rates were great.
Maybe just a little bit more on.
Your ability to supply.
Do your various maybe digging into the categories a little bit and then how do you feel about about trade inventories as well as maybe inventories in.
Pantries.
Sure.
Thanks for the question on supply I would say in the supply chain, we're definitely seeing improvements from the disruptions, we're dealing with over the last year or two.
Continues to normalize and that certainly helped benefit our inventory levels. So as you know we have raised safety stocks to try to help manage the supply chain disruptions, we are dealing with and create less impact to our ability to ship product to our retailers as a supply chain is normalizing we are able to go back and reduce these safety stock levels and so as an example.
In Q2. This is our fourth straight quarter that we've been able to reduce inventory levels.
I think year over year, we pulled another four days out of inventory on hand, and that's really a reflection of improving supply chain.
And you heard my earlier comment. One example that is we've hit the highest case fill rate.
<unk> been able to deliver since the pandemic began.
Now we've done that through some very good work by the team, but I would tell you we are still dealing with intermittent supply chain disruptions and I'm sure. You'll remember last quarter, we talked about a few disruptions on our glad and our burts bees business. So that continues to occur, but it's certainly starting to normalize and we're seeing less disruption than we did a few years ago and so that's allowed us to.
Continued work to optimize our supply chain and one of those elements just reducing inventory levels and then from a retailer perspective, the only place we saw some changes in retailer inventory levels was on our brita business in Q2. So we did see a little bit of a reduction in retail inventories on that business.
Nothing else to speak of and I would tell you in our outlook, we're not anticipating any additional material changes to retail inventories.
It always goes on every quarter, you'll see some noise, but nothing that we think has any meaningful impact on our outlook and thats whats assumed right now.
And then maybe if you want to talk about consumer pantry levels.
Yes, what we're seeing is very similar to what Kevin highlighted just in retail we are not seeing significant pantry loading by consumers or changes in behavior.
As it relates to the pantry, what we are seeing and I think well highlighted and probably some discussion around what's going on with pricing with the consumer we are seeing consumers continue to drive value seeking behaviors given what they are facing.
So we're seeing some purchase cycles extend as people try to make products work longer for them, they're purchasing different sizes.
So that's changing the purchase cycle, but that's largely in line with what we would expect from the elasticity impact that's in line with our expectations and we're not seeing any other consumer behavior, that's abnormal outside of that normal elasticity impact.
Okay got it so I guess if.
Supply chain is in more of a normal place inventories are at a normal place both at retail and consumer.
A a higher topline outlook.
And more of a normalized zone and then is that fair to say with some of those puts and takes over the last couple of years are behind us.
I wouldn't say normalized I mean, I think thats, probably overstating. It we are still dealing with supply chain disruptions I would just say the frequency of those disruptions has definitely gone down but.
But I would not say, where I wouldn't describe it as a normal environment, we're still dealing with a number of challenges on a regular basis, but certainly it's a lower frequency.
We were just talking last quarter about several of those that we're still working to resolve mostly behind us.
And I would expect we'll see more disruptions going forward I don't believe we're in a position not to expect that and so thats, probably the way I would better describe it then we're in a normal environment.
Got it better than before but but not normal certainly better than that.
Got it well done thank you.
Okay. Thank you.
And we'll hear next from Chris Carey with Wells Fargo.
Hi, everyone.
Hi, Chris.
Wanted to follow up on the supply chain dynamics.
Text of your gross margin outlook for Q3.
Yes.
And I guess, it's similar to the volume outlook, but I'm struggling a little bit given.
Given the delivery in Q2 with.
Why it.
It shouldnt be potentially a lot better right.
Unless productivity gets worse, yet pricing, which is going to remain strong raw materials, probably get sequentially better you just were talking about manufacturing and logistics switch, which sounds like it should get better.
And then.
From a volume standpoint, youre going to be tracking similar to what you just did in Q2.
And so why why is the.
