Clorox Company (CLX) — Q3 2024 Earnings Call Transcript

Thanks, Paul. Good afternoon and thank you for joining us. On the call today with me are Linda Rendle, our Chair and 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 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 reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures. Now I'll turn it over to Linda.

Thank you for joining us today. During the third quarter, we continued to progress our recovery from the August cyber-attack while advancing our Ignite strategy to build a stronger, more resilient company. For the most part, our progress in the third quarter was in line with our expectations. Sales came in lower, as a few businesses experienced slower supply recovery than we planned. Gross margin came in higher, benefiting from our margin transformation program and a modernized environment. Despite lower sales and strong investments in our brands, we finished the quarter ahead of our expectations on adjusted earnings per share. Before we turn to questions, I think stepping back and putting these results in context is important. Given the magnitude of disruption from the cyber-attack, we knew our plans to restore the fundamentals of our business would be complex, and a recovery path would not be linear. We have made tremendous progress and are laser-focused on finishing the job. We tracked well ahead of our expectations in the second quarter and knew we had more work to do as we entered the back half of the year to return our business to the strong trajectory it was on at the start of fiscal year 2024. This included fully rebuilding inventories, restoring normalized service levels, and rebuilding commercial plans for each of our businesses, which we accomplished by the end of the third quarter. These actions unlock our ability to fully restore lost distribution due to the cyber-attack and return to normalized merchandising levels as planned in the fourth quarter. Through Q3, we have regained nearly 90% of the market share we lost and expect to make further progress in Q4. With service levels now normalized and strong investment levels behind our brands, we're confident we can rebuild household penetration and return to volume growth over time. Despite the significant disruption and lost sales we've experienced and based on our team's strong work, we are now positioned to exceed our original gross margin target and meet or exceed our adjusted EPS guidance we provided at the beginning of the year before the cyber-attack. Importantly, our recovery progress to date puts us in a good position to exit fiscal 2024 with strong fundamentals. In addition, we continue to execute well against our IGNITE strategic priorities throughout our recovery. We made substantial progress rebuilding gross margins, continuing to target returning to pre-pandemic levels over time. We launched innovation, invested in our brands and capabilities, progressed our streamlined operating model and digital transformation, and completed the divestiture of our Argentina business, which supports our goal of evolving our portfolio to deliver more consistent and profitable growth. In closing, we're taking the right steps to navigate the near-term and continuing to advance our IGNITE strategy. I'm confident we have the right investments and plans to deliver against our strategic and financial objectives and enhance long-term shareholder value. With that, Kevin and I will take your questions.

Thank you, operator, and good afternoon, everyone. Hope you're doing well. I was hoping to get some more color on the implied 4Q organic sales growth and how this informs you on the path forward. I know this was always the case, but it seems like you're expecting to close some of these distribution gaps in 4Q, more or less implying that you're going to overship versus consumption. But when you kind of look at the implied 4Q guidance and to kind of where you need to be to land at the low end of low single digits for the year, it doesn't really imply a ton of growth considering this dynamic. So maybe first, am I thinking about that right? And if so, how does this exit rate inform your view on the growth looking out to next year just in the context of the long-term algorithm of 3% to 5%? Thanks.

Thanks, Peter. Why don't I get us started and I'll just talk about some of the dynamics that we expect in the fourth quarter. And then I'll hand it to Kevin, and he can talk about the outlook. And of course, you’ll appreciate we're not setting guidance for fiscal year 2025 at this point, but Kevin can certainly give you how we're thinking about the exit. So as it comes to Q4, there are a number of dynamics and things that are important that we plan to do and have the right plans to address. And the first is what you mentioned. We intend to fully restore the temporary distribution we lost as a result of the cyber-attack. And we are well on track to do that. At this point, we know the decisions on the shelf resets from all of our major retailers. We built the inventory in order to supply those distribution losses and are on track to restore that distribution. So certainly, that will help both reported and organic sales as we head into the fourth quarter. The second dynamic is now that we have fully restored our ability to supply and are back to normalized service levels, we are going to return to our merchandising plans, which, if you recall from our earlier conversations, we expect to be higher than they were during the pandemic, basically returning to pre-pandemic levels. And that is on track as well for the fourth quarter, and both of those will support growth. The thing I would mention, as you can see, the implied range is rather large. And that's because it's still quite variable and volatile what we're dealing with. We're dealing with a complex recovery. Shelf resets are all at different times for our retailers. How fast those resets happen. And then, of course, where we are in the purchase cycle with consumers will matter, and that's informing the depth and breadth of that range. But I'll hand that over to Kevin and he can help you think about just how that plays out in the outlook.

