Q3 2023 The Clorox Company Earnings Call
Speaker 1: Stomp head at any time.
Speaker 1: If anyone should require assistance during the conference, please press star zero on your touch don't pat at any time. As a reminder, this call is being recorded.
Speaker 1: I would now like to introduce your host for today's conference call, Ms. Lisa Berhann, Vice President of Invest Relations for the Corpse Company. Ms. Berhann, you may begin.
Speaker 2: In just a moment, Linda will share a few opening comments, and then we'll take your questions. During this call, we may make forward-looking statements, including about fiscal year 2023 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 statement section, which identifies various factors that could affect such forward-looking statements which has been filed with the FCC.
Speaker 2: In addition, please refer to the Non- GAAP financial Information Section of our Ardenk's Release and the Supplemental Financial Schedule and the Investor Relations Section of our website for reconciliation of Non- GAAP financial Measures to the most directly-compable of Non- GAAP measures .
Speaker 1: Hello, everyone, and thank you for joining us. We delivered strong results in the third quarter amid a challenging operating and cost environment, with organic sales growth in all four segments, growth margin expansion, and double digit adjusted EPS growth. Our performance reflects solid execution by our team, the strength and resilience of our portfolio, the superior value of our brands, and the relevance of our ignite strategy. Based on our strong performance, we're raising our fiscal year outlook. During the quarter, we made great progress rebuilding margin while maintaining top line growth.
Speaker 1: Net sales grew above our long-term target and we delivered our second consecutive quarter of gross margin improvement, supported by cost justified pricing and decade high cost savings.
Speaker 1: We also made further progress on our ignite priorities, investing in our brands and innovation pipeline while advancing our digital transformation and streamlined operating model to create a stronger, more resilient company.
Speaker 1: While we're encouraged by our progress to date, we're relentlessly focused on controlling what we can to drive and appropriately balance both top line and bottom line growth.
Speaker 1: Looking ahead, we expect the operating environment to remain volatile and challenging.
Speaker 1: Despite recent moderation pockets of input costs, overall inflationary headwinds continue to be strong. In light of this, and ongoing macro uncertainty, we're watching consumer reactions very closely, given the potential for them to come under greater pressure, and we are prepared to adapt plans as necessary.
Speaker 1: Regardless, we have trusted brands and essential categories, which we continue to invest behind. I remain confident that our actions position us well to navigate this environment and deliver consistent, profitable growth over time.
Speaker 1: With that, Kevin and I will take your questions. Thank you.
Speaker 1: Ladies, gentlemen, if you have a question, please press star one on your touchtone telephone. And our first question will come from Andre.
Speaker 3: Caiara, please go ahead.
Speaker 4: Thank you, Perrita, and good afternoon, everyone. So my question refers a more on the quarter coming in better than anticipated. And Linda, you and Kevin and the team had highlighted that elasticity can kind of came in better. But of course, you're not lapping and not assuming.
Speaker 5: If you look at our outlook for Q4, our full year outlook, and you can back into it, we're projecting about 3 to 6% organic growth. I would say at the high end of that range, it would look very much like it did in Q3. We expect continued strong consumption. The business is performing well. I think the one watch out we have, and you mentioned it, is our Kingsford business. While we had very strong performance in the third quarter, Kingsford was the one business that came in below our expectations. You may have seen our prepared remarks. We're seeing an increased level of competitive activity. We're not seeing competition move to the same degree we moved on pricing. That was one of the businesses we priced in December . We've seen price gaps widen.
Speaker 5: And as a result, we saw our shares decline in the third quarter. Now the team with that in mind, they've gone back and they've adjusted their plans in Q4. So we're increasing our support for the business in the fourth quarter. But it's certainly something we're watching. And Andrew, you may know this. That business has an outsized impact on our fourth quarter.
Speaker 5: We do about 50% of our total sales and King's shirt happened in the fourth quarter, so it's totally something we're keeping a close eye on. We think we have good plans in place that we've adjusted to reflect what we're learning Q3, but we're watching that closely. Particularly around the key holidays and it's a little early detail how Memorial Day or our July 4th plays out.
Speaker 5: And I think if we have a good successful season, you know, we'll be at that top into that range, which is pretty consistent in Q3. But if it delivers below our expectations, I think that would be a reason why we'd be towards a lower into the range for the fourth quarter. Andrea, I'll take a VMS. So as you all aware, VMS is a small portion of our portfolio. It's about 3% of...
Speaker 1: Kevin highlighted, we're seeing strong results across the majority of our businesses. And we think it's the right step now to look at resource allocation and allocate resources to businesses we think have higher growth potential. And therefore making a bigger focus on profitability in the VMS business.