Maybe like the other YY is the operating deleverage so much so much worse in Q3 or.
Maybe like what am I missing what gets what gets worse sequentially.
Yeah, Chris. Thank you for the question and I agree we do expect gross margin will get better in Q3. If you look at what we provided in the prepared remarks, we're looking at a gross margin of 38% to 39%. So I think a very nice improvement from where we landed Q2 at just a little over 36%.
You May also recall, we don't use spot rates when we develop our outlooks. We use forward curves. So our outlook is always anticipated declining commodity costs as we move through the year that that's not a change in assumption for us.
The only other item I would highlight is we will likely see more volume deleveraging in Q3 versus Q2, because keep in mind now we have the fourth round of pricing that went into effect in.
December had no meaningful impact on the second quarter, you'll start to see the impact of that in the third quarter, which means I would expect a bit more volume decline in Q3 than versus what we saw in Q2 as you now have one more round of pricing in the elasticities associate that round of pricing, so a little bit more volume deleveraging, but in spite of that we're going to continue to drive.
Nice benefits from pricing cost savings and as a result, I expect to continue to make very nice sequential progress.
It'll be up we believe up to two to 300 basis points versus Q2.
And that keeps us very much on track for getting back to about 40% by the fourth quarter.
Okay got it and then just to confirm that that volume that you are talking about a lot of that health and wellness segment, just given timing of cold and flu.
No the volume deleveraging will be based on the pricing and as Linda mentioned that pricing is pretty broad based across our portfolio. So as we take our fourth round of pricing there'll be an element of volume deleveraging because of the elasticity on those price increases that will impact the third quarter, but I think the other point you were making also keep in mind, we're lapping the omicron.
Variant from Q3 of last year, so that'll that'll have an impact on our cleaning and disinfecting business as we've got a more difficult comp on that business. So I think really a combination of both those items, you'll see that play out in our volume projections for Q3.
Okay, Alright, great just one quick follow up.
Still on the gross margin this was.
A nice sequential improvement in the manufacturing and logistics clients, certainly relative to where we were right and so.
Have we have we reached the end of this headwind.
Can we start thinking about manufacturing logistics normalization and maybe even it turns to a tailwind for your gross margins at some point in the back half of next year and certainly as we get into fiscal 'twenty four it. It does seem like some easing in this line item could be an unlock something which you don't necessarily have control over but we're looking at freight rates rolling over and.
And again, just a normalization in this line item and it seemed like a good development. So I wonder how sticky you think this is it and candidly whether this line item will ever actually become a tailwind for you or is it just cost or higher and it's likely to remain inflationary over over.
The medium term horizon. So thanks, so much for all that.
Sure, Chris I would say as it relates to manufacturing logistics, our expectation is it will continue to be a headwind. This entire year. So we think it is as you saw on our remarks $400 million of supply chain inflation about half of that is in commodities. The other half is in manufacturing logistics.
Now, we do think it moderates as we move through the year and so we think each quarter it'll be less of a hit than the previous quarter, but it'll be inflationary for the entire year.
And that's factored into our outlook and as it relates to the medium to longer term as I mentioned, we're going to hold off on making any comments on fiscal year 'twenty for just a little too early for us to do that but at least this year you should assume it will continue to be inflationary, but moderating as we move through the quarters.
Okay. Thank you.
Thanks, Chris.
And our next question will come from Jason English with Goldman Sachs.
Hey, good afternoon folks thank you for soybean.
Two quick questions I guess logistics manufacturing is now off the table, but in cleaning you guys mentioned that the professional.
Still lagging and I think you cited in their one driver's office occupancy.
<unk> seen it seems like were deep enough into Covid, where office occupancy is actually going the other way. So can you unpack a bit more of the headwinds on the professional business the cleaning.
Sure Hey, Jason.
Two factors and professional one which is a more.