Hey, Peter. Regarding the outlook and your specific question about organic sales growth in Q4, I anticipate seeing improved volume trends this quarter. In the first half of the year, our volume performance was down about 7%, and it declined 4% in Q3. I expect this trend to improve as we progress. Additionally, I foresee an increase in trade spending as we work towards a more normalized promotional environment; Q3 was still below typical levels, suggesting you can expect some rise in trade spending. Following the divestiture of our Argentina business, things have become much simpler. I do not expect any foreign exchange headwinds or significant pricing changes now, as most of our pricing issues were international, which will be resolved. Therefore, we should observe better volume trends and a slight uptick in trade spending, leading us to an organic sales growth rate that will likely be flat to slightly down in Q4. This positions us to achieve about a 1% increase for the year.

Awesome. Thanks so much for that. And Kevin, maybe just one follow-up or more of a piece of clarification. In the prepared remarks, you mentioned kind of building on the 43% gross margin exiting the year. Is that a broad-based comment, or are you talking specifically about building relative to the 4Q exit rate?

Yeah, I think there's a few things. You saw where we landed, Peter, in Q3, a little over 42%. We think we'll be closer to 43% when we exit. You know, as Linda said, we're not prepared to provide our outlook for next year. But I would tell you, we fully expect to continue to expand margins in fiscal year 2025. So we'll exit this year. You know, over the full year, we're probably up around 42%. And I expect to build on that next year.

Thanks so much. I'll pass it on.

Thanks, Peter.

Thank you, everyone, and good afternoon. Linda, you mentioned some areas of the portfolio that had slower supply recovery than anticipated, which affected the third quarter. I understand the 10% that you referred to is still below the service levels. In relation to your 2% organic growth, how much of that was due to out-channel consumption, considering your report also noted consumption losses? Could you provide more details on which areas you are still behind in market share and what gives you confidence that the consumers lost during that period will return to your consumption patterns? Additionally, Kevin, I would like clarification on your earlier comments about building margins into fiscal 2025. How do you view rising prices in other commodities? Are you factoring these inflationary commodities into your plans, and how do you intend to offset that? Is it primarily through savings? How should we approach IGNITE as we move forward?

Sure. All right, I'll get started with that first question. And I think the question was twofold. So I'll start first maybe addressing the areas on supply that we called out that impacted sales for the quarter. And then I'll talk a bit more about the consumer and the confidence that we have about where we are and that we have the right plans in place as we roll into Q4 to continue to accomplish what we intend to do around the consumer and restore our business fundamentals. So in supply recovery, we talked about the last call and actually the call before that we had a couple of businesses that were more challenged given the depth of their portfolio. And that was Glad, and we called out Litter as well. And those continued to be a challenge a bit longer in the quarter than we had originally anticipated at the time of forecast. The good news is that with a few other minor things in businesses, we were able to fully fix all of those by the end of the quarter, and we exited Q3 getting back to normalized service levels to our customers. And so feel good that as we head into Q4, we have the right inventory and we have the right production plans and plans with our retailers to be able to get back all of those distribution points that we lost temporarily and, again, restore merchandising. So again, that was a temporary thing in nature, impacted Q3, but we don't anticipate that it will impact Q4. If you look at the consumer, a few things going on. First, our distribution points are still down versus pre-cyber, which we had anticipated. And we knew that the majority of shelf resets would happen in Q4. That is still going as planned and we expect to fully regain that distribution that we anticipated having at the beginning of the year when we set our original outlook. So on track there. And then I would say we're starting to see the share turnarounds. We've recovered nearly 90% of our share loss. And actually, if you even look at the last few weeks, you've continued to see that trend improve. And in addition, we're rebuilding households. So our households in Q3 are still down versus pre-cyber, which we expected, but improving and moving in the right direction. And if you think about it, we really only had from when we fully restored inventories, and again, haven't fully restored distribution, that's basically one purchase cycle for the consumer in our categories. The purchase cycle is about 90 days. So we've had one chance to influence as that consumer comes back to the shelf, and we're not fully restored yet. What we're laser-focused on in Q4, and this is why we have the investment levels that we do, where we've increased our spending on advertising and sales promotion, as well as reduced revenue, ensuring that we have the right spending that in this next purchase cycle, that we can recapture that consumer. We intend to do as much of that as we can in Q4, and we're hoping to get the majority of it done. We're very confident in distribution, very confident in the merchandising, and now we're just watching as the consumer comes back to a fully-stocked shelf. What is their behavior, and do we need to make any tweaks as we head into the beginning of fiscal year 2025, but feel very good about where we are in restoring the fundamentals and very good that we're beginning to see the consumer come back that we lost during that time.

