Q4 2023 The Clorox Company Earnings Call
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Yes.
Good day, ladies and gentlemen for.
So the Clorox company fourth quarter fiscal year 2023 earnings release conference call. At this time, all participants are in a listen only mode.
At the conclusion of our prepared remarks, we will conduct a question and answer session. If.
If you would like to ask a question you May press star one on your Touchtone pad at any time, if anyone should require assistance during the conference. Please.
Press Star Zero and you touched on pad at any time as a reminder, this call is being recorded.
I would now like to introduce your host for todays call Ms. <unk> <unk>, Vice President of Investor Relations for the Clorox Company Ms. Brad you May begin your conference.
Thanks, Ross good afternoon, and thank you for joining us on the call with me today are Linda Randall, our CEO and Kevin Jacobsen our CFO .
Hope everyone has had a chance to review our earnings release and prepared remarks, both of which are available on our website.
And 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 our fiscal 2024 outlook. These statements are based on management's current expectations, but may differ from actual results or outcomes. In addition, we may refer to certain non-GAAP financial measures.
Please refer to the forward looking statements section, which identifies various factors that could affect such forward looking statements, which has been filed with the SEC.
In addition, please refer to the non-GAAP financial information information section of our earnings release, and the supplemental financial schedules 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 we closed out fiscal year 2023 with strong results underscoring the significant progress we've made against our strategic priorities over.
Over the course of the year, we've been relentlessly focused on driving topline growth and rebuilding margins in a challenging operating environment, while continuing to invest in the long term health of our brands categories and capabilities.
Thanks to our team's strong execution across our comprehensive set of actions we delivered on these commitments.
For fiscal year 2023, we generated net sales growth of 4% within our long term target gross margin expansion of 360 basis points and adjusted EPS growth of 24%.
Our performance reflects our commitment to driving operational excellence and margin improvement supported by the strength and resilience of our portfolio and the relevance of our ignite strategy.
In addition to delivering results over the short term, we made progress on our ignite strategy. The investments, we're making to deliver consumer inspired innovation strengthen the superior value of our brands advance our digital transformation and streamline our operating model are positioning us to drive long term profitable growth.
As we look ahead to fiscal year 'twenty 'twenty four we are clear on our priorities.
While we expect the environment remained difficult with macroeconomic uncertainty persisting, we are committed to building on our progress and have plans to enhance our value superiority at a time when it matters most to consumers.
We believe these actions will enable us to continue to drive topline growth and rebuild margins back to pre pandemic levels and put us in a position to grow share and household penetration over the long term.
I'm confident we're taking the appropriate actions to build a stronger more resilient company positioned to win in the marketplace deliver on our operational and financial goals and create long term value for stakeholders.
With that Kevin and I will take your questions.
Thank you Ms Rendell, ladies and gentlemen, if you have a question. Please press star one on your Touchtone telephone pad now.
And our first question comes from Peter Grom from UBS. Please go ahead Peter.
Thanks, operator, and good afternoon, everyone. So I wanted to ask two related questions on the top line.
Maybe first I know you called out stronger shipments in cleaning and some early shipments for back to school, but the minus 2% volume performance was certainly stronger than what we can see in the tracked data was that largely due to the shipment timing that you mentioned or is there just strength elsewhere, that's not being captured by the data and then just second on the.
Organic sales guidance of 2% to 4% you mentioned a mild U S recession in the back half you've provided some color on savings starting with mid single digit growth in <unk>.
Be curious to get your perspective on that.
Balance of pricing versus volume and that outlook, specifically as we need to be a year.
And do you expect volume growth at some point in the back half. Thanks.
Hi, Peter I'll start with your first question, then I'll hand, it over to Kevin.
So on Q4 over delivery versus what we had expected as we noted we did see stronger consumption across the board are across our categories in aggregate and that's a result of two things mainly the first being elasticity has continued to be better than they had been historically.
And that's an aggregate comment you know, we see differences by category, but in aggregate, they're favorable and trade promo has been normalizing at a slower pace than we would expect them and well continue to see that normalize as we go through fiscal year 'twenty four but for Q4.
It wasn't to the degree that we thought it would be so that's that's the first bucket stronger consumption.
The second is a better operational performance by our team and that's just a broad statement across the supply chain, we were able to make some supply that we didn't think we would have or shipments to retailers were stronger than we had expected just a lot of the things operationally came together with great execution and supported that growth and then finally in king.
For <unk> and we spoke about in Q3.
We did not perform to our expectations in Q3, we made significant adjustments to the plan, including working with retailers on category growth plans.
And having the right merchandising and those performed significantly better than we had expected which was great to see the consumer reacted very favorably and retailers executed with excellence and those are really the big three main buckets between what we saw.
And what we expected.
And then Peter I can I can talk about the our plans for fiscal year 'twenty four as it relates to sales and as you saw we're projecting 2% to 4% for the year.
If you think about the front end from the back out our expectations for sales to be closer to mid single digits in the front of house excuse me and then low single digits in the back half.
And that that phasing from front half to back half of it I'd call out a few items. The first is as you saw in our prepared remarks, we're projecting a mild recession in the back half of our fiscal year, which would be the front half of calendar year 'twenty. Four so we think that will put a little bit of pressure on consumer general categories, and we've reflected that in our outlook.
Other items to be aware of as we are now going to lap the four rounds of pricing we've taken when we get to the middle of the year So that fourth.