Midterm issue and then one that was a very short term issue that affected our professional last quarter and I'll start with that one which was our painful recall and that impacted professional and we have a fairly large business, a titanfall and professional and we would expect as we bring that distribution back that's going to be a short term impact.
As you look at the medium term now office occupancy is still down significantly as return to office has been delayed and we've all seen the press on how hard it's been to get people to come back into the office.
The degree that we thought we would so that continues to be a headwind to the business. We're looking at other avenues to grow the business beyond just that I'm looking at our portfolio broadly and innovation and we continue to have conviction that our professional business will be a growth driver for us in the future and it's good to see it start to be a bit more normalized when it wasn't the path will be are still dealing with that office occupancy.
Right.
Okay, Okay, and Kevin I've had a lot of debate with investors recently around sort of normalized earnings I think probably everyones having that debate.
But one key point of it really does rest at gross profit.
I know you aspire to get back to historical gross margins some time.
But one way we are looking at is around unit economics with the notion that gross profit per unit is probably a more reasonable near term target of what a normalized gross profit would look like.
What if any holes or do you see in that thought process and if you think gross profit per unit should be a lot higher than it was in fiscal 19 can you give us an understanding of or better a better explanation of kind of why and maybe where you might be able to achieve that thank you.
Sure Jason I would say we are.
Aspired to do both I mean, you start by rebuilding gross profit then ultimately rebuilds gross margin over time.
For us it'll be the same drivers we've talked about we're going to continue to execute the pricing actions that we've taken and as we've said we don't have any additional plans to take further pricing. This fiscal year based on our cost forecast, but we'll continue to drive pricing will continue to drive cost savings and supply chain optimization. That's the way that we think puts us in a position to first Rick.
Tempur gross profit and then ultimately keep going to recover.
To recover gross margin.
Typically I'd say in a normal environment that work, we do on cost savings is enough to offset a normalized level of inflation and allow us to build margins overtime and that allows us to continue to invest in our brands and continue to set the company up to deliver value over the long term, obviously, we're dealing with a very unique environment right now with the unprecedented level of cost inflation and so thats why.
We're leaning into pricing I'd like to believe over time as we get to a normalized environment. As you described we get back to more of our consistent model, where we're really driving cost savings and that's allowing us to offset inflation and build margin over time.
But we're not in that environment right now so we're leaning more aggressively into pricing but.
I think ultimately it's always both we start by rebuilding gross profit and then ultimately work to rebuild gross margin overtime.
Okay. Thank you I'll pass it on.
Yes.
Okay.
And our next question will come from Kevin Grundy with Jefferies.
Yeah.
Great Good afternoon guys.
A question for both of you really on investment spending.
Yes.
What I'm trying to connect the dots here, so youre still targeting 10% of sales for the year, you're about 9% in the first half Kevin I think you mentioned so that implies an acceleration in the back half of the year can you guys comment a moment ago.
Destinations for the spin.
Number two why we would not expect to see a little bit more of an acceleration if thats. The case why not more of a sort of an immediate topline payback and understanding that some of this is sort of more longer term in nature that would be great to get your thoughts on that and then the third piece, because I think kind of coming away from the call. If there is going to be I suspect our view that the gross margin.
Guidance, maybe a little bit conservative given the strong.
<unk> in the front half of the fiscal year.
What's your feeling on potential reinvestment understanding it's along still.
There is still ways to get back to where you'd like you won from a gross margin perspective, but how are you feeling about potential reinvestment. This year could you exceed on your gross margin guidance, what's the likelihood that you would sort of lean in here and reinvest given some of the promising signs you've seen on the top line. So thanks for all that.
Hey, Kevin on the investment spending piece incredibly important we're seeing good consumer and category resilience.
We're happy that we are maintaining share in an environment, where we are aggressively going after rebuilding margin and you. All know that's exactly what we've targeted we want to keep our top line momentum while rebuilding margins at the same time and that's how we're approaching investment we're making the right short term investments to do that but we're also not taking our eye off the long term and continuing to invest in those things that are going to make.
