Clorox Company (CLX) — Q1 2023 Earnings Call Transcript

Thank you, Ross. Good afternoon, and thank you for joining us. On the call with me today are Linda Rendle, our CEO; and Kevin Jacobsen, our CFO. I hope everyone has had a chance to review our earnings release and prepared remarks, both of which are available on our website. 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 our 2023 fiscal year outlook. These statements are based on management's current expectations, but may differ from actual results or outcomes. In addition, we may refer to certain non-GAAP financial measures. Please refer to the forward-looking statements section, which identifies various factors that could affect such forward-looking statements, which has been filed with the SEC. In addition, please refer to the non-GAAP financial information section of our earnings release and the supplemental financial schedule in the Investor Relations section of our website for a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures. Now I'll turn it over to Linda.

Hello, everyone, and thank you for joining us. While the challenging and volatile global operating environment we discussed last quarter persists, we delivered better-than-expected Q1 results, reflecting the strength of our brands, ongoing consumer loyalty, and solid execution. During the quarter, we maintained our unrelenting focus on rebuilding margin by taking additional inflation-driven pricing, delivering cost savings, optimizing our supply chain, and implementing our new operating model. At the same time, we continue to invest in our brands, to deliver consumer-inspired innovation with superior value as well as advance our digital transformation to drive top-line momentum and position the company for long-term success. Looking ahead, it's still early in the fiscal year, and we continue to contend with a number of macro headwinds, which we are proactively addressing, and we'll remain agile as the environment evolves. Given these factors, we are reiterating our full-year outlook. Nevertheless, guided by our IGNITE Strategy, we remain committed to delivering on our 3% to 5% sales growth target over the long term. The fundamentals of our business are strong. We plan essential categories and our business is well positioned to benefit from lasting consumer demand tailwinds. I'm confident we're on the right track to generate consistent and profitable growth over time and build a stronger, more resilient company. With that, Kevin and I will take your questions.

So I wanted to ask a big picture question on kind of the guidance for the year. You mentioned that currency is a $0.17 to adjusted EPS. And I know there are varying degrees of views under the level of conservatism embedded in this guidance. But just when we think about the ability to maintain the earnings range, is there something that's coming in better to offset that, whether it be underlying growth, commodity costs, etc., or is the right way to think about the updated currency impact that you now expect to be at the lower end of that earnings range?

Hey, Peter. Thanks for the question on guidance. Let me provide a perspective. At a high level, I feel our guidance is very balanced, and it is where we expect to land the year. If I think about some of the puts and takes where we're at, as you saw in our prepared remarks, we had a good solid start to the year that exceeded our expectations, which we shared with you about a quarter ago. And so we feel very good about the start of the year. At the same time, we are dealing with some additional headwinds, FX being one. But as Linda also mentioned, we've got a couple of supply disruptions on a couple of our businesses that we're working through. By and large, we feel like we remain on track. I think what's also important, Peter, is as we consider inflation, I would say inflation is generally playing out as we expected. We said at the beginning of the year, it was about $400 million of cost inflation in the supply chain. We still expect about that same amount. Although I would tell you, when we started the year, we were a little below $400 million; we're a little above right now. So it's gotten a little bit worse. As we've been doing throughout the pandemic, we are making the appropriate adjustments to our plans. We've done that, and as a result, we feel good that we're on track for our outlook.

And I guess, I had just one follow-up on the organic sales outlook. I know, previously, a lot of the weakness was expected to occur in Health and Wellness, and you were expecting to see continued momentum across the rest of the business. In the first quarter, obviously, Health and Wellness came in better than you were anticipating, and it seems like at least from our perspective that the other segments showed weaker performance. So just any thoughts or updated thoughts on how to think about the building blocks for the organic sales outlook from a segment perspective?

Yes, Peter, you're right. As you think about Q1 versus our expectations, our Health and Wellness segment came in better, behind the strength of Cleaning and Disinfecting. That business outperformed our expectations based on a very successful back-to-school merchandising program primarily. Then, as you said, if you look at the rest of our portfolio, we had anticipated stronger organic growth. It came in a little bit below our expectations, really driven by the supply disruptions in our Burt's Bees and our Glad business unit. If those two businesses had delivered against our expectations, we would have delivered about 3% organic growth on the rest of our portfolio, excluding Health and Wellness. But clearly, these are some new issues; we've been dealing with this for the last three years. Supply chain disruptions are nothing new. We're addressing it in these two businesses. We expect to get those worked out this quarter, and by the back half of the year, I'd expect those businesses are back to shipping and meeting our expectations. So I think it will drag a little bit in the second quarter as a result of that, and then I expect stronger performance in the back half of the year as we resolve those issues.