Andrea, your question on 2025 and gross margin. You know, as I'm sure you can appreciate, we're still in the process of building our plans right now for 2025. But where we're sitting at today, I fully expect we're going to be growing top line, expanding margins, and growing earnings. And so as you think about how we grow margin, I think to your specific question, certainly, top-line growth helps build margin. Additionally, the divestiture of our Argentina business, that was margin dilutive to the company. So, divesting that business certainly helps our margin. And then our margin transformation efforts. We think collectively that more than offsets what we believe will be a level of cost inflation, but continue to moderate. So, we do not believe right now we're going to be in a deflationary environment next year. There will be some cost inflation, but it continues to moderate. And the actions I just mentioned we think are more than enough to offset that and allow us to continue to build margin next year. But the exact amount we're still working through.

Yeah, thank you. That's super helpful. In Argentina, what is the impact of removing Argentina as a tailwind?

Yeah, we don't break that out, Andrea, specifically. But I can tell you it was significantly below the company average in terms of gross margins. You can probably do some math. It was 2% of sales and well below the company average in terms of gross margin.

Okay, very good. Thank you very much, I will pass it on.

Yeah, thank you.

Hi, everyone.

Hi, Chris.

I wanted to ask about sales delivery in the quarter excluding international. So in the prepared remarks, you spoke about increased competitive activity as you were trying to get back on shelf. Price mix was negative in your key division in the quarter. And I'm trying to marry that with, I think you had sounded quite good recently on the logistical dynamic of getting back on shelf in the quarter. And so I guess I'm trying to put maybe altogether the why behind sales coming in a bit below your expectations and whether competitors are perhaps a bit firmer on shelf and share gains than you had expected, and you need to increase competitive spending, whether that's in price mix? And obviously, you called out some trade promo in your gross margins this quarter to get back on shelf and whether you think to your comment to the prior question, you may need to actually accelerate that spending over the next several quarters if this shelf-uplift is not exactly how you expect. So you can tell, I'm trying to wrestle between not just that sales came in below the expectation, but the why and some of the actions that you seem to be taking to try and rectify the situation.

Yes, Chris. Based on all the data we have, the progress we've made with consumers, and our expectations for Q4, we don't believe that the sales shortfall was a result of a consumer issue or that we failed to recover from the loss in household penetration. The situation stemmed from having two very complex businesses; we anticipated making more headway on supply than we actually did. It took longer than expected and continued through the end of the quarter instead of being resolved mid-quarter. This affected our ability to supply for merchandising primarily. We always understood that distribution would rebound in the fourth quarter since that's when retailers reset their shelves. The good news is that we fully restored supply by the end of the quarter and are on track to recover distribution. However, this situation was exacerbated by heightened competition as we couldn't meet the demands for merchandising events, and we were still not fully equipped to supply those two businesses. But we have moved past that; we overcame it by the end of Q3. Now we can fully supply in Q4. We believe our investment level is appropriate and we have not restricted our businesses. We have stated they should invest what is necessary to reclaim these households. This is reflected in our outlook, where we believe we have the right allocation for both advertising and sales promotion. If we need to adjust as the quarter progresses, we will do so. Right now, we feel confident in our plans and are seeing the return of those households. We have gone through one purchase cycle and are starting another in Q4, with all indicators suggesting we will restore our business. We believe the fundamentals will be fully recovered by the end of Q4, positioning us well as we enter fiscal year '25.

Okay. One quick follow-up would just be Manufacturing and Logistics was a 210 basis point negative impact to gross margin in the quarter. That's a pretty notable step-up. And I don't think we're seeing logistics inflation at that level. Kevin, can you maybe just contextualize what happened there in the quarter? And whether that specifically is durable going forward or whether this is just an anomaly? Thanks.

