Clorox Company (CLX) — Q4 2023 Earnings Call Transcript

Thanks, 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 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 section of our earnings release and the supplemental financial schedules 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. We closed out fiscal year 2023 with strong results, underscoring the significant progress we've made against our strategic priorities. Over the course of the year, we've been relentlessly focused on driving top-line 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 a 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 improvements, 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 2024, we are clear on our priorities. While we expect the environment to remain 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 top-line 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.

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 track data. Was that largely due to the shipment timing that you mentioned, or is there 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 US recession in the back half, you provided some color on phasing starting with mid-single digit growth in 1Q. I just would be curious to get your perspective on the balance of pricing versus volume in that outlook, specifically, as we move through the year. And do you expect volume growth at some point in the back half? Thanks.

Hi, Peter. I'll begin by addressing your first question and then pass it to Kevin. Regarding Q4, we experienced stronger consumption across all our categories, which exceeded our expectations. This can be attributed primarily to two factors. Firstly, the elasticities have been more positive than historically observed, although there are variations by category. Secondly, trade promotions have been normalizing more slowly than anticipated. We expect this normalization to continue throughout fiscal year 2024, but it was not as pronounced in Q4 as we had thought. So, stronger consumption is the first key point. The second factor is improved operational performance from our team, which encompasses the supply chain as a whole. We were able to produce more supplies than we anticipated, and our shipments to retailers exceeded our expectations. Overall, our operational efforts came together well and contributed to that growth. Finally, in Kingsford, as mentioned in Q3, we underperformed our expectations during that quarter. We made significant adjustments to our plan, focusing on collaborating with retailers on category growth plans and ensuring proper merchandising, leading to much better performance than anticipated. The consumer responded positively, and retailers executed effectively. These are the main factors that accounted for the difference between our expectations and the results we achieved.

And then, Peter, I can talk about our plans for fiscal year ‘24 as it relates to sales. As you saw, we're projecting 2% to 4% for the year. If you think about the front half and the back half, our expectations are sales to be closer to mid-single digits in the front half, excuse me, and then low single digits in the back half. And that phasing from front half to back half, 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 ‘24. So we think that will put a little bit of pressure on consumers in our categories, and we've reflected that in our outlook. The other item to be aware of is 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 price increase we took last December, we will lap that when we get halfway through the year. So the second half of the year will now have lapped all the pricing we've taken. So as a result of that, what 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 in the front half and then really start to tail off in the back half. And so as we get 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's going to be a difficult economic environment for consumers.

Thank you, both. I'll pass it on.

Good afternoon. Thanks very much for the question. In your fiscal ‘24 guidance, you are expecting a 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 basis? And in addition, what do you see as the drivers of really achieving that sales growth longer term? Thank you.

Yeah. 2% to 4% organic sales growth and 0% to 2% from a reported is what we're expecting now. And that is slightly below what we want from a long-term perspective. But, just to put that in 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 kind of a tale of two halves, 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. In the back half, we expect it to get tougher for consumers. 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 1 point of a headwind from our vitamins, minerals, and supplements business. As we spoke about over the last couple of calls, we have re-engineered that plan to focus more on profitability, and we've done that at a trade-off from a top-line perspective. So that does include a 1 point headwind. And, over time, we would expect that that wouldn't be the case and that that would help us return to getting in within that 3% to 5%. The way that I would think about this, as we march through the year, we are expecting, again, lapping two price increases, we are expecting our elasticities 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 in forming that growth. And if those come true, we feel 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've mentioned that advertising as a percent of sales, you intend to spend about 11% in fiscal ‘24 versus about 10% in fiscal ‘23. Do you feel this is the right level of investment given a ramp in marketing spend versus some peers in the space? And also just in terms of the balance of advertising spend versus promotional in fiscal ’24, it does sound like you're ramping back up on promotional levels. And is this an intention to get back to pre-COVID levels with promotion as well? Thanks.