A stronger company like our digital transformation and like our op model. So that's what we're focused on it just happens to be the shape of spending to have left in the front half of our year versus the back half given our plans.
That's just the shape of the investment and we still are targeting 10% from an advertising and sales promotion perspective still continuing to invest in innovation, that's been going well for us.
And we're all going to continue to focus that investment on our brands, but I will say, though is we are watching our categories incredibly closely right now and the most important thing that we do is continue to deliver superior value to our consumers and right now we're really happy to say not all of that pricing that we took strong double digits.
Maintained our record high superiority rating of 76% and we were in the 50% range a few years ago.
And that combination gives us the confidence to continue to invest but if we see a change in that where consumers are reacting in a different way or if we don't see competition follow on price increases we are ready with backup plans that we can activate very very quickly to make adjustments to that and if we need to make additional investments we will to support the value of our brands, but we feel.
We have that balance right right now that played out in Q2 behind the good balance we had in topline and bottom line, but that's how we're thinking about it overall will continue to take a proactive approach of adjusting as we need to.
Thanks, Glenn I appreciate the color if I could just one very quick follow up and I think you've kind of touched on this a little bit.
Are you starting to hear from retailers at all.
Given some of the moderation in commodities that they'd like to see more on deal here more trade promotion because it hasn't moved up.
Looking at the scanner data on the 412 week basis, we haven't seen it move up a lot and we know that some of the categories. You plan historically had been heavily promoted category.
I don't want to exactly what the risk is that sort of coming up at some of these pricing you're going to say if you're going to have to go back on deal and then I'll pass it on thank you.
Yeah, Kevin what you are seeing in the latest data is what we see from a Q2 perspective and that promotion is still below where it was pre pandemic across our categories. It's higher than it was a year ago in our categories, but definitely lower than pre pandemic and what we're hearing from retailers, which you would expect is how do we continue to keep our categories healthy so it's.
Not a discussion on promotion necessarily it's a discussion on how we have the right set far with the right distribution for our products, how we can lean into innovation.
And drive value from our market basket perspective from a retailer perspective, but we are not.
Hearing an abnormal amount of level of interest and promotion because they know that's not usually the right way to drive the category, we want to use promotion very strategically and times of the year, where we can ensure that consumers like back to school for example, or a cold and flu, where we know people are looking for our products.
We can introduce them to innovation I'll remind them to buy so those conversations continue to be really constructive and we're mutually focused on ensuring the categories are healthy and doing it the right way.
Thank you very much congrats on a good set of results.
Thanks, Kevin.
And our next question will come from Lauren Lieberman with Barclays capital.
Great. Thanks.
First thing I wanted to ask about was the performance in households.
Because the volume growth was pretty striking so just curious if you could talk a little bit more about which of the businesses had volumes up and if there was any of the merchandising attached to that or.
Kind of what was going on there because again the steep volume off with pricing is strong as it is is pretty notable.
Hi, Lauren Yes, I'm happy to answer the question on household as you saw we had 9% growth in the segment from a volume perspective really litter was the star of that group, we had a double digit.
Growth in that business and we continue to see very strong category growth as you know we've talked about it before strong pet adoption during the pandemic, that's continuing to fuel that category and then we've continued to see very strong performance in that business and so we are seeing in spite of the pricing we've taken we're still growing volume in that business more.
Offsetting the elasticity and back.
Okay, Great and then.
So just on the pricing.
I can't remember, which of you had mentioned that the pricing really had very little impact on the second quarter given the timing.
It went into the market and some of it's still showing up on shelf. So as we think about modeling forward you spoke to seeing more volume pressure, but should we also see anything accelerating.
Versus what's already in them.
In the in the financials in the second quarter.
Yeah, Laurence So I think you'll have two impacts now we're starting to lap the first round of pricing. We took last year. So are you starting to see some of that first round of pricing drop off as we get into the back half of our fiscal year and is being replaced with this fourth round. So it's not as clean as another round of pricing being added I think in aggregate. This fourth round was larger than our <unk>.