So my question would be on how you see shipments against consumption. And obviously, Health and Wellness was coming in better than anticipated. How should we be thinking of retailers taking in inventory potentially ahead of the price increases? And conversely, on your point, Kevin, about not being able to fulfill some of the other parts of the business and the better outcome you had expected at 3%, how should we be thinking about consumption against inventory? As you try to fulfill, is that something that you may have missed in terms of the sets and the seasonal impacts as we move into the quarters, especially for Charcoal and Litter?

Hi, Andrea. Thanks for the question. So generally, we saw in Q1 minimal impact from any type of inventory effect going either way. We did have a couple of businesses that we saw retailers making inventory adjustments, actually on the other side, like vitamins, minerals and supplements as one of them, and Charcoal as another. We view that as a very normal inventory change, with no impact to the consumer or consumption, but retailers continue to optimize their inventory levels. We did not see a mismatch between consumption and shipments where we see inventories rising at retail. But we continue to see that will be dynamic. Retailers are adjusting to the new volumes they're seeing in the categories. We're monitoring that as we move forward, but again, there has been minimal impact in Q1, and we do not anticipate a sizable impact moving forward in our outlook.

And just if I can follow up on the margin. Kevin, you mentioned that there was an impact on volume deleverage this quarter. But as you move forward, you're still expecting the 200 basis points improvement in gross margin as you navigate through the $400 million that you called out being a little higher than initially expected and FX. Is there anything that you can comment on, perhaps more pricing that you can use as offsets? I understand that you're going to start to lap and have a better outlook from that perspective. Just trying to see the cadence and what to expect going forward.

Sure, Andrea. And you're correct. We still expect to deliver about 38% gross margin for the full year. That would be up about 200 basis points versus a year ago. As we've said, this continues to be a very dynamic environment. As conditions change, we continue to adjust our plans appropriately to maintain our plans for the full year. I'll just give you one example. As we've seen the FX environment become more difficult, as we discussed, and we're seeing higher inflation in various countries where we operate, we've gone back and adjusted our pricing plans in our international markets. That's an example of how we're adapting our plans to address the changing macro environment. Through these changes, we're able to keep our plans on track for the year.

So, obviously, very strong price mix in the quarter at 13%. You did take pricing later than some competitors and more aggressively at this point in time at least. So can you just talk about the consumer reaction that you're seeing so far, the retailer reaction and what you're seeing from competitors in terms of price gaps? And just give us a sense of what's left to come going forward on the pricing front in terms of increases from here.

Sure. Happy to, Dara. So pricing is on track. As you noted, we've taken multiple rounds of pricing, with the third round in the market effective in July. We are seeing elasticity largely in line with our expectations. Early in the year, it has been slightly favorable to what it was pre-COVID, but we're starting to see them drift toward our pre-COVID elasticities as we had anticipated. Our categories remain healthy and resilient, and our price gaps have returned to pre-pandemic levels for most brands. Given the pressures that Kevin spoke about in terms of costs, we are taking an additional round of pricing in December, which will be our fourth major round of pricing. We don't anticipate that round to be as deep or broad as the July pricing, which was the largest of the four that we've taken to date. We anticipate that we'll be leading in many of the categories that we're taking pricing in, in December. As Kevin said, we're going to continue to be nimble and adjust, but at this point, consumer resilience and elasticity is in line with expectations, and price gaps where we would expect them to be.

Great. And then it sounded like market share is coming in better than expected perhaps on the Cleaning side, with the merchandising around back-to-school, etc. So can you just talk about what you're seeing from a market share standpoint on that side of the business and what you're expecting going forward?

Sure. And maybe I'll just broaden the comment on share overall. We're making progress on share, but we have more work to do. Supply disruptions have been part of that, going on in our Household Essentials business. But we were happy to see continued momentum in Cleaning, as you noted. We've grown share consistently now quarter after quarter, and that continued with the strong performance we had in back-to-school, as you noted. We grew all-outlet share in our four largest businesses, which are Home Care, Glad, Food, and Charcoal. That was great to see. But as I've said many times, I expect to grow share in aggregate, and we're not quite there yet. We'll continue to see progress as pricing flows through in December, and as our distribution plans continue to take hold. We're feeling good about the progress, but the work is not done yet on share.