We have historically spent about 10% of our sales on advertising and sales promotions, and there have been instances where we've spent more. This year, we're aiming for 11%, which we believe is a wise investment considering the economic pressures consumers are facing. Following four significant price increases, we want to support consumers during this transition, so we feel 11% is appropriate. We have two reasons for this confidence. During the pandemic, we increased our advertising spending even when we couldn't fully supply our products, which resulted in stronger brand ratings, giving us the confidence to implement our price increases. In challenging times for consumers, investing that extra percentage in advertising makes sense. The second reason is our initiative to understand 100 million US consumers better, allowing us to personalize our marketing efforts through our IGNITE strategy. We've nearly reached that goal, and as a result, our advertising return on investment is at its highest level ever this year. Therefore, we're confident in allocating that extra percentage because we anticipate strong returns while also enhancing our brand appeal. We'll assess our advertising spend in the future, and it may not necessarily remain at 11% the following year. This figure represents the aggregate of what our general managers believe is necessary to support our brands at this time. Regarding promotions, they are still below pre-pandemic levels but are starting to increase. We expect that throughout the year, promotions will return to more normalized levels similar to those we experienced before the pandemic. However, we had hoped for a faster ramp-up this year based on the data we've seen, which hasn’t materialized yet. We don't plan to exceed pre-pandemic promotion levels, just aim to return to them. For our categories, the majority of our sales occur off the shelf without any price reductions, relying mainly on effective merchandising and targeting consumers at key price points. We believe this combination of strategies is the right spending level, given consumer behavior, the anticipated returns, and our long-term goals for category growth and market share increase.

Great. Very helpful. Thank you very much.

Hey, guys. Good afternoon. So I just wanted to touch on the fiscal ‘24 guidance. You're assuming gross margins come in well below the fiscal Q4 level and the level in the back half of the year. I know you've got $200 million of higher costs you mentioned in prepared remarks. First, can you just give us some more detail specifically on that bucket and what's driving cost increases? And then, b, just as you think about it conceptually, the lack of sequential progress versus the back half of the year, obviously, it's up year-over-year for the full year. Just wondering how that fits in with your goal to eventually move back towards those pre-COVID gross margin levels and why not more progress this year, again, specifically relative to that back half. Thanks.

I'm glad to address those questions. Let's start with cost inflation and our projections for this year. Looking at the longer term, we faced significant cost inflation during fiscal year ’22, totaling around $800 million. Last year, that figure was about $400 million, and this year we're anticipating around $200 million. It's improving sequentially, though we're still operating in a higher cost environment. Regarding the $200 million in supply chain inflation, we primarily see two areas driving these cost increases. Approximately one-third is expected to come from commodities, where we still observe inflation in items like chemicals, substrate, corrugate, and linerboard. We're continuing to see these costs rise year-over-year. On resin, we're expecting it to remain relatively stable after a decline last year. We are seeing some decrease in costs for certain agricultural products and diesel, but overall that category is expected to be modestly inflationary. The other significant cost increase is related to manufacturing and warehousing, largely influenced by labor, and we expect to maintain an inflationary environment there. Moving to our gross margin goals for this year, as mentioned, we aim to continue improving our gross margin, a focus we've discussed frequently. We are determined to return to pre-pandemic margin levels. We made considerable progress last year, improving by about 360 basis points, and we expect to achieve an additional 150 to 175 basis points improvement this year. If we execute this plan, by year-end, we will have recovered over 500 basis points of the 800 basis points lost. Traditionally, Clorox experiences some seasonality in margins, with the fourth quarter typically representing our highest margin due to peak sales of our Kingsford product line. For context, we sold out 50% of Kingsford in the fourth quarter, which is highly seasonal. Consequently, Q2 tends to be our lowest margin period, partly because we do minimal Kingsford sales and engage more in lower-margin gift packaging for our Burt's business, which while effective for brand awareness and trials, does not contribute as strongly to margins. Generally, once we surpass normalization in pricing and other disruptions, Q2 is often low, while Q4 is high. In Q1, while I don't expect the same extent of progress as in Q4, we should still see solid improvements. We're now through the third round of pricing, so the pricing benefit will taper off, but I anticipate a strong Q1 with year-over-year margin advancement, targeting around 41% by the end of 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? If I'm not overstaying my welcome, Linda, 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 an all-time high and the personalization reaching nearly a 100 million consumers? Thanks.

Yeah, Dara, I can start with our pricing assumptions. In the outlook, we have not assumed any broad-based pricing in the US similar to the first four rounds we've taken. Now, we will continue to price internationally because of the higher inflation rates we're experiencing there. We'll also continue to focus on net revenue management activities. But in terms of broad-based pricing, we don't have anything assumed in the US this year.