Speaker 1: and that's what the team will be laser focused on moving forward. That includes, like I said, moving resources to businesses that have growth potential, as well as continuing to narrow our focus on core brands. And we think that's the right role for the business moving forward. Given that, that's what triggered the non-cash impairment, but we feel like we have the right plans moving forward.
Speaker 1: And as it relates to our portfolio, we're always doing that work with our board. We'll continue to do that. But right now we're focused on driving more profitability in the VMS business as we want it today.
Speaker 4: That's very helpful. If I can squeeze one question on the WIPES business, it seems as if there wasn't any call out of, it seems that has normalized any changes in potentially regaining some.
Speaker 4: Some shelf space that was lost at the time, given the private label, taking more share and you didn't have enough capacity. How did that normalize and anything in the dynamics of the timing of promotion at club or anything that could call out that happened in the quarter?
Speaker 1: Yeah, certainly for wipes that was a business or one of the business most most impacted by COVID and as we noted in Q3 we were laughing at the Omicron variance and then began to get into a period where we're more normalized from a COVID perspective with wipes but it definitely has been bumpy over the last few years as we've gone through that.
Speaker 1: But we've been very pleased with the performance on the WIPES business. We've continually grown share quarter after quarter for the last well over 18 months now on WIPES. We've regained significant distribution. Our merchandising plans, while lower than they were pre-pandemic, are stronger than they have been, and that's behind our ability to supply.
Speaker 5: time items we highlighted. So if I set that aside, it's one of an ongoing basis. We're a little under 41%. If you look at our raised outlook for the full year, we're now looking at 38.5 to 39. You can back into the fourth quarter, and now I suggest we get to about 40 to 41%. So...
Speaker 5: I would say our fourth quarter is very much in line with what we deliver the third quarter. If I just set aside that, the one-time benefit we add. And so we expect the good strong performance we deliver this quarter to continue on into the fourth quarter. That's super helpful. I guess, maybe looking at longer term, I recognize being hesitant to provide.
Speaker 6: effective on the margin recovery and whether face on what you're seeing right now, whether returning to pre-pandemic levels is in the cards as you look out the next year.
Speaker 5: Yeah, Peter, as it relates to gross margin, Lynn and I remain committed to getting back to pre-pandemic levels. That's work that's well underway and we intend to get there. You know, I'm going to be cautious about providing any outlook for fiscal year 24. We're still in the process of developing our plans. It's a bit too early for that. But I would say at a high level.
Speaker 5: You should expect when you see our plans. It will be very much focused on the same priorities we've been driving this year. We're going to continue to drive top-line growth. We fully expect to continue to make progress, expand and grow margins and rebuilding them. And then we'll continue advance our strategic priorities. The challenge with the growth margin, I know there's a lot of interest in the exact, when we get to pre-pandemic levels is...
Speaker 5: You know, on the elements we control, I feel very good about the progress we're making, and we've talked a lot about those drivers. I would say those initiatives are primarily on track or exceeding our expectations.
Speaker 5: But the reality is there's real impact from the areas we don't control, either supply changes, ruptions or inflation.
Speaker 5: And as I said in the past, I really think that inflationary component will either Accelerate or delay or time to recovery depending on how that plays out, you know over the next 12 to 24 months
Speaker 1: Thanks so much. I'll pass it on you. Thanks, Peter. Your next question will come from Anna Lizole with Bank of America. Hi. Thank you very much for the question. To continue the theme on gross margins, I did want to just follow up. Understanding that commodity costs are still a headwind, but directionally keep moving in a better direction and less of a drag on margins here. Do you see commodity costs largely stabilizing at this point into fiscal Q4?
Speaker 1: And then also do you see a bigger benefit, you know, acknowledging that the mix and assortment on margins was a benefit in fiscal Q3, would you expect a bigger benefit on that in fiscal Q4? Thanks.
Speaker 5: Yeah, thanks for the question. You know, as it relates to commodity inflation, it is still an inflationary environment. Now, it is moderating that level inflation, but to give you a perspective, you know, on Q1, we had 330 basis points of commodity inflation.
Speaker 5: in Q3 at 230 basis points. And so we've seen some moderation, but still a, in a place your environment, you know, as we've said, resin is the one product we buy that we are seeing deflation, we've seen that for a good part of the year, but that's being more than upset by most of the other products we've purchased.
Speaker 5: And so it continues to be inflationary. We had called that $400 million in total supply chain inflation.
Speaker 5: about half that from commodities and half from other areas at the beginning of the year. And that still looks like the right call. We still expect about $400 million worth of inflation.
Speaker 5: And so I expect the X of this year still operating in inflationary environment as a???-related commodities.
Speaker 5: Now, as it relates to manufacturing logistics, I'd say the one area we are starting to see prices come down year over year, at least that's our expectations on transportation.