Rice increase we took last December we will lap that when we get halfway through the year. So the second half of the year, we'll now have lapped all the pricing we've taken so as a result of that we expect to see is you'll see improving volume trends as we move through the year and you'll see the benefit of price mix larger than the front half and it really started to tail off in the back half and so as we get that.
That low single digit growth it'll be a combination of some price mix, because we're still doing a little bit of pricing internationally, improving volume trends, but recognizing we still think it can be a difficult economic environment for consumers.
Thank you, Brian I'll pass along.
And our next question comes from Anna <unk> from Bank of America. Please go ahead Anna.
Good afternoon, and thanks very much for the question.
In your fiscal 'twenty guidance, you are expecting flat to 2% net sales growth. This is a little bit below your long term algorithm from your ignite strategy of that 3% to 5% annual sales growth I was wondering if you can comment on when you expect to return to the 3% to 5% net sales growth on a more normalized.
He says and in addition, what do you see as the drivers of really achieving that sales growth longer term. Thank you.
Yeah, you know, 2% to 4% organic sales growth and zero to two from a reported is is what we're expecting now and that is slightly below what we want from a long term perspective, but just to put that perspective of course, if you look at our four year CAGR and our strategy period, we did deliver in the midpoint of that range.
At 4% and again, 4%. This year this year coming up is that kind of a tale of two halves is the way I would talk about it and we expect stronger growth in the front half as we continue to lap the two price increases that we have.
And then in the back half, we expect it to get tougher for consumers and right now our expectation is a mild recession. So when you put those things together I think in aggregate we feel good about the top line that we've committed to in addition that includes about one point of a headwind from our vitamins minerals and supplements business as we spoke about over the long.
Couple of calls we have re engineered that plan to focus more on profitability and we've done that at a tradeoff from a topline perspective. So that does include a one point headwind and over time, we would expect that that wouldn't be the case and that that would help us return to getting them within that that three to five.
The way I would think about this.
As we March through the year, we are expecting again lapping two price increases we are expecting our elasticity has to be more normalized as we go through the course of the year, we're expecting trade promotion to normalize as well and then we're expecting a mild recession in the back half those are all of our assumptions informing that growth.
If those come true we feel you know this plan is a very balanced plan, but we'll be watching really carefully as we move through the year. If any one of those assumptions change and we need to adjust our plan that could impact both on the high end and the lower end of us delivering against what we put out there from an outlook perspective.
Thank you and just wanted to ask a follow up on just on marketing spend versus promotional levels you have.
And that advertising as a percent of sales do you intend to spend about 11% in fiscal 'twenty four versus about 10% in fiscal 'twenty. Three do you feel this is the right level of investment given our ramp in marketing spend versus some peers in the space and also just in terms of the balance of advertising spend versus promotional levels in fiscal 'twenty four it does.
Sounds like you're ramping back up on on promotional levels and is this an intention to get back to pre COVID-19 levels of promotion as well. Thanks.
Sure. So on the marketing spend as you rightly noted we've spent about 10% of sales on advertising and sales promotion.
Over our history and there's times, we spent more than that this year, we're targeting 11% and we think that's a prudent investment given the pressure that consumer is going to be under from a macroeconomic perspective. The fact that we are coming off of four rounds of pricing.
Significant price increase obviously cost justified, but we want to continue to support the consumer as they transition through that.
And so we think 11% is the right number and you two data points that give us confidence that 11% is the right number during the pandemic, we took our advertising spending up.
Even at a time when we couldn't fully supply.
That increase in advertising led to stronger superiority ratings for our brands and that gave us the confidence to take the four rounds of pricing that we took so we think again in a time, where consumers are pressured and stressed investing that additional point of advertising makes a lot of sense.
And then the second data point I would give you is that we've been on a journey to get to know 100 million consumers in the U S and that will allows us to personalize to them. This was part of our ignite strategy. We've nearly met that goal and that has led to a return on investment and our advertising being the highest ever was we reached a high point. This year. So we feel really good about putting that extra point.
Because we know what we're going to get from a returns perspective. In addition to supporting the superiority of our brands.
And again, we'll continue to evaluate this moving forward it doesn't mean, it will necessarily be 11% thereafter.
This is really a roll up of what we think our general managers need to best support our brands during this time.
And then from a promotion perspective promotions continue to be lower than they were pre pandemic, but are ramping up our expectation is throughout the course of the yard will return to more normalized promotions. So similar to what we were pre pandemic.
And we assumed to be fair, though this year that would ramp up faster and it hasn't but based on what we're seeing in the data we think that's a fair assumption.
And again, we wouldn't be targeting going beyond what we were pre pandemic, but just returning to those levels that we had and for our categories that still means the vast majority of our sales are done off the shelf with no price reduction most of this is good quality merchandising targeting and the consumer around key price points etcetera. So we think those in combination are the right level of spend give.
The consumer dynamics, given what we see from a return perspective, and what we think is needed to grow categories, an integral share over the long term.
Great very helpful. Thank you very much.
And our next question come from Dara <unk> from Morgan Stanley . Please go ahead Dara.
Hey, guys good afternoon.
So just.
I wanted to touch on the fiscal 'twenty four guidance Youre, assuming gross margins come in well below the fiscal Q4 level and the level in the back half of the year.
You've got $200 million of higher costs, you mentioned in prepared remarks first can you just give us some more details specifically on that bucket and what's driving cost increases.
And then B just as you think about it conceptually.