Can I just maybe ask a more conceptual question about gross margins? Kevin, I think you noted that your commodity cost basket of $400 million was trending slightly below $400 million before, and now, it's trending above $400 million. So I wonder if you could just maybe offer some additional context on the complexion of that cost basket, perhaps between commodity and non-commodity? Also, there's a view, which I think you've talked about yourselves, that the gross margins of this business should continue to improve at a progressive rate over the next few years. What are your thoughts on the durability of some of these cost increases specifically on the non-commodity side that continue to linger? How much pricing do you think you might need to take or cost savings that you would need to execute to achieve your longer-term objectives on the margin line?

Sure. Thanks, Chris, for the question. Let me start with the overall basket of cost increases we're looking at. As you mentioned, we started the year expecting about $400 million, a little below that. We've updated our most recent outlook, rolling up to a little bit over $400 million, but still generally in that area. What hasn't really changed for us is commodity inflation overall, which represents about half that total inflation. While we've seen a little bit of change by item we purchased, the general level of inflation in the commodities is pretty consistent with what we thought about a quarter ago. So no real change there. We've seen a little bit of improvement on resin prices, and then there are a few other areas in chemicals and ag products that have gone a little bit the other way. However, by and large, our commodity inflation expectation is consistent with what we thought earlier this year. Where we are seeing a little bit higher prices is primarily in logistics. I'm sure you're all seeing what's going on with the price of diesel, and that's coming in higher than we anticipated. So we've revised up a bit our expectation on logistics cost inflation. We're still operating in generally that $400 million range, but there are higher logistics costs we expect for the balance of the year. In terms of how I expect the gross margins to phase going forward, this is an important inflection point for us. As you know, margins declined for about five straight quarters due to the tremendous cost inflation we dealt with last year, about $800 million worth of cost inflation in the supply chain. We stabilized margins in Q4; they were essentially flat year-over-year. As you saw this most recent quarter, gross margin was down about 100 basis points, primarily due to the charge we took on the Pine-Sol recall. Excluding that charge, they are generally flat year-over-year again. We expect to start growing this quarter. We project 100 to 200 basis points of margin expansion moving forward. This is an important inflection point; we’re getting back to starting to rebuild margins that we've been working on for a while, and I expect that to continue as we move through the balance of this year. As we mentioned, we expect to grow margins about 200 basis points for the full year, starting from Q2 as we move forward.

Just one quick follow-up would be, and this would be for Linda or Kevin, but Professional business was flat, I believe, in the quarter, which seems like it's finally seeing some stabilization. I wonder if you could just add some context on what you're seeing in the business and how it factors into your plans for this year.

Yes, it was about flat, and we take that as a good sign as well. We're seeing continued headwinds on that business relating to return-to-office scenarios and factors affecting our janitorial business. However, we are seeing some return to office, which is good from a sales perspective as well as hospitals getting into a more normalized routine where they're utilizing our products to clean in between procedures. Now from here, we're focused on ensuring that we have the right sales plans and that we're working with businesses and janitorial services to ensure they have the right protocols for hospitals as well. We expect, over the long term, that business to be an outsized contributor to the company. But at this point, I would say we are happy to see it flat again and hope to return to growth in the coming quarters.

I have two questions. One, business planning for Kevin, and if I have a follow-up for Linda, more strategically on business planning. If we look at retail, we see volumes weakening, so it's high teens. So in that context, could you tell us what your second-quarter assumption is between volumes and pricing and how you distinguish normalization of demand versus elasticities, given that you are taking more pricing in the December quarter? And then I have a follow-up.

Sure, Javier. On Q2, and I'm not going to give a full, detailed outlook for Q2, but we expect top line to be down low single digits on a reported basis. We continue to expect about 2 points of FX headwinds. So you should assume organic sales growth is about 2 points better than our reported sales, which are expected to be down in that low single-digit range. I expect Q2, in general, to be somewhat similar to Q1. We expect ongoing normalization in our Cleaning and Disinfecting portfolio, but not to the same extent that you saw in Q1, where we were lapping the Delta variant. We do expect some ongoing normalization in that portfolio. And as we mentioned, we have a few supply chain disruptions we are working through. I think that will impact Q2, similar to what we saw in Q1, and we expect to get those resolved as we move into the back half of the year. Overall, I would think as you look at volume-price-mix, I would not expect it to be that different than what we saw in the first quarter.

So down double digits, the volume for the second quarter?