Speaker 5: It's stabilized in the 3rd quarter. And then our expectations, the 4th quarter, we'll start to see transportation on a year over year basis be lower. But keep in mind when we talk logistics, there's really 3 pieces in there. There's transportation. Which I think is moving to a deflationary market is we're seeing less demand for goods and.
Speaker 5: and more trucks available, but that also includes warehousing and what we call our diesel surcharge and we can see inflation those other two elements.
Speaker 5: So logistics can do to be a headwind, but transportation piece of logistics we're starting to see that decline. At least that's our expectation for the fourth quarter.
Speaker 1: Okay, thanks very much. And then just on the mix and assortment part of margins, are you expecting to see better benefit from physical Q3 to physical Q4?
Speaker 5: I don't. I mean a little bit of the Q3 benefit mix and assortment is our cleaning business, and particularly wipes because we're laughing at Omicron, our wipes business is down and typically we get the large multi-packs.
Speaker 7: But you did see a lot of sequential improvement in Q3 relative to Q2. And as you mentioned, there's some things getting better in terms of logistics. In theory, some of the commodity costs are less of a pressure point next quarter. So just wanted to understand why we wouldn't continue to see a path of sequential improvement, given as we look at fiscal Q3 on an underlying basis, you saw that versus fiscal Q2. And then also just looking at the underlying performance in fiscal Q3, can you just highlight based on the pressure points of the individual buckets, where did you come in better than expected versus what you originally expected in fiscal Q3? Thanks. Sure. Yeah, thanks, Dara.
Speaker 5: the strongest benefit from pricing. As we move into Q4, we're now lapping two price increases, the first two rounds we took. And so I would expect that we'll see less benefit from pricing in Q4, essentially all set by more moderate and cost environment. So collectively, we get back to that 40, 41%, which is fairly consistent with Q3.
Speaker 5: seeing a little less inflation and a little less benefit from pricing about offsetting. And then as it relates to Q3, probably the biggest benefit above what we expected is volume de-leveraging. We went into the quarter expecting based on elasticity that we would see volumes down in the mid-teens range. And as you saw, our volume was down about 11 percent. So that stronger top line performance.
Speaker 5: that really drove through the entire P&L, over delivered on sales, relative to rock expectations, but it also contributed to a strong gross margin expansion as well as EPS. So that was really the biggest change versus our expectations. And as I mentioned earlier to Peter, the cost inflation is generally in line with what we expected. That was true for Q3 and we still expect about $400 million of the cost inflation for the full year. Thank you.
Speaker 7: Great, that's helpful. And then just on price gaps, you obviously talked about Kingsford is are the plans on Kingsford mainly to adjust promotional spending? Are there other plans as you think about managing that business, particularly heading into the peak season there? And can you discuss if you're comfortable with price gaps?
Speaker 7: Elsewhere across the portfolio or are you seeing anything worrisome elsewhere? Thanks
Speaker 1: Sure, I'll start with the portfolio and then get a little deeper on Kingsford.
Speaker 1: So from a price gap perspective, the pricing we took a few months ago went generally as expected. And we've seen pockets of price gaps, and frankly we're still closing some of those. And we've adjusted some of our plans on the businesses where we've had issues. For the most part, our price gaps are in line to where we expected them to be.
Speaker 1: King's word, as you call out, is the biggest gap that we have right now as competition did not follow that price increase in full. And that's one that we are making adjustments to our plan and we have those already beginning to show up and marketing Q4. Part of that would be trade related. We're ensuring we have the right merchandising plans to support the right price points.
But we're also focused on market baskets with retailers, which is one of the biggest opportunities given the overall basket for the consumer in the grilling space is under pressure with protein prices being up and of course the rest of the things that go on the grill. So we're focused on supporting those enhanced merchandising plans and we'll expect to see that play out as we head into Q4. That being said though, you know, we are laser focused on any price.
brand value with consumers, but not get ahead of ourselves from a trade perspective. And I think that balance has been working and we'll continue to do that in Q4 and beyond as we manage price gap.
Great, that's helpful, thanks.
And our next question will come from Filippo Filoni with Citi. Hey, good afternoon, guys. Question on pricing, you mentioned obviously in Q4 you're going to cycle some of the price increases from last year. You still have the December price increase flowing through. So can you give us a sense of what's going on in the market?
the magnitude or the sequential changing price in that you're thinking for Q4. And then longer term, you've talked in the past about shifting from least price increases towards more price back at texture. So can you give us a sense of the potential contribution from those initiatives as we look?
Please go 24 and beyond. Thank you. Sure. I fully both. As it relates to Q4, you know, I won't give a by-line forecast for the fourth quarter, but you should expect that the price benefit to margin we saw in Q3 is a high water mark this year.