Lack of sequential progress versus the back half of the year, even though obviously, it's up year over year for the full year, just I'm wondering how that fits in with your goal to eventually move back towards those pre COVID-19 gross margin levels and why not more progress. This year again, specifically relative to that back half. Thanks.
Yeah happy to take those questions Dara, maybe let me start with cost inflation and what we're projecting for this year.
And maybe if I step back and just think a little longer term in terms of what we've been dealing with you folks know fiscal year 'twenty two are really difficult year, given the extreme levels of cost inflation about 800 million.
Last year, we experienced about $400 million of the cost inflation and this year, we're projecting about $200 million.
So sequentially getting better its moderating, but we're still expecting to operate in a higher cost environment as we look at that $200 million of the supply chain inflation. There theres really two areas, we're predominantly seeing those cost increases coming through.
Say about a third of that we're projecting will hit in commodities.
There's a number of items, we still are seeing inflating, particularly chemicals substrate corded and linerboard were still looking at rising costs year over year resin for us. We're looking at is a fairly neutral cost. It came down last year and we're assuming it would be relatively flat this year.
And then we are seeing some cost declines in some of our AG products diesel, but overall, we think that bucket will be modestly inflationary and then the other item. We're looking at really gets particularly manufacturing and warehousing, primarily driven by labor. We continue to expect to be operating inflationary environment. So those are the primary buckets, where we expect to see that too.
Hundred million.
Now on the gross margin.
Goals this year and the phasing of those as you said Dara work, we're expecting to continue to make progress rebuilding gross margin and you folks know we've talked about this quite a bit we're committed to getting back to those pretty bad numic levels of margin.
I think we've made good progress last year, we improved about 360 basis points, we expect to build on this this year expect to get another 150 to 175 basis points of improvement and so by the end of this year, assuming we deliver this plan will have recovered a little over 500 basis points of that 800, we lost now in terms of phasing I'd say typically clorox has.
Some seasonality in terms of our margins typically our fourth quarter is our highest margin and that's particularly because we do a disproportionate amount of our kingsford business in the fourth quarter I think as you folks know we sell about 50% of kings for the fourth quarter and it's a very profitable business. So that tends to generate our highest margin and then typically Q.
Two is our lowest margin 0.1, because we do very little kings for as well as we do some a lot of gift packing on our <unk> business, which is a great.
Great activity to drive awareness and trial, but it comes at a lower margin. So you should normally think about our business once we've gotten past the normalization in the pricing and all the disruptions. Historically Q2 is the low point and then Q4 is our high so I think it's better to look on a year over year basis versus sequentially quarter by quarter now.
In Q1, I expect we'll make good solid progress now not to the same degree in Q4.
560 basis points, because we've now lapped that third round of pricing starting now and so you should expect it to step down and the benefit of pricing, but I expect to have a good solid Q1, and then what I expect to do is continue to advance margins on a year over year basis, and as we said, where we're targeting to get to about 41% this year.
Okay and are you assuming any incremental pricing next fiscal year I'm, assuming you're not is that more just a pause after all the pricing you've taken and maybe you can return later on and then if I'm not Overstaying My welcome Linda can.
Can you just comment on household penetration and your performance this fiscal year, particularly in light of the comments around the ROI on marketing being at all time high in.
The personalization, reaching nearly 100 million consumers.
Yeah, Dara I can start with our pricing assumptions in the outlook, we have not assumed any broad based pricing in the U S. Similar to the first four rounds. We've taken now we will continue to price internationally because of the higher inflation rates were experiencing there and we also continue to focus on net revenue management activities, but Georgia broad based pricing, we don't have anything is.
In the U S. This year.
And then your question on household penetration.
You know when we've talked about this a bit over the last few quarters household penetration along with volume.
Were things that we knew were going to take a hit as we took the level of pricing we have over the last 18 months.
And we've certainly seen that and this is a category comment not just the clorox brand comment, but what we tend to see is people, having short term reactions from a behavior perspective, and they adjust as they see the initial shock of pricing and certainly they've seen four rounds, they've had to adjust to so typically what we see as we see consumers.
Looking to go to alternate.
Maybe they use the inventory they have in their home.
They delay a purchase cycle.
They look they they engage in value seeking behavior. They trade up to larger sizes are smaller sizes and in very extreme cases, they leave the category.
And then from a household penetration perspective, a number of those factors play in we've seen some light users exit the category, which isn't a big surprise. It's typically what we've seen during price increases and I think importantly to note again. This is a category behavior not a clorox brands behavior.
And then what we're focused on of course is over time, returning that household penetration and I think it's important to put in perspective, we're still in nine out of 10 U S households, with our portfolio.
But we want to be in a place where we're growing household penetration again, so what I would what I would think about is all the investments that we spoke about a little earlier.
The increase in advertising and sales promotion as well as our focus on innovation and category growth plans are all in service of returning to volume growth returning to household penetration growth and then of course, our aim over the long term to grow share I mean would expect household penetration to begin you begin to improve as we get through pricing and as we move through the course of the year on them through the course of our plan.
What I would say, it's very in line with our expectation and we felt good about the plans we have in place to continue to make progress on household penetration in fiscal year 'twenty four and beyond.
Okay.
Yeah.
And our next question comes from Filippo, Florida from Citi. Please go ahead Filippo.
Hey, good afternoon guys.
Just wanted to ask a question on gross margin again totaling up to <unk> question.
What drove the outperformance relative to your plan in Q4.
Seemed like cost savings came in well ahead.
A lot of expectation and it was a record year for you guys, particularly Q4.
And how much was the incremental volume leverage from the better.