And then your question on household penetration, when we talked about this a bit over the last few quarters, household penetration, along with volume, were things we knew were going to take a hit with the level of pricing we took over the last 18 months. We've certainly seen that. This is a category comment, not just a Clorox brand comment. We tend to see short-term reactions from a behavioral perspective when consumers adjust to the initial shock of pricing. Consumers look to go to alternatives, use their inventory at home, delay purchases, engage in value-seeking behavior, or in extreme cases, leave the category. From a household penetration perspective, a number of those factors come into play. 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. I think it's important to note, again, this is a category behavior, not a Clorox brand behavior. What we're focused on is returning that household penetration. It's important to put in perspective. We're still in nine out of 10 US households in our portfolio. We want to be in a place where we're growing household penetration again. The investments we talked about earlier, the increase in advertising and sales promotion, as well as our focus on innovation and category growth plans all serve to return to volume growth, improve household penetration, and grow share over the long term. We would expect household penetration to begin to improve as we get through pricing and as we move through the course of the year and then through our plan. What I would say is very much in line with our expectations, and we feel good about the plans we have to continue to make progress on household penetration in fiscal year ‘24 and beyond.

Good afternoon, everyone. I have a question regarding gross margin, following up on Dara's earlier inquiry. What factors contributed to the outperformance compared to your plan in the fourth quarter? It seems that cost savings exceeded expectations, and you achieved a record year, especially in Q4. Additionally, how much of the performance was driven by increased volume trends? As you look ahead to next year, how should we anticipate cost savings continuing above the algorithm? Thank you.

Yeah. Thanks, Filippo, for the question. As it relates to Q4, and you're right, the over-delivery on gross margin versus our expectation. We went into the quarter targeting 40% to 41% gross margin. As you saw, we delivered just under 43%. I would say for the most part, as you look at the various drivers within gross margin, they're generally in line with our expectation. That was certainly true for cost savings, pricing, and commodities. The biggest variance was our top-line performance and particularly on volume. Volume only declined 2% for the quarter. We had projected a larger volume decline in the quarter. As a result of that, we had improved operating leverage, which really flowed through the entire P&L. It certainly benefited gross margin, but it also was the primary driver of our very strong earnings performance for the quarter. As we go forward on your question about cost savings, look, our team did some terrific work this year. We target a 175 basis points of EBIT margin expansion each year through cost savings. In fiscal year ‘23, we delivered well north of 200 basis points. That’s a credit to the team and the work they're doing to drive cost out of the system. 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 that's probably north of 200 basis points. That's incredibly important because as we said, we continue to operate in an inflationary environment. 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 the supply chain optimization work we're doing, allowing us to absorb that increased inflation and continue on our rebuilding margin. Really good work by the team and exceeded our goals both last year, and I expect to do it again this year.

Great. That's super helpful, Kevin. And then a high-level question, Linda, just in your guidance on top-line, you mentioned you expect a sequential improvement in volume throughout the year. Just what gives you guys the confidence of the volume coming back other than, obviously, the comparisons to like, at a high level, is it that incremental advertising investment or any other specific point that you can point to give us some confidence on the volume improvement? Thank you.

Yeah. On volume, maybe just to take a step back, I think would be helpful and talk a little bit more similar to my comments on household penetration of what impacts volume and then what we believe we'll see over time as we return to more volume-based growth from more pricing-driven growth. The big picture on this, we knew we were going to make a volume trade-off with the level of pricing that we took. Certainly that pricing was cost justified. I think that's the right trade-off given the fact that we were able to deliver the top line and margin progress that we committed to. It's only one lever that we look at it, understanding brand and category health. If we look at volume, what impacts it? Consumers are adjusting to pricing right now. We still have two price increases that we will lap here in Q1 and Q2. They’re still adjusting to what the pricing is, past our categories. It's also important to note there’s an element of cross-elasticity here. Everything in their world has changed from a wallet perspective. They just came through a pandemic and they want to have experiences. We're watching that consumer settle out. What we're seeing in our data is volumes are beginning to improve. You saw that if you look to 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. From a consumer behavior standpoint, what you'll see is consumers will return to their old routines because those routines were the most efficient and effective for them, particularly in essential categories. They don't want to have to work harder to do this stuff. Perhaps they've run through the inventory they have in their house, maybe they tried an alternative and it doesn't work as well, and we tend to see those people start to come back. We also saw light users category loss tend to come back again as we reintroduce our products to them through innovation. We use our advertising spend to talk to them about the benefits of the product; we remind them that, and they pick us up again as they send their child back to school or if their family experiences a run of cold and flu in the house. Those moments generally bring those light users over, and volumes tend to grow again. We've seen that every time we've taken pricing, and that's consistent in categories. What’s unique for this time is the level of inflation our industry and Clorox experienced is unprecedented. We’re certainly not taking this level of pricing. It 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. Our brands are still a superior value versus what they were pre-pandemic, so they're very strong. Over time, again, we believe we will make progress on volumes and return to more volume-based growth moving forward.