Sure, Chris. The increase you referred to that is primarily driven by inflation in Argentina, you might recall before we divested that business, we were projecting about 300% inflation, and they had a significant devaluation in December. So that was playing through and it's the biggest driver. To your question, as you go forward now that we divest the business, I would not expect to see Logistics and Manufacturing be that level of a drag. Logistics is turning on us; it's fairly benign in terms of year-over-year cost once you strip out Argentina. So, this is one of the additional benefits of not having that business in our portfolio any longer, given the disruptions it had broadly across the P&L.

Hi guys. I get you don't want to be too explicit for fiscal '25 at this point, but I just had a follow-up question on top-line growth as we move into next year just relative to a normal base this year. Kevin, can you just talk about or Linda, any puts and takes as you look out to fiscal '25 as we think about top-line growth? And maybe also just quantify what level of sales did you lose in fiscal '24? Do you expect to lose in fiscal '24 from the systems issue relative to a typical year?

Hi, Dara, what I'd say it's a little too early for us to talk too specifically about the '25. As I said, we're still developing our plan. Maybe the one item, I would just make sure to remind folks is, with the divestiture of Argentina business, that's about 2 points of sales. We'll see a portion of that in Q4, but you'll probably still have about 1.5 point headwind next year as a result of that sale. But for the other items, we're going to wait until August to have that conversation because we're still working through our plans. It'd just be too early to talk any detail.

Okay. And then on gross margins, you talked about a CAGNY focus on holistic margin management and RGM. Can you give us a little more color on how important that might be over the next couple of years? And as you think about recovering gross margin pressure over time as you indicated in the prepared remarks, is that a big piece of the recovery? And as we think about the recovery, is this a multi-year effort? Should we think about a lot of progress coming out in fiscal 2025? How do you think about that conceptually from a timing standpoint?

Sure, Dara. Without obviously, again providing any guidance for 2025 or beyond on specifics. I think I can say with really strong confidence, one based on the track records, if you look, we've delivered our sixth consecutive quarter of gross margin expansion behind this toolkit that we have. And what we talked about at CAGNY is important. Pricing and cost savings have been the majority of the tools that we've had, and we put them to good use over the last couple of years as we've dealt with inflation. But we knew that we wanted to take a broader look and the fact that we are implementing a digital transformation, and we have more visibility end-to-end, gave us a great opportunity to look and see where else we can go beyond traditional cost savings. Revenue growth management is certainly one of those tools, price pack architecture within that. And the teams all have plans in place to use those tools to continue to make progress against our commitment that we stand behind to return gross margins to pre-pandemic levels and then grow from there. And we feel very confident in our ability to do that. Kevin and I have talked before, it's really dependent on two things. One, how fast we implement this toolbox and feel good about that. But second, will be what the cost environment looks like. And as we continue to look forward, we continue to see inflation in people's reporting. Again, we are not providing any specifics around our business at this point. But the pace of recovery and when we return to pre-pandemic levels will be those two factors, but we feel very good about what's in our control and that we have the right toolbox to be able to accomplish what we set out to do.

Okay, thanks guys.

Thanks, Dara.

Hi, good afternoon. Thank you for the question. You mentioned in your prepared remarks a consumer who remains under pressure. I was wondering if you're seeing this across all income tiers? Or is this comment primarily related to the lower income consumer as some other companies have indicated so far in Q1? And then you mentioned your levels of merchandising and promotion are increasing along with the higher advertising spend in the second half here. So, just wondering how much of this is driven by the need to rebuild share loss from the cyber-attack versus just trying to win over a financially weaker consumer. Thank you.

We're observing pressure across all consumer segments, and there are significant changes in behavior as people reassess their situations. This includes considerations of the interest rate environment, housing costs, and grocery prices. Generally, consumers are exhibiting value-seeking behavior by opting for larger and smaller sizes and being more mindful of their shopping trips. We pay close attention to lower-income consumers, who are facing more pressure, and so far, we've been able to maintain our strong position with them. Historically, we perform well during tough economic conditions for this group because we offer great value products that meet their needs, and they can't afford mistakes in their purchases. Currently, we haven't noticed a significant shift toward private label brands that isn't related to the cyber-attack. We're closely monitoring the situation as we restore our distribution and merchandising, but we believe the growth of private labels is primarily because our products were unavailable on the shelves. In Q3, their market share was lower than in Q2, indicating that households trying private label products during our absence are now returning. While we focus on low-income consumers, our observations reveal that all consumers are feeling more pressure and reevaluating their spending habits. Regarding our spending plans, we expected to revert to pre-pandemic merchandising levels well before identifying any stress among consumers. We believe this is essential for introducing new innovations and adapting to changing consumer behaviors, particularly during events like back-to-school or college seasons. We anticipated this shift and see it as pivotal to our growth and distribution recovery. Increased advertising and sales promotions this year are a response to the pressured consumer environment, ensuring they recognize our superior value, but this spending is still within our normal range of operations. Typically, we allocate about 10% of our budget to advertising and sales promotions; this year it's closer to 11%, but we're returning to previously reduced revenue spending levels. We don't feel the need to adjust this further, as we maintain the right spending level. Overall, our actions are more about normal business operations than reacting to changing consumer behaviors.