Some better volume trends and then as you think about next year, how should we think about cost savings.
Also another year of above.
With them. Thank you.
Yeah. Thanks Filippo for the question as it relates to Q4 and you are right the over delivery on gross margin versus our expectation, we went into the quarter targeting 40% to 41% gross margin and as you saw we delivered just under 43% I would say for the most part as you look at the various drivers of gross margin, they're generally in line with our expectations.
Asian that was certainly true for cost savings pricing and commodities. The biggest variance was our topline performance and particularly on volume and so volume only declined 2% for the quarter. We had projected a larger volume declined in the quarter as a result of that and had improved operating leverage that really flowed through the entire P&L. It's certainly benefited gross.
Margin, but it also was a primary driver of our very strong earnings performance for the quarter.
And then as we go forward and on your question on cost savings look our our team did some just terrific work. This year, we target of 175 basis points of EBIT margin expansion each year through cost savings.
In fiscal year 'twenty, three we delivered well north of 200 basis points, and that's really a credit to the team and the work they're doing to drive cost out of the system and I fully expect to have a very strong year. This year as well. So I would expect this year, we'll have another strong year, there's probably north of 200 basis points and that's incredibly important because as we said we continue to operate in inflationary.
Environment and for Us to continue to grow margin, it's really based on the good work. Our team is doing both on driving cost savings and driving the supply chain optimization work, we're doing and that's allowing us to absorb that increased inflation and continue on our progress rebuilding margin. So really good work by the team in and exceeded our goals both last year and I expect to do it again this year.
Great.
Okay, and then a high level question, Linda just a new guidance on top line.
You mentioned you expect a sequential improvement in volumes throughout the year, just what gives you guys the confidence of the volume coming back other than obviously the comparisons but like at a high level.
Is it incremental advertising investment already out there specific point that you can point to give us some confidence on the volume improvement. Thank you.
Yeah and volume maybe just to take a step back I think would be helpful in and talk a little bit more similar.
Similar to my comments on household penetration of what impacts volume and then what we believe will see over time.
As we've returned to more volume based growth from Maher.
Pricing driving growth. So you know the big picture on this we knew we were going to make a volume trade off with the level of pricing that we took and certainly that pricing was cost justified and I think that's the right trade off given the fact that we were able to deliver the topline and margin progress that we committed to and it's only one lever that we look at it understanding you know Brandon.
Category Health. So if we if we look at volume again, what impacts it consumers are adjusting to pricing right now and we still have two price increases that will lap here in Q1 and Q2. So there are still adjusting to what the pricing is and they're adjusting to pricing well beyond our categories. I think it's also important to note. There is an element of cross elasticity here everything.
In their world has changed from a wallet perspective, and they also just came through a pandemic and they want to have experiences. So we're watching that consumer settle out what we're seeing in our data as volumes are beginning to improve you saw that if you looked 52 weeks our volumes were down more than they were in the latest 13 weeks. For example, so we are making improvement we still have to lap.
Those two price increases, but from a consumer behavior standpoint, what youll see is consumed.
Consumers will return to their old routines, because those routines, we're the most efficient and effective for them and particularly in essential categories.
Don't want to have to work harder to do that stuff. So perhaps they run through the inventory they have in their house, maybe they tried in alt, a and alternative and it doesn't work as well and we tend to see those people start to come back. We also those light users at the category lost tend to come back again, because we reintroduced our products to them through innovation.
Use our advertising spend to talk to them about the benefits of the product, we remind them that and they pick us up again.
They send their child back to school or with their family experiences a run of cold and flu in the house. So those moments we tend to bring those light users over and volume tends to grow again, and we've seen that every time, we've taken pricing and that's consistent and categories. I think what's unique for this time is.
The amount of inflation, our industry and clorox experience specifically.
Is unprecedented we certainly not taken this level of pricing. So it really will be about the pace that this happens at.
But we're happy with the progress we've made so far we think we have the right plans in place, we're making the right investments our brands are still a superior value versus what they were pre pandemic. So they are very strong and we believe over time again, we will make progress on volumes and returned to more volume based growth looking forward.
Great. Thank you guys.
And our next question comes from Andrea Teixeira from Jpmorgan. Please go ahead Andrea.
Thank you good afternoon, Hello, everyone. My question is on the shipments and consumption.
If there is any trade off you mentioned volumes came in better than anticipated.
And was driven by was it driven by consumption or do you think retailers will also be building inventory.
Given that consumption was better than feared.
As you as you exited the quarter do you see you.
Inventory levels are where they should be and then related to that I also have a clarification on the assumptions for the mild recession for the second half and in your comments about like volumes coming in.
Better than anticipated so but on top of that you said the category behavior has been changing.
Is that some more price lists to study you.
That you saw towards the back end of the quarter or.
Are your exit rate in the quarter or you're just prudently that at some point are you going to see that the historical Chrysler once you once you can.
Hey, Andrea let me maybe start with your shipment consumption question and then Linda can.
Dress price elasticities.
As it relates to the fourth quarter I think there's a few things we were seeing and I I'll talk both versus our expectations and on a year over year basis versus our expectations. As you know we had anticipated about 3% to 6% organic sales growth and we delivered much stronger growth in the quarter that was primarily driven by consumption coming in stronger than we had.
Dissipated so the consumer is still quite resilient and we haven't seen any drop off in consumption. As we look Q4 to Q3, and we expect that we might see some drop off in consumption and that didn't materialize and then the other driver of our performance was kingsford and as you know we talked quite a bit about that last quarter.