Great. Thank you, guys.

Thank you. Good afternoon, everyone. My question is about the balance between shipments and consumption, particularly if there is any trade-off. You mentioned that volumes were better than expected, Linda. Was this primarily due to increased consumption, or do you think retailers were also restocking inventory because consumption exceeded expectations? As we finish the quarter, do you believe inventory levels are appropriate? Additionally, I would like clarification on your expectations for a mild recession in the second half and your remarks about volumes being slightly better than anticipated. You also mentioned that category behavior has been shifting. Did you notice more price elasticity towards the end of the quarter, or are you cautiously assuming that we will eventually see the historical price elasticities that you are looking for?

Hey, Andrea. Let me maybe start with your shipment consumption question and then Linda can address price elasticity. As it relates to the fourth quarter, I think there are a few things we are seeing, and 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 anticipated. The consumer is still quite resilient, and we didn't see any drop-off in consumption as we look Q4 to Q3, which we expected might occur, and that didn't materialize. The other driver of our performance was Kingsford. We were disappointed with the results in the third quarter. We made some changes to our plans. Credit to our team, we had very strong execution. That business grew both volume and double-digit in sales, with a very strong performance. That was the primary driver of the overdelivery. The other element to think about though, as it relates to inventory, we think retailers generally have the right inventory levels. One reason we had very strong growth on a year-over-year basis is that last year, retailers were reducing inventory levels. 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. We saw that last year with retailers reducing inventory. This year, as you fast forward, we saw our shipments much closer to consumption because retailers are not adjusting inventory levels. On a year-over-year basis, that drove much stronger performance. That was particularly true in our home care business where we saw inventory reductions a year ago. We saw, particularly in wipes, we saw very strong wipes shipments this Q4, which is now shipping in line with consumption, which was not the case a year ago. That contributed to very strong year-over-year performance and the 14% growth.

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; some categories had less favorable elasticities, etc. In aggregate, however, our elasticities were more favorable than we expected. What we expect to happen in fiscal year ’24 is over time those elasticities return to more normalized levels. It's not anything related to particularly our categories, just the broader pressure the consumer is under. If you look at what's going on, certainly balance sheets for consumers 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, we're anticipating a mild recession in the back half. We think that's the most prudent plan based on what we're seeing for economic predictions in the US. That will put additional pressure on the consumer as well. We think those factors in combination will lead to more normalized price elasticities, and that's what we have assumed in the plan.

That's helpful. Just to clarify, regarding the inventory rationalization impact from last year, did it present a low single-digit headwind that has since disappeared or normalized this year?

Yeah. Andrea, you're exactly right. Last year, we anticipated there was a couple of point headwind as a result of the inventory reductions at retailers. We didn't have that impact this year. Year-over-year, that's a source of benefit and part of the 14% organic sales growth we delivered this year, driven by lapping that inventory reduction in the prior period.

Super helpful. Thank you. I'll pass it on.

Hey, everyone. Just one quick follow-up on the gross margin assumptions. Kevin, you said in the prepared remarks that commodities would still be a bit inflationary. What are those commodities? I know there's always a lag, but I would just be curious where you're seeing that just given the favorability that we can see on this side? Then I have a quick follow-up.

Sure. Chris, as it relates to commodities, and within that $200 million, we said about a third, roughly $60 million, is coming from commodity inflation. 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 offset in many areas where we are expecting some deflation, particularly in ag products, soybean oil. We also expect diesel down year-over-year. Resin, we've got about flat on a year-over-year basis, so it's not necessarily contributing or helping. 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 is what we're projecting.