Okay, that’s very helpful. Thank you.

Good afternoon, everyone, and thank you for the question. I have two inquiries. First, could you elaborate on the discussion regarding market share and household penetration? It seems that the focus has been predominantly on the cyber-attack. However, if I understand the situation correctly, there were also market share losses compared to pre-pandemic levels due to the supply chain challenges you mentioned. Can you address whether the goal is to regain market share to pre-pandemic levels in competitive segments such as pet litters and trash bags? I also have a follow-up question.

Certainly, Javier. The past few years have been quite complex, with many ups and downs. I want to emphasize that our goal is to increase market share, which we view as a key indicator of our success with consumers. Unfortunately, due to the cyber-attack, we haven't seen an increase in market share this year, but we are noticing positive trends. For context, we experienced a loss of about 5 points of market share at the lowest point due to the cyber situation, but we've now reduced that decline to approximately 0.75 points. We have made progress in recent weeks. Our immediate focus is to regain market share before we look to expand further, and we believe we have solid strategies to achieve that. Many of our businesses show variability in market share compared to previous levels, but overall, we have mostly recovered, with some sectors like our cleaning business even surpassing prior performance, despite challenges related to COVID and various price increases. Overall, I believe we were well-positioned in terms of market share before the cyber incident, and while it has set us back, I am optimistic about our ability to recover. We are actively planning for fiscal year '25 and beyond to achieve the market share growth we are aiming for.

Thank you. For the follow-up, which relates to Chris' question, it's quite rare to see consumer businesses experience both negative pricing and negative volumes in a single quarter. What gives you confidence that you haven't raised prices too much, especially with value players increasing their market share in trash bags and pet litter, and most recently in Glad, indicating you won't need to adjust prices again before 2025?

Yes. First, there was a price mix in the trade component of Q3, and Kevin can elaborate on that. If I step back and consider the dynamics in Q3 that gave us confidence and those that were detrimental, it's evident we couldn't meet the supply for a few businesses, particularly Glad and Litter. This limited our availability to consumers, which is something we dislike. However, the positive news is that by the end of Q3, we regained that supply capability, and we feel optimistic going into Q4. Additionally, since we couldn't provide full supply, we faced increased competition and merchandising from rivals. Regarding private label, there was already a stressed consumer before the cyber event, and we didn't experience any significant loss in private label share during that period, nor have we lost substantial share during recessions in the past. Our brands provide great value, innovation, and consumer trust; people love our products and brands, and we invest in promoting them to highlight the superior value we deliver. We observed improvements in Q3 as we reinstated distribution and inventory, resulting in a decline in private label share compared to Q2, moving towards what we expect in a more normalized environment. We anticipate continued progress in restoring distribution in Q4. It’s reasonable to understand that if products are not fully available on the shelf, consumers will choose what is available, which they did. Nonetheless, we are confident in our brands and our spending plans to regain that share. History shows us that when we were out of stock during COVID, we managed to recover. Whenever we faced product issues that limited shelf availability, we returned to restore our share and distribution. We have a strong track record in this regard, and I remain confident in our ability to achieve this in Q4 and beyond.

Thank you very much.

Hi, good afternoon, guys. I first wanted to ask on the recovery from a shelf space standpoint. In prior earnings call, you sounded very confident that you're going to recover the full TDP that you still haven't recovered the distribution points. Is that still the expectation and in the quarter, and in the year, I mean? And was the weakness in the quarter? Like does that change a bit the full year expectation versus what you had expected, particularly for Glad and for the Cat Litter business? Thank you.