And then now we really start laughing that second price increase. You'll start to see that pullback. I'd say more in the range, somewhere in that Q1 to Q2 range, generally in that area. So we'll see that start to step down. And that should continue to play out that way for the next three quarters until we fully lap the last round of pricing we took in December . It'll continue to step down in value over time.
And then your question on list price changes is I think you may have read in our prepared remarks. We do not have any additional large-scale pricing in our plans for the balance of this fiscal year. We will continue to work on price-packed architecture changes and then we'll evaluate, we're developing our plans for 24. So welcome back to you in August and we'll share more details about our plan.
we grow the top line, which is more volume dependent and we'll continue to focus on innovation, consumer trade-up, and some price back architecture be much more volume driven than price mix driven. And so I think you'll see that evolve over time, but we're still very much in the mode where it's being more driven by price mix and I expect that to continue for another three quarters until we lap all this pricing. Great. That's helpful. Thank you. Thank you.
Our next question will come from Lauren Lieberman with Barclays Capital. Great, thanks. Hi, everybody. In the prepared remarks, Linda, you talked about being pleased with market share performance.
And that's readily apparent on a dollar basis. But I was just curious how much you guys think about volume share and whether or not that's a metric that's important to you, it's something you focus on. And then I have a follow-up related to that after I kind of hear the answer. Thanks.
Sure, Lauren. So when we share overall, you know, we were happy to maintain share an aggregate and we grew share in five of our nine businesses and continue to grow share in growth markets around the world. You know, that being said, of course, our goal is to grow share and I've been transparent about that. That we're not satisfied into on that zone, but, you know, we are really pleased to see given the level of pricing that we've taken that our shares have held up.
And of course we are talking about dollar share. And if you recall, you know, earlier we were growing volume share pretty steadily as pricing hadn't fully taken hold in our categories. And that was something that we were looking at too. For Lauren, we're balancing both of them. You know, our focus is usually on dollar share as the primary metric that we want to focus on. We think that.
conveys well our overall superior value and how we think about consumers thinking about value in the category, and DollarShare is a better representative of that. But again, we are watching volume and unit share to see how consumers are making decisions, etc. The good news is that because the categories have mainly moved in line with us, with some exceptions, Kingsford being notably.
you're seeing adjustments in volume share that in some places are larger, but most of the time in line and just have to do with normalizing price gaps.
So we watch it, primary metric is dollar share, happy to see where we are and happy to be growing in five or nine businesses but the work is certainly not done yet.
Okay, great. And then, so when I was thinking about Gross Mergen and Kevin had mentioned it briefly about the operating delivery and it was better this quarter than expected, but it's still a headwind to Gross Mergen.
As you think forward, what should we be thinking about in terms of volumes? Stable at two lower level, albeit give out a pressing, is it volume grows because...
How should we think about where the business is geared to on an absolute volume performance basis, such that if we're really talking about restoring gross margins versus pre-pandemic levels, we often need to be mindful of where volumes stand relative to that pre-pandemic period.
Hi, Lauren, you know, I'd say a few things on volume. I think one thing that continues to benefit us, as you know, is we chose to use contract manufacturers, I mean, that significant spike. So we did not overbuild our facilities. That allowed us to as volume moderated. We were able to shut those agreements down and not be left with a lot of unused capacity internally.
And so I think that's benefited us. I think, as I mentioned, I think to Filippo, as we move forward now, depending on where pricing goes in fiscal year 24, but given the pricing we've taken, I would expect price mix to continue to moderate and the volume declines to moderate as well as we cycle through this pricing. From Robert P Advertising in New York, Robert Pckser, Senior
As I said, short of any future pricing being taken, I think we've probably got three more quarters or so. We're seeing price mix driving the top line to a greater extent of volume. But I think that'll level and balance out as we look further out into our fiscal year of 24. And so I think that's when we get to a more steady state of volume. And what we try to do is be thoughtful about.
But certainly it's something we're keeping a close eye on. Okay, great. And then final question. We just in the expenses excluded from earnings this quarter and then the outlook, especially on the operating model changes, that's just things are moving more quickly. So higher expenses in this year, but no change to the overall program. But on the digital expenses, they are higher. And so you're now excluding, I think it's, I forget, it's an additional seven cents or something like that. So just be curious if we can explain a little bit, you know, what's incremental? Is it just the estimated cost of program has gone up? Is there an incremental savings? Just curious about that change. Thank you.
Yeah, sure. Thanks for the question as it relates to our digital transformation. That program is very much on track. As you know, it's a 5 year program and we plan to spend 500M dollars. No change in our expectation. We are seeing a little bit of a shifting between years. This is the 2nd year of the 5 year program. We started the year out expecting we spent about 150M dollars. 90M of Op-X, about 60M of Cap-X.