First round so in aggregate youll see a little bit more benefit from pricing and you see a little larger hit in terms of the impact to volume from elasticities.
Okay, Alright, that's great.
<unk>.
And yes, and then just a final question, which you may have.
Interesting the way that prepared remarks were written about.
Rebuilding household penetration.
So knowing that you don't typically expect a lot of revenue growth when you take pricing and everything is kind of going according to plan, but I was curious what categories.
Warrant that extra attention with specifically with regard to rebuilding household penetration and what if anything you can tell us about plans to do that.
Yeah Lorraine. This is a fundamental thing we're really focused on and one of the tradeoffs do you do when you take the level of pricing that we're taking in the categories. As you know your tradeoffs and household penetration in the short term in order to do that and while we're still in nine out of 10 households, and have very strong household penetration across our category and in most cases are performing better than the category.
As in household penetration. This is one of the trade offs that we're making.
I think it's the right tradeoffs given the fact that we need to both maintain topline momentum and rebuild margins, but that being said.
Household penetration is incredibly important to us and the health of our business over the long term and we are committed to re growing that over time and typically what we see in price increases you'll see some volume loss initially as consumers adjust their behavior and you begin to rebuild that over time. So our first focus on household penetration will be rebuilding volumes over.
Over the mid to long term and we will do that by continuing to invest in innovation, having strong levels of investment in our brands as we're going to have 10% spending in an S. P. This year.
And continuing to make the wrong right long term digital investments to.
To support brand building et cetera. One note we were really proud of we had our highest ROI marketing.
In this last period due to the personalization efforts that we've taken out so we haven't talked a lot about that but that's working.
Wowing, our money to work harder and will allow us to help us focus on growing household penetration over time, so what I would just again to say that this is a wide eyed open trade off that we are making in household penetration, but it's something that as we rebuild volumes, we would expect to rebound over time and what's key to that is continuing to invest in our brands.
Okay, great. Thank you so much.
Excellent.
And our next question will come from Olivia Tong with Raymond James Financial.
Great. Thank you.
Ask you about gladden birds, where things stand, there and particularly with glad given that.
The particularly strong performance in household how much that contributed if Glenn continues to be an issue.
And then with Burts, where do we stand with respect to some of those supply chain challenges.
Yeah.
Sure glad was a business we were up in sales this quarter I mean, we actually grew share from a trash perspective. So we're really pleased with the performance of glad after multiple rounds of pricing.
<unk> strong performance in the market and Thats really behind our innovation program that we've got a lot of time talking about.
Whether it be the addition of colors and.
Our focus on value there.
Our work on distribution across the retailer base is paying off and we felt good about where that business is from a trash perspective, and then from FERC perspective, we did share that we had a supply disruption that happens and we believe we'd be able to work through it you know through Q3 and that continues to be the case, we made good progress on it in Q2, when we are able to support the strong holiday promotions and.
Sales that led to growth on that business, but we still have some work to do and we intend to be through that by the end of this quarter.
Right and then just following up and I know you mentioned a couple of times too early to read too much into the December pricing, but just overall are you seeing any bifurcation as far as pack sizes or willingness to stay with branded versus private label with high end consumers versus low end.
And I imagine that as the <unk>.
Year progressed, so I don't think you have so far but as the year progresses, how much of that is embedded into sort of some conservatism on the outlook.
It seems like the consumer is still sticking with you, but just curious if you see any.
I would give you.
A reason for some caution as the year progresses.
Sure as we've said it really is too early to judge December price increase at this point, but maybe I'll speak Olivia to the broader sets of price increases and just what we're seeing on average and what we continue to expect to happen as December gets fully reflected in the marketplace. We are seeing consumers in our categories remain resilient.