Yes, I'd expect so, because that's probably playing out based on elasticities. A broader point that's helpful to comment on is that when we take pricing based on the usual elasticities, we don't generate much incremental revenue from that pricing. We take pricing to address the cost inflation. It is not necessarily a source of revenue growth. I would expect that if elasticity plays out as we expect, I would see volume declines similar to what we saw in Q1, with possibly a better outcome due to less normalization in Cleaning and Disinfecting. However, we still expect volume declines that generally offset the price mix by helping to generate significant savings to gross margin. In Q1, we generated over 500 basis points of margin expansion through pricing. I would expect to build on that in Q2 because we'll see the full impact of the July price increase, along with a modest impact from December pricing.

That's great, Kevin. And more strategically, for Linda. I'm kind of refamiliarizing myself with Clorox, and I'm a little surprised about how significant the investment in ERP is. Most of your businesses are U.S.-centric. Many of your categories' main competitor is private label. Essentially, there is more of a cost issue, low-cost base kind of situation. Your cost base is getting higher. So why do you need that investment in digitalization? These are now beauty companies. This is Charcoal, Bleach, trash bags. Help us understand the rationale behind that investment.

Javier, our digital transformation is much larger than just implementing a new ERP, which we need to do. Our ERP is well over 20 years old, and that's the foundation of how we run our business. What we're trying to do is modernize our digital infrastructure to maximize our ability to grow and improve our efficiency. The technology we're investing in is not just foundational but also allows us to move faster on innovation. We leverage the vast amount of data we have across our ecosystem to glean insights and be able to grow our categories. The transformation is about generating savings by identifying and removing non-value-added costs in our supply chain. This digital transformation supports the 3% to 5% growth we're targeting, and we anticipate the value to begin to surface at the end of this strategy period and beyond to set us up for future success. From an ERP perspective, we have businesses in over 100 countries, and we'll be rolling out this ERP across the globe to ensure we can run our business effectively. This is much bigger than just implementing base technology; it's about digitizing for the future.

I wanted to follow up on pricing. You mentioned you're taking more pricing in December. So it seems that you feel comfortable that retailers and consumers can absorb this additional pricing. If you could comment on recent trends, are you seeing any bifurcation in consumer appetite for Clorox products with higher-end consumers being more stable versus lower-end consumers trading down or out of the brand?

I would say our consumers and our categories remain very resilient through the three rounds of pricing that we've taken. The pricing elasticity has played out just as we expected. It has been slightly favorable compared to pre-COVID levels, but we are seeing them drift back towards normalized elasticities, as we anticipated. We are not seeing any material signs of trade down from our brands to private labels or other brands. We're monitoring that closely and are ready to adapt our plans if necessary, but what we are seeing is consumers broadly engaging in value-seeking behaviors. This is expected, as we've discussed previously. Consumers are shopping more heavily in value channels, for example. These include shifting to club, dollar, and mass retail channels. We're also seeing them explore different sizing options, such as buying at an opening price point if they have a limited cash situation, or opting for larger sizes to get better value per ounce. We've noted increases in trip frequency, where consumers are spending a little less on each trip but visiting more frequently, which is typical behavior for value-seeking consumers. Our low-income consumer in our brands is holding up even more strongly than the general population, with stronger household penetration from low-income consumers, which reinforces our belief that the highest value becomes increasingly important during challenging times, and our brands provide superior value. This is also reflected in our measurements, showing that the majority of our portfolio is deemed superior by consumers now more than ever. We are in a very good spot and expect the December price increase to align with how the previous three rounds have gone, while continuing to monitor the marketplace closely. We anticipate that the environment will continue to be bumpy, but we believe we are well-positioned to manage this inflow of pricing.

Great. That's very helpful. And just as a follow-up, given that you've exited certain private-label contracts, how do you feel about your inventory levels moving forward?

Anna, I think you're talking about our contract manufacturing agreements, right?

Right.

Yes, you're exactly right. As you may recall, we increased the use of contract manufacturers during the pandemic to help meet the heightened demand for our products. We recognized that this was a temporary solution to normalize. We have ended those agreements at the end of last year. What we've indicated is that we've been holding higher safety stock inventory levels to help build resilience in our supply chain to manage through the ongoing disruptions we're experiencing. As we expect these disruptions to level out, we will be able to reduce inventory levels as we gain more reliability in our supply chain. That said, the supply chain is improving from where it was a year ago, but we're not back to pre-pandemic levels yet. Currently, we’re starting to see our inventory levels decrease. In Q1, we managed to reduce our inventory levels by about $30 million year-over-year, which also contributed to cash provided by operations increasing. This trend toward reduced inventory levels will continue in the coming quarter, as we pay close attention to the supply chain. With higher trust in our ability to respond to consumer demand and less disruption, we will be able to work those inventories down even further. We're making encouraging strides.