We were disappointed with our results in the third quarter, we made some changes to our plans and I would tell you we're a bit cautious on what exactly will you be able to accomplish in the fourth quarter, but a credit to our team. We had very strong execution that business grew both volume and double digit in sales are at a very strong performance and that was the primary drivers to the over delivery.
The other element to think about though as it relates to inventory, we think retailers generally have the right inventory levels.
But one of the reasons, we had very strong growth on a year over year basis is if you think about last year retailers, reducing inventory levels and at the time as we were all getting more comfortable with the resiliency of the supply chain, everyone was starting to take down their safety stocks and we saw that last year with retailers reducing inventory.
And if you think about what's really happening when they do that what that means is retailers continue to sell to their customers, but they don't reorder from the manufacturers, so they're still selling product and not not reordering from us and so last year, our shipments lagged consumption. This year as you fast forward, we saw our shipments much closer to consumption because of <unk>.
Tailors, we're not adjusting inventory levels. So on a year over year basis that drove much stronger performance that was particularly true in our in our home care business, where we saw inventory reductions a year ago, we saw in particularly in wipes. We saw a very strong wipe shipments. This Q4, which was really now we're shipping in line with consumption, which was not the case a year ago.
That really contributed to very strong year over year performance in that 14% growth and then Linda I know she can speak to elasticities.
So on elasticity, what we saw in Q4, specifically was continued in aggregate lower elasticities than pre pandemic and lower than we had expected again. This is nuanced by categories or some categories that are less favorable etcetera, but in aggregate. Our elasticity is were more favorable than we expected what we <unk>.
That to happen in fiscal year 'twenty four is over time, those elasticity as return to more normalized levels and it's not anything related to particularly our categories, but just the broader pressure that consumer is under.
So if you look at what's going on certainly balance sheets for them are returning to pre pandemic levels, particularly savings rates, where the consumer had a lot of excess savings over the last few years.
Right now our we are anticipating a mild recession in the back half we think that's the most prudent plan based on what we're seeing for our economic predictions in the U S that will put additional pressure on the consumer as well and we think those factors in combination will lead to more normalized price elasticity and that's what we have assumed in the plan.
That's helpful and on the just a clarification the impact of inventory write down not lay down between inventory rationalization last year.
It wasn't like a low single digit headwind.
NAND is up here this year.
Oh normalized.
Yeah, Andrea Youre exactly right last year, we anticipated there was a couple of point headwind as a result of the inventory reductions at retailers and so we didn't have that impact this year. So year over year, that's a source of benefit and part of the 14% organic sales growth. We delivered this year part of that was driven by lapping that inventory reduction in the prior period.
Super helpful. Thank you I'll pass it on.
Okay.
Yeah.
And our next question come from Chris Carey from Wells Fargo. Please go ahead Chris.
Hey, everyone.
Hi, Chris.
Yeah.
Just one one quick follow up on the gross margin assumption.
Kevin you said in the prepared remarks.
That commodities would still be a bit inflationary.
What are those commodities I know I know, there's always a lag.
Just curious.
What are you seeing that just given.
The favorability that we.
We can see on on this side.
And then I have a quick follow up.
Sure Chris as it relates to commodities and within that 200 million. We said about a third of that we see is coming from commodity inflation. So that'd be roughly 60 million or so yeah, I would say, there's a few areas, we're seeing substrate, some chemicals and some corrugate linerboard inflating year over year now that's partially being off.
Said in a number of areas, where we are expecting some deflation, particularly in AG products soybean oil. We also expect diesel down year over year.
And resin, we've got about flat on a year over year basis, so, it's not necessarily contributing or helping.
But that's really what we're seeing in terms of our commodity basket and it's modestly inflationary certainly an improvement from where we were last year, but still modestly inflationary as what we're projecting.
Okay, and then just on the organic sales over delivery.
Non tracked charcoal comping.
So under shipment in the base.
And then stronger consumption and make sure.
Anything else coming up a lot. This evening, okay alright. Thanks.
Those are the that's just the <unk>.
Our drivers.
Okay great.
A strategic question Linda.
It.
It's interesting how far this hole.
Spectrum on investment has come.
This evening, it's almost like are you spending enough and you are talking about higher advertising spending really strong SMA.
Yes.
Maybe it'd be helpful. Because we're getting through earning season now.
What's your take on why we're seeing this.
Really significant step up in investment levels, not just from Clorox. It from all of your peers marketing spending SG&A or just go into levels have not been keen in a very long time is this just a lot of manufacturer thing we need to get volumes growing or are you are you feeling a lot more push from the retailers to get volumes go.
<unk>.
Yes.
What are your thoughts on maybe why this investment cycle is coming together.
Some of the key drivers.
Yes, because he was going so that's a big question, but thanks for any thoughts.
Sure, Chris I won't speak on behalf of the industry I will certainly let everyone speak on their own behalf, but I can just give you the insights into how we're thinking about it and and I think it's a pretty clear understanding.
He had headed into Covid, we had.
<unk>.
Learned a lot about volatility and the impact it had on our business and so we began investing more.
Number of years ago to ensure that we had the right digital foundation that we have the right organization suited to a more volatile environment that.
We have the right capabilities to ensure that we continue to lead from a consumer insights perspective and that the data we have flows as fast as we possibly can get it out so that we can make quick decisions. So that was certainly an area for us where we need it needed to invest within our digital transformation in our operating model to ensure we could react as fast as consumers could be and we want to be more consumer up that.