And that's just a little bit of shift in timing between years. We're not changing the overall expected spend. As a result of pulling a little bit of that forward into fiscal year 23, we've raised our expectation about $10 million, and that's that seven cents you mentioned, Lauren. Okay, great. Thank you so much. Sorry for all the questions. And then our next e-mail address we'll catch up in a little bit. Otherwise, err, thank you and we'll see— Sure.
Thanks, Lauren. Our next question will come from Olivia Tong with Raymond James Financial.
Great, thanks. Good afternoon. My first question is on advertising and your view on reinvestment levels, especially with AMP up pretty substantially in Q3. So we certainly saw some nice acceleration following the gross margin improvement. So just wondering on your views going forward, if gross margin continues to recover of headaches or expectations, where do you think advertising goes?
And then just to follow up on that, this is the biggest increase in advertising margin on a year-by-year basis in quite a few years. So can you talk about where the incremental spend was and your view on the ability to generate the same level of ROI on that spend versus what your going-in expectations were? Sure, Olivia. Advertising continues to be an incredibly important part of how we support the superior
of merchandising. And again, we don't manage quarter to quarter, but this was the right time to spend this money to support our brands. And coincides with having our fourth price increase in the market, which is good timing. We continue to believe that about 10% is the right spending, but we adjust that and look at that depending on what the businesses require. And we're not...
that we can get from our brands. And our focus, as you know, has been on improving our ROI.
given the fact that we are driving personalization. So we wanted to get to know 100 million consumers in the US.
of driving efficiency and effectiveness by doing that. So we're getting the right people, the right message at the right time, and spending our money more effectively. And if you look across the advertising we said in our prepared remarks that that was more heavily concentrated in the U.S. where we had lots of good opportunities and was pretty widespread across our businesses. And you saw that in the strength across all segments.
specific questions on Kingsford. If you could just remind us first where Kingsford margins stand relative to company average. And then obviously a lot of pricing this quarter. How much of that pricing acceleration that you saw in Q3 was driven by Kingsford versus the other brands where you saw competition follow your pricing.
Olivia, I'll answer on gross margin and we don't provide gross margin at the individual brand level, but it's a nice profitable contributor to the company. And I'm sorry, Olivia, can you repeat your second question? I'm not sure I was tracking.
Sure. Would you mind just giving us a sense in terms of Kingsford relative to company average then? And then also how much of that pricing acceleration that you saw in Q3 was driven by Kingsford versus other brands where you did see the competition follow your pricing? Yeah, on the margin.
So overall, Kingsford is not as large in Q3. The question about how Kingsford's physically contributed pricing. As I mentioned earlier, we do about 50% of our sales in our fourth quarter on the Kingsford business would have a very outsized impact on the company. But in Q3, that's really early season for Kingsford and so it's less meaningful in terms of the impact it has on our performance.
Got it. Thanks so much.
if not an advertising, are there areas of SNA that you felt like have been underinvested in that you have opportunity over the next four to six quarters as you look at the normalization of the P&L over the next couple of years? And just connected to that, there's been this target of 13% SNA as a percentage of sales out there. Is that still a relevant target over the near to medium term? So thanks for those.
Are there areas of SNA that you felt like have been underinvested in that you have opportunity over the next four to six quarters as you look at the normalization of the P&L over the next couple of years? And just connected to that, there's been this target of 13% SNA as a percentage of sales out there. Is that still a relevant target over the near to medium term? Thanks for those. Thanks for Chris.
I'll start and then ask if Kevin wants to add anything after I finish. Just maybe taking a step back in what we're trying to accomplish. We talked about the balance that we want to strike between maintaining top line growth and rebuilding margins. And ensuring, given the incredibly volatile and uncertain environment, that we're taking all the actions we can control to do both of those things. And we're pleased with the progress that we've made on both of them. If you look at our growth, if you look at any kind of three-year average over quarters, etc., it puts us at the top end of our growth.
We still think it's a multi-year journey to rebuild margins. And we think the uncertainty from a consumer perspective in 2024 is going to continue to remain high. And that's very difficult to predict right now exactly what the inflationary environment will look like, when, if we will hit a recession, and then of course what the corresponding impact will be to the consumer. And it is very likely that they could become under more pressure.
And so what we're taking this as is another good quarter. We need to continue to control or controlling. We want to continue that into fiscal year 24. And then we want to make the right investments to your good point to support that business. And we believe in advertising, supporting innovation, which we continue to feel very strongly about, ensuring we have the right capital plans against our business, which we feel we do.
And we'll look at all of those hard and 24 to make sure that we're making the right choices. And we're not afraid to invest if we need to, to support both that top line growth and rebuilding margins. We'll have more specifics, of course, when we talk to you again in August about what that means for 24. But just know that's the posture we're going into as we're committed to that margin growth committed.