A couple of questions on gross margin. First, you indicated you expect GMs to be up 100 to 200 bps this quarter. Let's just take the high end of the range; that would imply around 35%, which would be 100 basis points below what you achieved this quarter. Typically, there isn't significant seasonality influencing it. Is the expectation that you will push through more price increases? Why would gross margins go down sequentially? What incremental headwinds do you expect to weigh on results in the second quarter?

Yes, Jason. Thanks for the call. In terms of driving gross margin accretion, and to your point of 100 to 200 basis points of what we're projecting, we continue to project fairly strong performance on cost savings. I expect pricing to build from Q1 to Q2, as I mentioned earlier. Regarding headwinds, we continue to face a very challenging cost environment. We had over 300 basis points of headwinds in Q1 and expect another challenging quarter in Q2 from cost inflation. We're seeing similar challenges in logistics and manufacturing. Additionally, we have a couple of supply chain disruptions to manage in the second quarter, which will likely partially drag on margins as well as we navigate these issues, which we expect to resolve by the third quarter. Lastly, there's likely to be volume deleveraging in Q2. We project volumes will decline, and as you know, manufacturing deleveraging is associated with that. Across all these drivers, the good news is we expect to achieve an inflection point where we start rebuilding margins this quarter, and I expect that trend to continue. However, within the context of those factors, we expect about 100 to 200 basis points this quarter.

The recall expense goes away too. So you had more price, less recall expense, yet gross margins go lower. I'm missing something here in this from Q1 to Q2...

Yes, there is seasonality in our business. Q2 tends to be our lower quarter because it's the lowest quarter for our Kingsford business, which is notably profitable. Typically, Q2 is our lower quarter in a normalized environment, and we'd expect this quarter to follow that trend.

Okay. And regarding the manufacturing and logistics, I hear you loud and clear on logistics, but many of us expected at least the manufacturing component to flip to a tailwind as you exited some co-managed agreements and repatriated some of that volume. My expectation was that this would help mitigate the logistics component. Could you unpack that for us? Are we overestimating the tailwinds of unwinding those agreements? Or are logistics costs increasing significantly and outpacing the benefits?

Yes, Jason, I would say you're likely overestimating the value of unwinding those co-pack agreements. That was a nice benefit but was less than a 100 basis point benefit to logistics and manufacturing as we stepped out of those agreements. While that helped contribute to rebuilding margins, it was not a significant driver to the margin challenges we have been facing over the last six quarters or so.

Kevin, can you talk a bit about the operating deleverage risk given how much volumes are declining? I certainly understand the justification for taking pricing. However, we're seeing some big declines in volume. Could you balance the effort to capture inflation on the cost side against how much it might impact manufacturing deleverage?

Sure, Kaumil. It's interesting when you think about the manufacturing deleveraging; typically, you'd expect to have a bigger impact given the 15% volume decline we discussed. However, you're seeing that mitigated because, as you know, we stepped out of those contract manufacturing agreements, and therefore have brought that volume back into our plants. As a result, our production volume is not down to the degree you're seeing in our shipment cases. That minimizes the volume deleveraging we're seeing in our facilities, and I expect that mitigated effect to continue going forward.

Okay. Great. You mentioned in your prepared remarks about distribution gains. Are those gains over the course of this year? How does the distribution compare with 2019?

Sure. We've been able to grow total distribution points for eight consecutive quarters now. Our team is working on both restoring the base—remember, we rationalized our assortment at the beginning of the pandemic to produce as much product as possible—and gaining distribution from our innovation programs. We are pleased with our progress from a distribution perspective and will continue to invest in innovation moving forward.

First question about the level of pricing at a total company level of 12%. I don't think we have other U.S.-facing companies or companies reporting in HPC that have posted pricing like that. Linda, as you implement another round in December, why are you so confident that we won’t see any share wobbling? You commented on the elasticity being maintained, but could you clarify? Is it merely that consumers are consuming less, and that’s the elasticity you're observing while you’re suggesting that you’re not losing share?