And you can see that just in the strong consumption that you see and moolah right now consumers are reacting favorably and I think this is really due to the fact that we're an essential categories. These these brands play a role in consumers' everyday.
Routines and we're continuing to see them favor value. That's what we've always focused on with our brands, they're looking for superior value not necessarily the lowest price.
And with our superior at a rating I mentioned earlier of 76% consumers continue to feel that our brands are the best value and their voting for them in store.
And with that we are seeing value seeking behavior, though within our own brands. So people want to stay with the Clorox company.
Company branded product and so they're trading within our portfolio and we've seen that over the last number of price increases some consumers are choosing to.
By opening price points, because perhaps that day their wallet. They have a limited amount of money. They can spend on a category or theyre looking for the very very best value on a price per use basis and so they are trading up to larger sizes.
Or maybe they are trading within our cleaning portfolio between a dilutive bowl and a spray cleaner in order to get the value equation right for them and the good news is we have offerings to meet their needs there and thats, what really focused on with retailers, ensuring we have the right distribution to meet those needs as consumers continue to look for the best value within our portfolio and I think we're going to continue.
To see that happen.
As it relates to private label, we're not seeing any meaningful trade down in our categories to private label.
And again, we maintain share a mid four price increases so that that is playing out but I'll tell you. We're watching it really closely this ah it looks like it is going to continue to get tougher for the consumer in aggregates.
And so we're looking particularly is that fourth round is implemented and particularly in categories, where we have higher private label penetration.
To ensure that we have that right value.
Also mentioned earlier, we haven't seen some competitors reflect an additional price increase as we did in December and so we're watching our gaps really closely in those categories as well to ensure that we are continuing to offer superior value and we will make adjustments we are ready to if we need to to protect the value of those brands, but at the moment category consumers resilient.
Our brands are very resilient maintaining share.
And we're going to continue to activate our plans on innovation and investment to keep them healthy.
And our next question will come from Javier Escalante with Evercore ISI.
Sir your line is open.
Hello can you hear me.
Sorry for that.
Wanted to double click good afternoon, everyone wanted to double click on the on the timing.
Factors and.
The household volume growth of 3% if you look at the scanner data it shows.
Double digit decline. So if you can help us understand how much.
Stronger pet food pet.
Our business was in the quarter on whether the western channel shifts there.
And then I have a question more philosophically to link that when it comes to the health <unk> wellness business. Thank you.
Javier Let me, let me see if I answer your question on shifting so as we mentioned in Q2, we had some benefit of shifting of some merch activity and as I said, that's pretty typical that youll see some merchandise shifts between quarters out of Q3 into Q2 and that was across a number of businesses and then more specifically we're seeing.
The benefit of an early start to cold and flu season in Q2 as it relates to our health and wellness portfolio.
But maybe say a little bit more on what your questions I'm not sure that gets at the question you're answering.
It's a little bit more of a quick follow up on Lauren's question when it comes to.
The jobs being household.
The categories that you've referred to.
The shift in health and wellness and they were down 19%.
The real jump Westinghouse hold and we don't see that in retail. So if you can help us.
Good color there and then help us understand the disconnect between what we've seen retail on what you just reported.
Okay.
Yes, I'll jump in on that one Javier so.
You are noting a few categories that have very strong on tracked channel performance.
And particularly in litter our business in club that was up due to some strong merchandising activity, we had and actually some of the shift that we experienced from Q3 into Q2.
So thats, what youre seeing the difference between the tracked channels and what we're talking about from a volume and sales performance in household.
Very helpful and then.
Basically just curious.
How you go about answering this question with consumer research do you have a health and wellness down.
Down 19% is slapping down.
18% a year ago volumes, how you see normalization play now do you see people cleaning more as they were during the pandemic cleaner and less clean less how much. Many other quarters you feel that volumes are going to be down in health and wellness.
Thank you.