The way I understood it was, did Kingsford atypically contribute to pricing in Q3? And as such, did it give back in Q4? I'm not exactly sure what you meant, but that was the question I had, so I figured I'd ask you as well. How could I not just invest in variance?
Yeah, Chris on pricing is, as I think you may recall, we took pricing pretty broadly across our portfolio in December . So Kingsford was one of a number of brands reprised and so as I said, Kingsford did not have a outsized impact and because it was low-season, it had fairly small impact. So I don't expect to see any
Thanks, Chris.
Your next question will come from Javier Escalante with Evercore ISI.
Hi, good afternoon everyone. My question has to do with SDNA and if you could first operationally tell us what you have accomplished on this digital investment that you are making financially is $0.63.
It's been excluded of consensus. What is reasonable to think as recurring cost going into fiscal 24?
Hi, Aviar. I'll start just with a reminder of what our digital program entails and how we're thinking about it. And then if there's any specifics we want to provide, Kevin can talk about the specifics of the spend for this year and how we're thinking about it moving forward.
So we're investing as you know $500 million to transform our company digitally and this of course is putting in the right technologies including a new ERP, but it really is around changing the processes.
and the work that everyone at Clorox does to be faster and simpler. And we see this supporting both our top-line momentum as we put in place innovation capabilities, better access to consumer data to drive insight, and speed of decision making as well as efficiencies as we have the ability to look across our supply chain and make decisions that reduce costs.
This investment is on track. I think Kevin highlighted that to begin with. You know, we'll see differences year to year. We're in the second year of the program, but the team continues to be on track implementing against that. What we've said is most of the investment is up front, but you get the majority of the benefit as you start to exit our Ignite strategy year in 2025. And that's because…
project by project to ensure we're getting that return, and we continue to be on track to deliver good value on this over the long term. As it comes to specifics, we talked about in our release that we are about to implement the first region of our ERP coming up this calendar year. That is on track, as well as some of the other technology improvements that we've made. And of course we have paired that with an operating model change.
That is also on track and in fact a little bit ahead from a cost savings perspective this year as we were able to implement some of those changes faster. But those two things in combination are really about being that fast, simple, and more cost effective company that we want to be and develop the type of resiliency and strength we can to weather whatever comes our way, another pandemic.
Sure, Javier, as you relate to the spending, what will happen is the $500 million is the cost, the investment to put these new systems in place. I think through the end of this year, we'll be a little less than halfway through that spend. So it'll be somewhere around $230, $240 million. And then that'll continue as we complete the program over the next three years. That's the one time investment with this.
Now there are ongoing maintenance costs, which we have in our legacy systems now, when those get shut off, there will be ongoing maintenance costs for a cloud-based system that we'll continue to pay. But the $500 million is the cost of the investment in this technology to get it put in place. That's very helpful. And if you're changing topics,
If you can comment on the underlying category growth on a volume basis so we can compare it versus... Thanks for listening!
your 11% decline now that omicron is behind us. And if you can give that assessment of volume category growth when it comes to your household penetration, Clorox products versus 2019. you know, you're having feet on paper and valuable resources, you're living on the couch. Less recently, 20% of
Thank you very much. As you would expect, given the elasticities of what we spoke about, and the fact that our pricing is generally in line with category pricing, category volumes are down. And we've absolutely expected that to be the case. If you look at dollar sales, so if you look at consumption, high single digits in our categories which continues.
to show the strength and resilience of the consumer in our categories. Given we compete in essentials, this is something that we expected. We're watching really closely as the consumer continues to react to pricing and as they continue to react to the macroeconomic environment, but right now feeling very good about the category position that we're in and consumer response to pricing.
Generally, we would expect over time as we begin to lap category pricing that you'd see category volumes return and get to that place where you see low single digit growth in our categories from a volume perspective over time. We are certainly not at that point right now as we have nine more months to lap pricing. And that, of course.
We're not seeing that type of trade down either as it relates to consumers making choices for private label, etc. That's been pretty steady. As we highlighted earlier, our shares in aggregate are flat. We grew in five of nine categories. We have seen private label increase share a bit in some of our categories, but it's not coming from us. It looks like it's coming from other brands.
over time as we continue to invest in innovation, in advertising, and in category growth trends with our retailers. And they have some penetration statistics. Do you have them?
Sure. Yeah, the household penetration is still very high for the Chorox portfolio. We're still in about 9 out of 10 home. And as we spoke about last quarter, you know, household penetration is something we expect to decline in a time when you take extraordinary pricing. But that's not a Chorox phenomenon. It is a category phenomenon. And what you see is people using those more, you know, pricensitive behaviors.
and we would expect over time to rebuild category penetration as we rebuild volume.