Yes, Lauren. Pricing comparisons across companies can be challenging as everyone has different portfolios and global circumstances. What I would emphasize is that our pricing aligns with the categories we compete in around the world. Our price gaps have returned to pre-pandemic levels, which suggests that pricing has been consistent across our competitive landscape. While we expect to lead price increases in many categories, we anticipate that our price gaps will remain stable. That said, we will keep a close eye on our plans and make adjustments if necessary. Our elasticities are behaving as expected, remaining generally favorable to pre-pandemic levels. We’re observing consumers adjust their behaviors, such as making their trash bags last longer or delaying purchases rather than exiting brand loyalties. Overall, we don’t expect substantial changes in our market share from ongoing pricing. We’re vigilant and ready to adapt our plans if necessary. The consumer fundamentals remain strong, and we're encouraged by our current performance.

Acknowledging the strong aggregate sales growth and the expected elasticities, when would a substantial volume decline prompt concern? The current magnitude of decline is striking; while you have benefits from bringing production in-house, the overall margin is further obscured. What are your sensitivities regarding volume declines?

We are focused on three main objectives: maintaining top-line momentum, sustaining long-term margin growth, and ensuring our brands remain healthy. We’re keeping a close watch on our consumer metrics to verify that we remain on solid ground. Currently, we have the highest consumer value rating on record, with 75% of our portfolio rated as superior by consumers. Additionally, we’re seeing positive share growth in our four largest businesses and strong international performance. From a category perspective, we're not underperforming, and our success mirrors market trends. Innovation is driving growth in these categories, and we anticipate that consumer behavior will normalize over time. We’re actively monitoring all these factors and are prepared to make adjustments if metrics begin to decline significantly. We feel comfortable with our three rounds of pricing and the planned fourth round for December based on current consumer trends.

Continuing on pricing, could you clarify the rationale behind the fourth price increase in December? From what I understand, the overall cost inflation outlook for the year remains largely constant, particularly regarding commodities, and considering that the first-quarter gross margin was healthier than your original expectations, I'm looking for more clarity. Was the price increase part of your initial guidance?

Sure, Steve. Let me provide more context on pricing and objectives. Our pricing strategy is not solely driven by the current cost environment but also by the need to recover cost inflation faced over recent years. Over the past two years, along with projections for this year, we face about $1.5 billion in total supply chain cost inflation, resulting in over 20 gross margin points lost during that timeframe. Rebuilding margins is a critical goal, and pricing is an essential tool to achieve it. The fourth round of pricing was factored into our outlook, as was the expectation for margins to recover from prior inflation—even anticipating that some commodities will continue to increase. We regard this pricing as necessary, in addition to pursuing cost-saving strategies and optimizing supply chains to restore margins.

Outside of currency-driven pricing in overseas markets, will there be any additional pricing under consideration for the year that might be relevant to our reviews? What was initially planned?

Yes, Steve. The December price increase was part of our overall strategy, but we are also implementing additional pricing on specific brands that were not initially scoped in our outlook. At this moment, our plan is to keep evaluating pricing as we progress through our long-range strategy until we achieve restored margins, which will rely on a combination of pricing, cost savings, and hopefully some commodity relief in the future. For now, we don't have any new pricing to announce, but we will keep you updated as we implement additional rounds. Furthermore, price pack architecture will play a more significant role in the latter part of this fiscal year and into fiscal year '24.

Linda, I want to revisit market share and potential trade-down risk. Based on the Nielsen data, we notice you’re losing share across a majority of your portfolio, while your insights suggest no material trade-down to private labels. Can you reconcile what we see in scan data versus your comments?

Yes, my comments regarding share growth in our largest market segments consider factors beyond just Nielsen's data. While Nielsen may show losses in share, we observe differing factors in tracked data. There are scenarios such as pricing effects, normalization of demand, and assortment normalization contributing to our variation. Importantly, we see no material trade-down due to pricing impacting private labels in our categories. Instead, we notice pressure on third-tier brands. Despite variations in specific categories, we didn’t witness trading between our own portfolio and private labels.

Okay, that might not be surprising, especially given the nature of your categories. Do you expect to maintain your current trajectory in planning, especially regarding category growth rates, elasticities, and market share outlook, absent any fundamental change in your current environment?

That’s correct, Kevin. We’re not embedding any material trade-down to private labels in our outlook, and our observations have shown us that share dynamics mirror prior patterns. In 2008, private labels did not materially gain share in our categories and we anticipate a similar trend in this current economic climate.

Thanks again, everyone. I look forward to speaking with you again on our next call in February. Until then, please stay well.