Yes. This is a category that certainly has had the biggest swings as consumers change their behavior as we went through the height of the pandemic and we're still lapping we're still normalizing given omicron happened last Q3, and we're in the process of lapping that right now what I would say is if you look at this last Q2 versus.
<unk> prepay.
Pre pandemic our volumes are still higher so in aggregate people are still cleaning more.
And certainly we're still normalizing consumer behavior, and then we had a very abnormal cold and flu season. This year.
It happens earlier it happened in December from a peak perspective, it usually happens in January and February So theres a lot of dynamics in play here around normalization.
We see is still a business that has great opportunity to grow and be an outsized contributor to the company given people.
They care about cleaning and disinfecting as part of keeping them well.
But we're gonna be normalizing as we get through this and consumers continue to adjust their behavior and hopefully we'll get into a more normalized cycle. We're cognizant normalizes and we are seeing a more normalized impact from COVID-19, but we're not quite there yet and as we look at the volume loss, that's really due to that that factor around normalization, but also the pricing that we have and it's in line with our expectations.
So as we look at that.
Yes.
That just gives us conviction because it's about what we expected it to be and then as we move forward, we'll continue to adjust as consumers adjust but it's the same thing we're focusing on innovation in those categories, where we can make the job easier for them, we're continuing to invest to help people to understand with different ways to keep themselves well whether that be in a professional setting or at home.
But we feel really good about the health and wellness business overall, it's just going to be bumpy until we get back to a normalized environment.
Thank you very much very helpful.
Thanks Javier.
Yeah.
And our next question will come from <unk> <unk> with Bofa Global research.
Yeah.
I just wanted to follow up on on the cost side, you're still seeing cost inflation, but you noted in your prepared remarks, not cost inflation has moderated slightly on a sequential basis, even though it still higher year over year. I was wondering if you can give some more color on which inputs are moderating and Hal.
Quickly those are coming down versus the ones that are still a headwind and then could you also remind us how quickly you expect some of your raw materials come down in your P&L relative to when we see spot prices for those raw materials decline. Thank you.
Sure as it relates to the cost environment and you said it correctly, we are seeing moderating cost increase now as I said, we anticipate it's going to be inflationary all year, along with that year over year increase will moderate as we move through the through the year.
As I look at specific commodities, we have anticipated resin would be a cost tailwind so a lower year over year cost for resin. That's something we assumed at the beginning of the year and that continues to play out that we are seeing resin prices favorable year over year, but that's being offset by we're seeing increases in most of our other buys outside of resin Joe soybean.
Oil linerboard chemicals solvents substrate most of the other key buys that we're purchasing we are seeing cost increases on a year over year basis, and we expect that to continue throughout the year. So that's generally how it's playing out well.
I would tell you when you talk about what that moderation is I think you can see it when you look at just the first half results. If I look at Q1 commodities were a 330 basis point hit to gross margin in Q2. There are 240 basis point hit so that's exactly what prescribing still a headwind, but a lower hit each quarter.
I'd expect that to continue to play out that we will see a declining impact from commodity cost as we move through the year, but again, we're looking at $400 million of the total inflation.
And being favorable boat shows are other buys continue to be unfavorable on a year over year basis.
Okay. Thank you and just could you remind us how quickly you would expect the costs to come down and European I'll, just relative to when we see those spot prices coming down.
Yes, Im sorry, you had asked that question as well it really varies by commodities in some cases, we hedge and so in those cases, you may have nine to 18 months before we'd see the impact of a changing commodity environment play through our cost structure and other cases, we have contractual relationships with our suppliers that delays those changes. So it's really hard to give you an enterprise answer how.
Quickly that plays through it as a commodity by commodity discussion based on how we set up those relationships with our suppliers.
Okay.
Great. Thanks very much.
Thank you.
Okay.
And our next question will come from Steve powers with Deutsche Bank.
Hey, Thanks, good evening.
On the household penetration topic I guess a question is.
How much recovery.
At this point as anticipated.
The remainder of your outlook for fiscal 'twenty three is that something you expect to.