That's all for me. Thank you very much. Very helpful. Thanks, Javier. We'll hear next from Steve Powers with Deutsche Bank.
Hey, thanks. Actually, it's a good lead in. I just wanted to pick up on that household penetration discussion. Last quarter we were talking about it and I think the framing was that you were looking to rebuild household penetration over the course of – –
2024 and then looking longer term obviously. Just in response to Lauren's question earlier on volume growth, Kevin, your response, if I heard it correctly, emphasized stabilization of volumes. I just want to marry or tie those two things together and make sure I'm grounded.
Maybe it's a progression over the course of 24, but just so I don't walk away with the wrong impression. Thank you.
Thanks for the question. As it relates to volumes, I think for the next three quarters, given the pricing we just took in December , we would expect to continue to see volumes decline and we would grow top line based on price mix. As we get past that pricing and assume we don't have any other large scale pricing in our plan, then I think the balances start switching as we target that 3 to 5 percent top line growth.
You're driving that more through volume versus price mix. So then I think it reverses and then volume starts to be the primary driver of our top line. Supplemented with our innovation in trading consumers up, but more volume driven as we target 3 to 5% over the long term. But I think we're probably still a number of quarters away before we get to that more stable environment. We'll return to a more traditional model of top line being more driven by volume and price.
next. Yeah, okay. Okay. Thank you very much.
Yeah, OK. OK. Thank you very much. Thanks, Pete.
Your next question will come from Jason English with Goldman Sachs. Hey, good afternoon folks. Thanks for slotting me in.
A couple questions. Let's start with maybe the trade down. To Lauren's question earlier, you're clearly losing some volume sharing of our categories. You're saying usage occasions like they're not going to cheaper products, they're trade down. Where are you seeing those lost usage occasions out of your brand? Where is it going if it's not going to trade down?
And Jason, it's very dependent on category, the consumer behavior. But what I would say is we notice big buckets of the following. First, we see consumers trading to larger sizes, and they're looking for the best cost for use, for example. We also see certain consumers trading down to lower sizes because they're looking for the best cost for use.
and willing to put more elbow grease in to get that same amount of clean and trade off that price inconvenience. And then we're seeing behaviors, and this is really consistent across the category, where people are just trying to stretch something more. So, you know, they're getting every last spray out of a bottle, they're using a wipe longer, they're stuffing a trash bag, and that's pretty consistent.
across the category. But really those three first buckets are the really important ones as we see people trade into different sizes and then of course adjust their behavior. And the good news for us is in many cases we're able to capture that consumer because we offer different levels of convenience, for example, in our cleaning business. Okay, and Kevin.
Can you you mentioned a couple of sort of one time transitory benefits this quarter? Can you remind me what they were and quantify them and then related maybe do the adjusted math on this? Gross profit, we're all benchmarking as pre-COVID right? As you are too when you mentioned like cut recovery to margins. Your gross profit I think was up adjusted 19% versus 3Q19.
cumulative volume growth of three, suggesting that unit economics are up a lot, like 15.5% versus pre-COVID. And almost to Chris's question, like wow, you hold this, you're going to blow through a $3,233,000,000,000 gross profit next year at that level.
Is anything unusual or is that like, yeah, that's it. Your unit economics are that much better and we can run rate this. Yeah, Jason, on the two questions, I think the first question you had was one.
Is anything unusual or is that like, yeah, that's it. Like your unit economics are that much better and we can run rate this. Yeah, Jason, on the two questions, I think the first question you had was one time benefits of the quarter, we had to.
The first one was on trade spending. We have a normal process at the end of the second quarter. We evaluate our trade spending accrual. In this case, we're not seeing the promotional environment increase at the rate we expected, so we reduced our trade spending accrual. That was a one-time benefit in the quarter. And then the other one-time benefit was one of our competitors had an out-of-stock in our dilutable category, so our Pinesol business saw a pretty nice performance, double-digit growth.
as a result of that out of stock. Now the competition is back on shelf so we don't expect that to continue back to a more normalized level of competition. So those two items are the ones we highlighted as fairly unique for the quarter that we don't expect to continue into Q4. That generated about two points of top line benefit and about a hundred basis points of margin benefit for the quarter.
Then on unit economics, yes, we're committed to rebuilding gross margins and we are going to be, we expect to be a much larger company than we were before the pandemic. We went into the pandemic with a little over six billion in sales. As you know, we're sitting a little over seven billion right now. So you would expect gross profit to be higher because we rebuild gross margins. None of this stuff. So that is definitely a mystery and it is going to have a powerful impact in everybody's life.
and we are a bigger company that will generate more gross profit. So ultimately we expect that to occur as we rebuild margins over time. But as Linda said, we think that's a multi-year journey to get there. You know, we'll see how much progress we make in 24. We're developing those plans right now. But that is certainly our intent is to rebuild gross margins and then have the results of the impact of gross profit as it relates to that. Through a larger company.