Thanks, Filippo. We fully expect to recover in Q4, the distribution against our plan that we had for fiscal year 2024 that we lost. We view that as temporary. And we have seen the shelf decisions from retailers. They are now in the process of converting their sets. As we speak in some of our categories and some will happen throughout the quarter. So we have strong confidence that we will restore that distribution. And that really was not the Q3 story because we always knew most of that distribution would come back in Q4. That's really more of a supply and service level issue story in Q3. And again, we have fully recovered from that, and we are heading into Q4 in a great place. We're able to fully supply that distribution that we will recover. I'd also just note, I did a recent roadshow with all of our top retailers. And they want our business pack on shelf too. We are the brand that leads their categories. They're very invested and growing with us. Our conversations were focused on growing, moving forward, our innovation plans, what we want to do to unlock our joint digital plans now that we're well underway on our digital transformation, now that we know 100 million consumers, how can we personalize better to them. The conversations were very growth-oriented, future-focused, and they're looking forward to having our full distribution back as well so that we can grow their categories.

Got it. That's helpful. And then maybe, Linda, just a longer-term question. I remember when you updated your long-term outlook to 3% to 5% from 2% to 4%, a component of that higher outlook was the international business. Obviously, you made the decision to divest Argentina. So maybe you can review what's left in the international business and how that contributes to your long-term target?

Sure. You are absolutely right that we talked about international being a portion of that growth. And if you look at the performance of our International over the last couple of years, it certainly has played a role where it's growing faster. But we also talked about having a more consistent, less volatile business. And Argentina was a high source of volatility and variability. And certainly, you saw the FX impact play out, and you heard Kevin talk about what we expect moving forward. So that was definitely on our minds to reduce the volatility and variability that we had and then be able to grow from a very solid base. And you might recall from a few years ago, we had purchased the majority ownership of a JV partnership we have in the Middle East, was a good example of looking at markets that we could grow faster in that were more stable and predictable, and that has played out very well. We continue to have a really healthy consumer there. Innovation is working well in that marketplace. And so what I’d say is, it's very consistent with what we've said before. We have continued business in Latin America that we feel good about, and we'll continue to grow business in Asia, Europe, the Middle East. And we continue to have growth pockets on businesses like Litter, et cetera, our cleaning business, which is the majority of our business is international, and we continue to expect international to be a strong contributor, but it will be much more profitable and stable versus what it was before.

Great. Thank you.

Thank you.

Great. Thanks. Just a couple of things. So first was just in the release you specifically called out that part of the increase in the gross margin outlook was a more favorable outlook for raw material costs or for input. So just curious on a little bit of color there. And then secondly was thinking about Argentina, I know we are not going to do business planning guidance for '25. But just thinking about when you lap Argentina, like Argentina FX is such a huge impact, for example, on gross margins even this quarter, last quarter. Do we like reverse that? Or is it just the impact disappear because the business is gone? I'm just kind of thinking ahead. Again, not about the totality of gross margin, but just how to think about the absence of Argentina moving forward and the margin impact on the business.

Yes, Lauren, I'm happy to address that. Regarding gross margins, we'll start with the cost perspective. We are noticing a continued moderation in costs; as you saw in Q3, the impact was relatively small, especially concerning commodities. Some commodities are becoming deflationary, such as soybean oil used in our food business, along with other categories including substrates and some chemicals. However, we are still facing increased costs in certain areas, particularly with petroleum-based products, solvents, and diesel. Resins have seen a slight increase, which is primarily driven by supply and demand rather than input costs. Overall, things are moving in a positive direction, and the impact in Q3 has been modest, with ongoing improvements. As for inflation, particularly wage-driven inflation, it's unfolding as we anticipated, with ongoing inflation in this area. However, commodity inflation is easing, and as we exit Argentina, which has been a source of inflation, I expect the situation to be quite manageable by Q4 on the commodity side; we will still need to address wage inflation. Looking at Argentina moving forward, I agree with your thoughts. Many of the impacts you mentioned will not persist. For instance, the foreign exchange impact you noted this quarter was approximately 180 basis points on margin, primarily from Argentina. As we move into Q4, we should see almost no foreign exchange impact on gross margins, which will be beneficial. However, keep in mind that this will be counterbalanced by other factors, such as pricing. The pricing impact seen in Q3 was mainly linked to Argentina, which will also be eliminated. In the end, Argentina was a margin-dilutive aspect of our business, and by exiting, we will see an overall improvement in margins as we remove the various elements driven by Argentina.

Okay. And that impact from Argentina from the exit and just going back to it's actually a pretty small business. It is a small net impact when you put all these pieces back together on the year-over-year margin, like in this quarter next year for example?