Okay. And then just on the organic sales over-delivery, non-tracked charcoal comping, some under shipment in the base, and then stronger consumption, just to make sure I have those. Anything else...

Yeah. Those are the two primary drivers.

It's interesting how far the investment spectrum has evolved. It raises the question of whether companies are investing enough. With higher advertising spending and strong selling and administrative expenses, it would be helpful to understand the reasons behind the significant increase in investment levels that we’re seeing across the board, not just from Clorox but also from your competitors. Marketing spending and selling, general, and administrative expenses are reaching unprecedented levels. Are manufacturers collectively pushing to boost volumes, or is there increased pressure from retailers to drive sales? What are your thoughts on why this investment cycle is occurring and what the main drivers are? I understand it's a complex question, but I appreciate any insights you can provide.

Sure, Chris. I won't speak on behalf of the industry; I’ll certainly let everyone speak on their own behalf. But I can just give you the insights into how we're thinking about it. I think it's a pretty clear understanding. We headed into COVID; we had learned a lot about volatility and the impact that it had on our business. We began investing more a number of years ago to ensure that we had the right digital foundation, that we had 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, so we can make quick decisions. That was certainly an area for us where we needed to invest within our digital transformation and our operating model to ensure we could react as fast as consumers could be. We want to be more consumer-obsessed, faster, and leaner. If you look at the bucket on promotional spending, I see that as more of a return to the norm. For us, that spending is on good things. We spend mostly on quality merchandising. We do that to introduce consumers to innovation, to remind them in key pulse points of the year, like back to school, back to college, remind them of the great products that we have, introduce them to new benefits, etc. Seeing that return to more pre-pandemic levels makes good sense given the industry can fully supply now. We can certainly supply now. We can get back into that good cadence of giving the right information to shoppers. We're taking our advertising spend up from 10% to 11%, as we addressed earlier. The number one thing we can do right now is ensure that we have superior value for our consumers. 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. Our portfolio of superior brands continues to deepen, and we think given the stress that the consumer is under, it would make absolute sense, given the improvement we've made on margin, to invest a bit more in advertising and sales promotion. That's how we're thinking about it. We focus on the long term. We focus on building brands. The spending is right in line with doing that.

Thank you, both.

Hi. Good afternoon, everyone. I have another permutation of the same, observed retail sales in tracked channels versus the over-deliver in the quarter, but hopefully it's from a different angle. If you can talk about all channel retail sales growth, if you give us a sense of what were Clorox's Q4 retail sales, including online and Home Depot and things like that, so we can better understand your guidance going into fiscal ’24? If we can start with that and I have a follow-up.

Javier, 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 in tracked channels; that's true. But what I'd also tell you is some areas not showing up in tracked channels, we had very strong performance. Our PPD business grew both volume and sales in the quarter. In international, we held volumes and grew sales 14% organically. Our non-tracked sales were even stronger than track. We're seeing broad performance, not only in tracked channels, but we're seeing it in all areas where we're selling product. That contributed to the overall performance of the business. You'll probably see even stronger results on what you're seeing if you're just looking at tracked channel performance.

I'm asking because Linda mentioned that consumption has been stronger, which is part of the over-delivery this quarter. However, we don't see that reflected in tracked channels. Retail sales grew by 6% in both the March and June quarters, but there's a significant difference in organic sales, especially regarding volume. So, I was wondering if you could clarify what percentage of your sales comes from non-tracked channels for this quarter, considering the seasonality of Kingsford. That information would be helpful.

Javier, maybe it would be good to back up again and go through all the drivers of what drove track consumption versus organic sales and Kevin just covered part of it. We do have a fair amount of our sales in non-track channels. It's complicated because non-track does not include international PPD, which is why Kevin broke it out that way. To break it down, we had Q4 organic sales growth of 14% and we saw track sales consumption of about 7%. The delta would be what Kevin highlighted. International and PPD are part of that. PPD grew volume, and international held volume. Remember that we're lapping wipes inventory that Kevin spoke about, and that's a portion of it. We also saw stronger non-tracked performance in a number of retailers across e-commerce and brick-and-mortar, etc. In addition to that, we do always ship some of our Q1 events in Q4, and that contributed to that delta as well. We do have a strong non-channel track channel presence. Yes, that absolutely can move the number. This is pretty normal for us to have a quarter that is a bit disconnected from tracked channel sales, in addition to the fact that we typically ship some of that in Q4. Those are really the drivers of the difference between the 14% and the 7%.