<unk> faster and leaner.
And then if you look at the bucket on promotional spending you know I look at that as more of a return to the norm and for us that spending is.
On good faith, we spend mostly on quality merchandising, we do that to introduce consumers to innovation, we do that to remind them and keep health points of the year of like back to school back to college.
Remind them the great products that we have introduced them to new benefits et cetera, and so seeing that return to more pre pandemic levels I think.
It makes good sense given that the industry can fully supply now we can certainly our supply now and so we get back into that good cadence of giving the right information to shoppers and then on the NSP, which we have decided to take up is as you know from 10 to 11 and we addressed earlier I think this is another case where are the number one.
Thing that we can do right now is ensure that we have superior value for our consumers.
And we have that from a ratings perspective.
Over the last couple of years, we reached the highest brand superiority overall from a portfolio perspective, we've ever had we continue to have more of our portfolio superior than we did pre pandemic and we think given the stress the consumer's going to be under it would make absolute sense given the improvement we've made on margin to invest a bit more in advertising and sales promotion to secure that with consumers.
And that's how we're thinking about it we have great brands, great innovation, great products, and we want them at this time, when they're making those choices in their total basket of spending to remind them at in our household essential categories, no one delivers a better value than cloth and.
And that's exactly what we're focused on so to me I think it is it's exactly what we do we focus on the long term, we focus on building brands and spending is right in line with doing that.
Thank you Bob.
Thanks, Chris.
And our next question comes from Javier Escalante from Evercore ISI.
Please go ahead Javier.
Hi, good afternoon, everyone.
And I have another permutation of this thing.
Sure.
Absorb.
Retail sales in tracked channels versus the over deliver in the quarter, but hopefully it's one that you put in Angola.
If you can talk about old tunnel retail sales growth.
If you give us a sense of.
What were Clorox is key.
Q4 <unk>.
Retail sales.
Including.
<unk> line.
Home depot and things like that.
So we can better understand your guidance going into fiscal 'twenty. Four so if we can start with that and I haven't follow up.
Javier Let me let me see if this helps if you look at our Q4 performance and I think your question is sales across many different channels.
As you saw very strong growth. If you look at track channels, that's true, but what I'd also tell you some of the areas that are not showing up in tracked channels, we had very strong performance or.
Our PPD business grew both volume and sales in the quarter and international we held volumes and grew sales, 14% organically and then our non track sales were even stronger than track. So we're seeing broad performance not only in tracked channels, but we're seeing it in all the areas, where we're selling product and that contributed the overall perform.
<unk>.
Of the business and Thats why you will probably see even stronger results in what Youre seeing if youre just looking at a track channel performance.
Well the reason I'm asking that is because I think lindon mentioned consumption with a stronger Ryan. This is part of the over deliver.
In the quarter, but we don't see that interact channels, we see retail sports books at six both in the March and the June quarter and then there is this very big difference in.
Organic sales.
Particularly on the volume side. So wondering if you could at least.
Let me tackle differently, what do you what percentage of your sales are you seeing non track channels.
Typically in this quarter given the seasonality of Q4 that would be helpful.
Javier maybe it would be good just to back up again and go through make sure. We go through all the drivers of what drove track consumption versus organic builds and Kevin just covered part of it.
But we do have a fair amount of our sales and non tracked channel. It's a little complicated because non tracked does not include international PPD, which is why Kevin broke it out the way you did so.
To break it down we had Q4 organic sales growth of 14% and we subtract he'll consumption of about 7%.
So the Delta would be what Kevin highlighted international in PPD, our portion of that PPD grew volume International health volume.
Remember that we're lapping wipes inventory that Kevin spoke about and that's a portion of it and then we saw.
Stronger non tracked.
Performance in a number of retailers on a number of businesses.
And that's across e-commerce, and brick and mortar et cetera, and then in addition to that we didn't we haven't spoken a lot about this yet, but we do always ship some of our Q1 events in Q4 and that contributed to that delta as well, but.
But we do have a strong non channel tracked channel presence and so yes that absolutely can move the number and this is pretty normal for us to have a quarter that is a bit disconnected from track channel sales and.
In addition that you have the fact that we have very strong merchandising in Q1 as we normally do and we typically ship some of that in Q4, but those are really the if you look at those those four buckets. Those are the four buckets of the difference between the 14 and the stomach.
Well. Thank you Anthony we're seeing something when it comes to pricing for next year, how much is the carryover impact for fiscal in fiscal 'twenty four.
Javier at this point is pretty minimal what we have left to lap is the fourth round of pricing we took for half a year. So if you look this year, we had in total about 670 basis points of total benefit for the year you should expect a much smaller benefit of just 24. It because now we're looking at just half a year.
On one of our pricing actions in the fourth round was not as large as the third round.
Okay. Thank you so much very helpful.
And our next question comes from Olivia Tong from Raymond James. Please go ahead Olivia.
Great. Thanks, I just wanted to revisit gross margin because the pace of gross margin expansion in fiscal 'twenty four versus what you just reported obviously.
A fair bit of deceleration.
But I'm trying to understand I mean fiscal 'twenty three recovery in gross margin wise, we're still meaningfully ahead of your expectations.
Why is that.
The pace of expansion is slowing so much in fiscal 'twenty, four because cost inflation, while maybe not down it's certainly less of a pressure versus last year pricing is by and large working.
The top line.
It is growing and gross margin is still quite a bit below pre COVID-19 levels, So would love a little bit more color on that thanks.