Okay, yeah, sounds like this is a good benchmark to run right then. Thank you. I'll pass it on. Thanks, Jason. And our next question will come from Kevin Grundy with Jefferies. Great, thanks. Good afternoon, everyone. A couple from me. A cleanup on the SG&A. Kevin, I apologize if I missed this.
It looks like your SG&A on an underlying basis, X the digital, moved up about 50 basis coins from your prior guidance. What's driving that? This is another phone call to shoot out of yourmontage profile reached out to m mutual funds to our, Powerail and al have a thumbs up There likesBluemans Atleast tell us what you think A thank you to the To saw pan
Yeah, Kevin, if you just talk, I'll talk Q3 and I'll talk full year. So Q3, a little over 16%. We had a couple items. We had the digital transformation, which we highlight is about 150 basis points. We also had about 40 basis points from our operating model changes. A portion of those restructuring said an SDNA a portion sits in OINK. And so you're seeing some of that flow through an SDNA.
And then the other one was we have higher expected incentive compensation. We have a very strong pay for performance philosophy and as we've taken our goals up for the year, we expect our incentive compensation will be higher as well. So we've baked that in. So as a result, we went from 15 to 16 percent was our expectation last quarter. And now we're expecting closer to 16 percent for the year.
Got it. A couple more for me real quick. Just to walk from the 14.5% this year to the 13% ambition longer term, understanding it's going to take some time to get there. But broad brush strokes, what gets you from 14.5% this year to 13.5% over a reasonable amount of time? Fine, great.
Yeah, I would say one is if you just get to a normalized level and center conversation, it's going to be above target as our expectation this year. But if you just go back to target payout, you pick up, you know, 40 to 50 bips there. And then our expectation, you start looking at the operating model we talked about. So $75 to $100 million. We're going to generate about $25 million as our expectation this year. But that's a nice contributor as you look at 24 and beyond. And then you start getting the benefits from our digital transformation. We're still very early in that process.
to gauge sort of order of magnitude with the decision to take down the accrual. But I think like collectively everyone on the call would think promotion levels moving higher and not lower. And I guess particularly in your categories. So I was going to question for both of you. I was going to ask Linda just how you're thinking about great promotion, risk around that. But remember those brown areas. Ok.
Are you starting to have those conversations already? Are retailers starting to push already? They see what's going on with resident inflation more broadly. They see what's happening with this gross margin start to inflect. Are you starting to get more pressure there? And, Kim, maybe you could just jump in and sort of comment on the decision to take down a trade accrual with the likelihood the trade promotion is going to move higher over the next 12 months. And then I can pass it on. Thank you for that. Sure, Kevin.
we're continuing to see the promotional environment normalize, and the dynamic that happened is we expected the promotional environment to increase this quarter but did not increase as much as we expected. And that's a dynamic, and then Kevin can talk about the accrual as it relates to that. As we look just broader, though, in the environment on promotion, that plays a very specific role for our categories. We've talked about in the past that more than 90% of our business is done.
off the shelf with no pricing discount. And promotion plays a role to ensure that we talk to consumers about innovation, we talk to them around key holidays and pulse points where consumers, you know, are looking, for example, back to school or back to college or around cold and flu, and we use that to ensure that we're speaking to consumers about our products, the values they offer, and new innovation. That continues to be the focus that we have on the promotional environment, and those are the discussions we continue to have with retailers.
We're not afraid to use promotional dollars if we have price gaps that we need to adjust on a temporary basis, and we will do that. We are doing that right now, as we have a couple of price gaps that are out of line that we spoke to earlier. But generally, you know, Promo continues to be a strategic investment lever for us to ensure that we're in front of the consumer when we need to be and when it matters from an innovation and health point period.
perspective. And then, I would just add as it relates to the trade accrual specifically, and Linda said it well, which is, it's not that we expect tradesmen to go down, it's just not growing at the rate we expected. We, before the pandemic, about 25% of our product was sold on some form of promotion. In our most recent quarter, it was at 20%, and if I look at two through a year, it was at 19%. So, it is increasing.
we expect that we get back to more of that pre-pandemic level faster. And so the reduction in the cool is just recognizing that it's not as growing as fast as we had anticipated. But we do expect a continued increase.
Thank you both. I appreciate it. Good luck. Thanks, Kevin. And that concludes the question and answer session. Ms. Rendell, I'd now like to turn the program back to you. Thank you, everyone. We look forward to speaking with you again on our next call in August . And until then, please stay well. And this concludes today's conference call. Thank you for attending. Thank you.
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