Well, thank you. And if I squeeze in something when it comes to pricing for next year, how much is the carryover impact for fiscal '24?

Javier, this one is pretty minimal. What we have left to lap is the fourth round of pricing that we took for half the year. So if you look...

Okay.

This year we had, in total, about 670 basis points of total benefit for the year. You should expect a much smaller benefit in fiscal year '24 because now we're looking at just half a year on one of our pricing actions. The fourth round was not as large as the third round.

Okay. Thank you so much. Very helpful.

Great. Thanks. I just want to revisit gross margin because the pace of gross margin expansion in fiscal '24 versus the year just reported, obviously, a fair bit of deceleration. I'm trying to understand, I mean, fiscal '23 recovery in gross margin was so meaningfully ahead of your expectations. Why is the pace of expansion slowing so much in fiscal '24? Because cost inflation, well, maybe not down, is certainly less of a pressure versus last year. Pricing is by and large working. The top line is growing and gross margin is still quite a bit below pre-COVID 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. Our commitment is to rebuild gross margin back to pre-pandemic levels. This year, we're looking at about 150 to 175 basis points of progress. That's slowing from what we delivered last year, and it's primarily driven by pricing. We took four rounds of pricing over the last 18 months, and that had a significant benefit last year. It contributed over 650 bps to gross margin. As we look at fiscal year '24, as I was just mentioning to Javier, we have fairly limited pricing in the plan. We're going to get a little bit of carryover on that fourth price increase, so it'll have a smaller impact on gross margin. 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. 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. While we're making good progress, I'd expect that to continue as we move into fiscal year '25. I expect that progress to continue. The one thing we'll have to look at over time is we buy these commodities for decades. They are cyclical. At some point, they'll turn deflationary. That's not our expectation this year. When that occurs, it'll certainly accelerate the pace of recovery. It's just hard in this environment to predict exactly when that's going to occur. 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, but I feel very good about progress we're going to continue to make this year in spite of ongoing inflation.

Olivia, I'll add just one point to that. Kevin underscored the $200 million, which is significantly better than what we had at $500 million in fiscal year '23. But I just want to underscore that's still three times the level of average we had before we got into this inflationary cycle on an average year of inflation. 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? In your view, what kind of impact does innovation have on this year versus last?

Sure. Innovation continues to be the lifeblood of how we grow our brands over time. We set out to deliver bigger, secure innovation platforms as part of our IGNITE strategy. 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 in the prior strategy period. We'll continue to focus on accelerating that this year. We have innovation across our portfolio just as we did this year. We would expect something similar in fiscal year '24. We're really focused on value and value superiority in that innovation. We're looking at a combination of product improvements and new innovations, as well as good claims support. Of course, we'll support that innovation with that 11% of sales from an advertising and sales promotion perspective. We think as we lap these price increases and as a consumer comes under more pressure, innovation will be as important as it ever has been. Our retailers are looking for innovation to help them grow their categories and to ensure that we're getting shoppers down the aisles, etc. We see it as a continuation of what we've done. We want to have additional progress as we can and think we have the right investments to ensure that continues in fiscal year ‘24.

Thank you.

Thank you. I want to analyze our loan model and review the multi-year stacks, particularly the two-year stacks regarding volume and price mix this quarter. Your comments about the comparisons and contributions make more sense, especially regarding charcoal and the situation with wipes in health and wellness. As we look ahead, are there any other timeframes that we should highlight, considering the recent inventory reductions by retailers? I'm interested in understanding any potential differences in shipments compared to what we see in tracked channels, knowing that there are always off-track elements that we may not capture.

Yes, Lauren, it has certainly been a challenging time. I don’t think everyone fully understands what we mean by challenging, but I would say we are currently in a decent phase of normalization where I don’t anticipate any significant issues ahead, such as a major inventory buildup that we need to address. We have managed the impacts of COVID-19, and while we are still experiencing the effects of pricing changes, I believe you can forecast that based on the information we've shared. In terms of any unexpected events in the market, I hope for stability, but I don't see any major challenges on the horizon, with pricing being the notable exception.