Sure Olivia as it relates to gross margin as you said, we continue to expect to make progress. This year. So our commitment is to rebuild gross margin back to pre pandemic levels. This year were looking at about 150 to 175 basis points of progress.
Is that slowing from what we delivered last year and is primarily driven by pricing. So we took four rounds of pricing realized 18 months and that had a significant benefit last year. It contributed over 650 bps to gross margin as we look at fiscal year 'twenty four as I was just mentioning the half year, we have fairly limited pricing in the plan, we're going to get a little bit of carryover on that.
Fourth price increase so we'll have a smaller impact on gross margin and then we're really able to grow margin based on all the very good work. Our team is doing on cost savings and supply chain optimization. So in spite of still dealing with about $200 million worth of cost inflation. We believe we can more than offset that through the good work, we're doing within the supply chain.
And continue to grow gross margins.
And so while we're making good progress I'd expect that to continue as we move into fiscal year 'twenty, five and expect that progress to continue.
The one thing we'll have to look at over time is we've bought these these commodities for decades. They are cyclical at some point they'll turn deflationary.
Not our expectation this year, but certainly when that occurs that will certainly accelerate the pace of recovery. It just hard in this environment to predict exactly when that's going to occur, but we feel very good about our ability to rebuild margins back to those pre pandemic levels and we know that's going to take some time to get there, but I have to tell you I feel very good about the progress we're going to continue to make this year in spite of ongoing inflation.
We're dealing with.
Olivia I'll add just one point to that Kevin underscored the $200 million, which is.
Significantly better than what we had a $500 million in fiscal year 'twenty, three but I just want to underscore that still three times the level of average we had you know before we got into this inflationary cycle on an average year of inflation. So I think the point that Kevin is making is really important to understand this is still a very challenging environment with significant cost inflation although.
Certainly better than we experienced over the last two years.
Got it and then on the top line as you look towards rebuilding volume as the year progresses can you talk a little bit about innovation and what role that plays.
And in your view what.
What kind of impact us in a position have on this year versus last.
Sure innovation continues to be the lifeblood of how we grow our brands over time, and we set out to deliver a bigger stickier innovation platforms as part of our ignite strategy and we've talked about the fact that we've been able to have more net contribution from innovation in our strategy period than we did.
And the prior strategy period, and we're going to continue to focus on accelerating that this year.
We have innovation across our portfolio just as we did this year. So all of our major brands launched innovation in fiscal year 'twenty, three and we would expect something similar in fiscal year 'twenty four.
Really focused on value and value superiority in that innovation. So we're looking at a combination of product improvements and new innovations as well as good claim support and of course, we'll support that innovation with that 11% of sales from an advertising and sales promotion perspective, but we think as we lap these price increases.
That is a consumer comes under more pressure innovation will be as important as it ever has been and certainly our retailers are looking for innovation to help them grow their categories.
To ensure that we're getting shoppers down the aisles et cetera, So what I would say, it's a continuation of what we've done of course, we want to we want to have additional progress as we can and we think we have the right investments to ensure that that continues in fiscal year 'twenty four.
Great. Thank you.
And our next question comes from Lauren Lieberman from Barclays. Please go ahead Laura.
Great. Thanks, so much.
So I was just taking a look playing online model looking at kind of the dreaded multiyear stacks.
And then looking at the two year stacks on volume and on price mix for this quarter in particular like all your comments make frankly more and more sense on the things you were lapping the contribution for example for charcoal.
Price mix that that you know.
The inverse probably I guess for whites on health and wellness.
I was curious as we look forward.
Any other periods because the stacks are messy that you think should be called out where there is the dynamic of retailers, having reduced inventory in the prior year, so that we should be particularly keen.
For differences in shipments versus what we're seeing in tracked channels. Knowing there is always on track that we won't see.
Lauren.
It has certainly been as we said bumpy. This is now this is everyone understands that makes the definition of bumpy.
And then we have lots of lots of such a I would say we have had a pretty good period of normalization now where I don't see anything.
We look ahead and say there was a significant inventory buildup or something that we have to lap. That's very notable we've gone through the COVID-19 waves lapping the pricing would be the one thing I call. It we're still lapping pricing.
Kevin I think and I've been clear on that.
But I think you can predict that based off of what we put out there.
And of course that.
That comment is barring any other changes that we see any other shocks in the environment I want to knock on a little bit of woods, saying that.
But I don't see anything material that.
We would be looking ahead, and saying you know there's a big laugh ahead of us that we have to consider pricing being the one exception.
Okay, Great and then just a follow up I was curious if you could comment on kind of where you stand I guess in terms of shelf space or distribution and knowing that it.
And we've talked about several times in the past pre Covid there was some.
You kind of lost shelf space and now you've had you pointed out in our release you know really strong innovation agenda. So I guess, where do you stand on kind of shelf space. How are you thinking do you think there's opportunities to be growing shelf state of innovation in 'twenty four is that part of the outlook or not so much.
Yeah, we made good progress as we return to full supply and getting our total distributions pointed out we made good progress over the last call. It 18 to 24 months across a number of our businesses.
And you all remember that in many cases, where the current us and our competitors couldn't play supply. There are a lot of third tier brands that had entered in for the most part that is cleaned up and we've been able to gain distribution points.
As a result of that in aggregate what we're focused on for fiscal year 'twenty. Four is exactly what you said, we want to gain distribution on our innovation, we want to make sure that we have the right skus on the shelf.