See some sequential progress rebuilding the next few months and quarters or is that more of a fiscal 'twenty four and beyond objective.
Yes, Steve on household penetration that is definitely a more mid to long term goal for us to get back to household penetration.
Given the fact that the December price increase is just starting to take hold now we would expect to have to go through an entire cycle of that and we haven't even lapped the July price increase which was our big one coming up here. So that will be something that we're focused on now to ensure that we are investing in that we're keeping as many consumers in.
<unk>.
As we possibly can but that work will be rebuilding over 24 and beyond.
Yes, okay.
Is there a assumption.
Go backwards sort of as we get into.
Calendar 'twenty three before you go forward or is there more whole blood.
Yes.
That's very possible based on the fact that we just took that pricing we could see a bit more of a reduction in household penetration and again, we think that is the right trade off to make.
To get that balance right between topline and bottom line, but yes, it's possible as we go through we could see some additional household penetration erosion.
Okay, Okay and then.
Yes.
You talked about.
Promotional.
Intensity in the category right now it seems pretty.
Yeah.
Rational benign constructive I guess is there.
Is there at all.
In the base plan, an element of increased promotion.
As you go through the next couple of quarters or is that also a more steady state as a base case.
The base case is more steady state Steve.
As we talk about promotions being a more strategic part of our portfolio than something that we just due to to drive volume on a quarterly basis. That's the approach that we're taking for the back half of the year. We have good innovation plans I want to make sure that we hit consumers on key pulse periods to remind them about the category and the value that we drive so that's our approach.
<unk>.
Ken being what it is we will look to ensure that we have the right value and that we are competitive and so if there were to be a change in what we're seeing in the category today, which is slightly higher like I said earlier promotion than last year, but still less than a pandemic and we could potentially adjust our plans and we're ready to do that but we would expect just a more.
Normalized promo environment, that's how we are trading at for the back half and that's what we've seen so far in Q2.
Okay. Okay.
Last question on the one hand.
Definitely.
A really good news story here in terms of the pricing momentum you got it.
The gap between price and with building relative to the cost on the gross margin rebuild.
On the other hand, you missed a couple of times Tonight.
Just the price gaps that you're watching.
Divot label, a branded price gaps.
So from a consumer resiliency.
The fourth wave of pricing I guess could you give us a better sense of what the mile markers are for you in terms of is it just the gaps that youre seeing.
<unk> has widened out.
The time period, where you just don't want to fill gaps that wasn't that long ago was it value share volume share those household penetration metrics.
I'm sure. It's a mosaic of all of those things and probably some others, but just.
Give us a little sense of kind of the.
If there are more important.
Caters in there that would be helpful. Just the way youre thinking about it.
Yes, you got it got it right on Mosaiq, Steve that's exactly it which is we're taking a combination of all of those factors as we're deciding if we need to adjust our plans are not and really primarily what we're looking at is consumer reaction to our brands and we're looking very closely at any changes that would be outside of what we expect given the elasticities that we have.
<unk> market and then we would make corresponding plans and we're looking at the competitors to see are they doing something different or are they promoting more heavily or are they looking at a certain pack size that would make us adjust our plans. Those are the two primary factors were looking at the very very short term and then of course, as we look over months and quarters worth.
Looking at share and we're really happy that we maintained share this quarter given the fourth round of pricing, but that's the other thing. We're watching is there too much of a slide of share that tradeoff not worth it et cetera. So.
So we're looking at all of it but to start we're looking at that gap. We're looking at consumer behavior by category to say is that different than our expectations and then adjusting from there.
Okay very clear I appreciate it thank you very much.
Thanks, Steve.
And this concludes the question and answer session misread, though I'd like to now turn the conference back to you.
Thank you everyone. We'll see you at Cagny later this month and look forward to updating you on our progress in May please stay well.
And this concludes today's conference call. Thank you for attending.
The host has ended this call goodbye.