Okay, great. Following up, I was wondering if you could share your current status regarding shelf space or distribution. We have discussed before how pre-COVID, there was some lost shelf space. Now, as you mentioned in the release, there has been a strong innovation agenda. Where do you currently stand on shelf space? Are you considering opportunities to increase shelf space with innovation in 2024? Is that part of your outlook?

Yeah. We made good progress as we returned to full supply and getting our total distribution points up. We made good progress over the last 18 to 24 months across a number of our businesses. You all remember that in many cases, us and our competitors couldn't fully supply to a lot of third-tier brands that had entered. 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 ‘24 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 the consumer, given their value-seeking behavior. We think we've done most of that work, but we want to continue to make progress, particularly to ensure that we get our innovations on shelf as fast as we possibly can on both the physical and digital shelf, and that's what the team will be focused on. That will contribute to ‘24. We expect the category growth plans and the plans we have with retailers and our execution of those plans to contribute. We feel good about what we're walking into and what we have for both the front half and the back half.

Okay. Thanks so much.

Sorry. Can you hear me?

Okay. Great. Sorry about that. So following up on that conversation you were just having, actually, 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've guided to what you expect category growth rates to be, both from a value perspective and a volume perspective, or if you're embedding any bias of share gain or even some share sacrifice as you still continue to rebuild the margins? Just how to think about your guide relative to category growth expectations?

We've certainly taken account 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 lap pricing and as we head into what we predict is a mild recession in the back half, assume category rates commensurate with that. By category, we're looking at our plans, comparing it to that and adjusting based off of if we see headwinds or tailwinds. We want to make progress over the long term on share. We've 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, grounded in the realities of the categories and what we expect.

To summarize, it seems that overall, your revenue is essentially aligned with category growth. If things improve, there could be a possibility of gaining market share, but if not, you'll remain in a stable position. Is that accurate?

That's fair.

Okay. Thank you.

Thanks, Steve.

Good evening, everyone. Thank you for having me, and congratulations on a strong finish to the year. I'd like to take a moment to revisit a time when you used to provide a detailed account of all your price increases and decreases. Back in 2009 and 2010, there were decreases related to Glad and litter. More recently, in 2018, I believe you rolled back the prices of Glad. This was clearly influenced by significant fluctuations in commodity prices. My question is, if we experience another downturn in commodities, would we expect you to reverse some of the price increases implemented over the last couple of years? Or, considering the investments you are making, are you managing the business differently this time? Instead of reducing prices, will you reinvest that relief into other areas of the business, such as advertising and marketing?

Hi, Jason. Thank you for your comment. To clarify your question about price rollback, we have reversed one price increase in a category we no longer own from a truckload perspective after implementing an increase. Regarding the other pricing actions you mentioned, we have always utilized trade to assess pricing since resin is a volatile commodity. As we adjusted prices, we relied on trade to make up the difference if we saw favorable changes in resin or any shifts in the category. The pricing changes we made have remained in the market. Although we have not completely regained our margins, we have made significant progress through these pricing actions, and there is more work ahead. Considering the ongoing inflationary environment, we anticipate that our price increases will hold, which should help restore volume and household penetration through innovation and investment in advertising and sales promotion. We believe there are no structural reasons preventing these price increases from sticking as they have previously. We are focused on growing categories effectively through these additional strategies. If needed, we will respond to market dynamics, with Kingsford being a prime example where we did not rollback pricing.

Okay. So that actually sounds like you do intend to manage pricing differently than you did a decade ago or so. Last time we came through a commodity super cycle where you didn't just adjust by trade, you actually announced those price increases, you published those price increases, you gave us a log for the list price decreases on the back end of it. I'm hearing you say now that that's even if clients do come in, that's not the intent. The intent is to manage it differently with trade and flexing trade 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 overall inflation environment?

Yeah. I see it as a continuation of what we've done in the past, Jason. We seem to have a little bit of different data. But yes, I think we're getting to the same conclusion, which is we intend for these pricing 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 on the strong category performance we've had from a top-line perspective as I noted on spending and innovation. 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 the spending is right in line with doing that.

Understood. Thank you.

Thanks, Jason.

Great. Thank you, everyone. We look forward to speaking with you again on our next call. And until then, please stay well.