Yes, that's right. I mean you look at the business, it is 2% of sales, and you can probably do the math pretty quickly. It is a very dilutive business for us that when we owned it and represents 2% of our sales. So you can probably do the math, you see there is some modest benefit to our gross margin going forward now that it is out of the portfolio.

Okay. Great. And then one thing I just want to clarify. I think I figured out the call in on, but there were two conflicting statements in the release in the prepared remarks about supply chain constraints being a problem in the quarter, but having resumed normal service levels. So I didn't know if it was a timing difference, like normal service levels as you exit the quarter, but constrained by supply chain during the quarter. I just wanted to make sure it's clear on how those two statements fit together.

That's right, Lauren. So we were not able to fully service our retailers throughout Q3 until the end. So at the end of Q3, we restored normal service levels, and we entered Q4 with them back to being normalized and that marries with the supply chain comment that we had some constraints, which impacted those service levels throughout the quarter.

Okay, all right. Thanks so much.

Great, thanks. I wanted to ask you two questions around margins. First, on gross margin. Obviously, the EPS outlook for this year is now higher than where you were pre-cyber-attack, and much of that is due to the gross margin expansion of about 100 basis points ahead of where you thought you were going to be at the beginning of the year. So in the past, you've talked about 200 basis points of gross margin improvement annually as you recover from the post-COVID decline this year, now $2.75. Last year, obviously, a lot more than that, despite all the ups and downs with the cyber-attack. So, can you just talk about ex-Argentina, ex the cyber, all these things, the ability to keep outperforming on gross margin, what you learned from this year last year, what capabilities continue versus some of the one-offs that are helping and hurting this year? Or just sort of the ongoing recovery on gross margin relative to the post-COVID timing? Thanks.

Sure, I'll be happy to take that one. As you think about gross margin, and you almost have to separate what we've been doing for the last several years in terms of where I think it's going longer-term. We're still working to recover from the record level of inflation that we've had to absorb. And as I think you know quite well, Olivia, we lost about 800 basis points in gross margin due to this inflationary cycle. And Linda and I both talked quite a bit; we remain committed fully to recovering that. To your point, with the work we did last year, the work we're doing this year, we'll get about 650 basis points – we will recover. We've got more work to do and feel quite confident we'll get there. The process to get there, we were leaning into pricing. We took four rounds of pricing, which is very consistent with what you saw broadly in our industry to recover from this inflation. As we move forward though, now and get back into what I described as we believe a more normalized cost environment, typically, our cost savings efforts is more than enough to cover normal levels of inflation and allows a little bit extra that we can either invest back in the business or take to the bottom-line to further expand EBIT margin. And that's where that long-term goal of 25 basis points to 50 basis points was generated, which is normal levels of cost inflation, which for us tends to be about $75 million a year. Our cost savings more than cover that, and we use the extra to modestly improve margins each year. That's where we're going. We're not there yet. We're still working on recovering from the inflationary cycle, and not was through pricing, but it's certainly moving in the right direction. So we will get back to fully recovering these gross margins over time. And then I expect, assuming that the commodity environment gets to a more normalized level, that's how you should expect to see us continue to grow margins over the long term as our margin transformation efforts more than offsetting regular levels of inflation.

Got it. I just need a clarification regarding your prediction about increased advertising in the second half. Are you referring to an increase as a percentage of sales sequentially, or is the year-over-year change in the second half higher than in the first half? How much of that increase is attributed to the significant reduction in spending during the first half due to stock shortages versus the desire to implement more extensive programs and support for some innovations? Thanks.

Sure, Olivia. If we look back to the start of the fiscal year, we originally planned to allocate more for advertising and sales promotion, around 11%. We still aim to do that. However, as you noted, the recent cyber attack has altered our spending timeline. We spent less in the first half of the year but plan to increase spending in the second half, maintaining our goal. Currently, we are projecting spending over 11% of sales. I want to clarify that while our spending is roughly what we initially planned, the changes in our sales outlook and the situation in Argentina are leading us to exceed that 11%. We're still investing the same amount we intended when we first issued our guidance. This decision is primarily about supporting our brands as consumers face more challenges. We're enthusiastic about our innovation plans and want to back them appropriately. Overall, the spending pattern has shifted due to the cyber event.

Great. Thank you.

Thanks so much, everyone. We look forward to updating you on our continued progress on our next call. Until then, stay well.