As we think about the right pack for.
For the consumer given their value seeking we think we've done most of that work, but we want to continue to make progress.
And particularly ensure that we get our innovations on shelf as fast as we possibly can on both the physical and digital digital shelf and that's what the team will be focused on.
And that will contribute to 'twenty four we expect.
On the category growth plans and the plans, we have with retailers and our execution of those plans to contribute but we felt good about what we're walking into and what we have for both the front half in the back half.
Okay. Thanks, so much.
Thanks Lauren.
And our next question comes from Stephen Powers from Deutsche Bank. Please go ahead Steven.
Yeah.
Steven is your line muted.
Sorry can you hear me.
Okay, great sorry about that.
So following up on the conversation you were just having with Loren actually so it sounds like.
Things are relatively normalized from a supply and inventory standpoint, so the guidance implies.
Shipping to consumption I guess I'm curious.
If it also you have guidance for what you expect category growth rates to be.
But from a value perspective, and a volume perspective.
Or if you're embedding any bias of of share gain or even or even some share sacrifice does you still continue to rebuild the margins just how do I. How do we think about your guide relative to category growth expectations.
So we've certainly taken out kind of the foundation of any year that we plan, we look at what we expect the categories to contribute.
And our assumptions in both as we lapped pricing and as we head into what we predict is a mild recession and the back half of our fiscal assume category rates commensurate with that and then by category. We're looking at our plans comparing it to that and adjusting based off of if we see how our headwinds are tailwind.
We want to make progress over the long term on share we built that into these plans.
We've built in the fact that we're spending additional advertising and sales promotion that we have good innovation plans.
That lands us at the total outlook that we've provided but theyre very much grounded in the realities of the categories and what we expect.
Okay.
So just to.
To summarize that on a net basis it doesn't sound like you're it sounds like the.
But the topline all you're making is essentially in line with category growth if things go well, maybe top envelope market share gains if not kind of in the in the zone is that fair.
That's fair.
Okay.
Thank you.
Thanks, Steve.
And our next question comes from Jason Jason English from Goldman Sachs. Please go ahead Jason.
Hey, folks good evening, Thank you for something in and congratulations on a strong finish to the year.
I'm totally do it myself by going back in time to time, when you guys used to give us a lock up all your price increases and decreases.
The point there was there was decreases back in two.
2009, and 2010, you get some decreases.
Hum.
Later more recently in 2018, and he can rollbacks and prices are glad obviously all of that was a pretty substantial downdraft in commodity. So my question is if we get to your point, Kevin another dollar drop in commodities because these clients two point or cyclical.
Would we expect or should we expect you to roll back some of these price increases you put through in one of the four blaster last year or two.
Or.
I don't think that's what you may see like are you trying to manage the business differently instead of give back that debt relief in the formula pricing.
Spend it back into the belly of the P&L two lines like A&P marketing.
Hey, Jason.
For your comment and then on your question on price Rollbacks.
Just to be completely clear. So we're all on the same page we've rolled back one price increase in a category, we no longer own from a truckload perspective, after taking an increase and the other ones that you're referring to I think rightfully on glad as we've always used trade as a way to evaluate given resin is such a volatile.
Commodity and so as we've taken pricing we'd use trade in the past in order to make up a difference if we've seen favorability in RASM that we needed to deal with and we saw something change in the category, but the pricing that we've taken has stuck in the marketplace.
And given what we're facing right now obviously, we have not fully recovered margins have made great progress through the pricing actions, we've taken but we have additional work to do given the fact that we continue to see an inflationary environment with what we talked about three times the average year, certainly better than last year, but still a big headwind, we are planning to and anticipate that price increase.
He says will stick.
And that will bring back volume and household penetration through innovation and through investment in advertising and sales promotion, but we don't see any structural reason why these price increases wouldn't stick like they have in the past and again, we're really focused on ensuring we grow categories. The right way through those other levers and.
And if we need to make an adjustment I think he can towards a good example, we did not roll back pricing. So we took pricing competition did not follow we made an adjustment to our plan by putting incremental merchant place. We did not roll back our truckload pricing. We continue to hold that is a good example of how we're approaching it that if we see a dynamic in the category, we need to react too we will try to do.
In a short term manner.
And maintain the truckload pricing we've taken.
Okay. So it sounds like you do intend to manage differently.
Way to go or so last time, we came to the commodity super cycle with.
<unk> been just addressed by trade actually announced those price increases. He published list price increases you gave us a long list price decreases on the back end of it.
And I'm hearing you say now.
Even if clients due to that and that's something we intend to manage differently.
Flexi trades, if we find ourselves in that scenario and I totally appreciate that you don't see that scenario, that's not what you're calling for in 2024, given the commodity and the overall inflation environment.
Yes, I see it as a kind of a.
A continuation of what we've done in the past Jason It seems sounds like you have a little bit of different data, but yes, I think we're getting to the same conclusion, which is we intend for these price increases to stick. We think we have the right tools in place to do that.
We're focused on all the other levers we can pull to continue the strong category performance. We've had from a topline perspective as I noted on spending and innovation.
But where you are landing on the same conclusion, which is we believe these price increases will stick and have a good structural reason to do that.
Understood. Thank you.
Thanks, Jason.
This now concludes the question and answer session.
I would now like to turn the program back to you.
Great. Thank you everyone. We look forward to speaking with you again on our next call and until then please stay well.
Okay.
This concludes today's conference call. Thank you for attending.
Okay.
The host has ended this call goodbye.