Clorox Company (CLX) — Q4 2025 Earnings Call Transcript

Thank you, Jen. Good afternoon, everyone, and thank you for joining us. On the call with me today are Linda Rendle, our Chair and CEO; and Luc Bellet, our CFO. Please note also that our earnings release and prepared remarks are available on our website at thecloroxcompany.com. 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 year 2026 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 in 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.

Thank you for joining us today. Our Q4 and fiscal year 2025 performance was mixed, with weaker-than-expected top line growth, balanced by strong margin and earnings performance for the year. In the front half of the year, our fundamentals on consumer category and tariffs played out largely in line with our expectations. In the back half, our category slowed when macroeconomic uncertainties picked up. While this largely stabilized in Q4, it has not yet normalized. To put the quarter in context, we executed many of the elements with Opulence as we shipped higher than expected incremental orders to temporarily build retailer inventories in support of our ERP launch in the U.S. And as a reminder, our new ERP is a critical part of a strong digital foundation that enables us to better leverage data and insight to drive revenue and efficiencies. We also delivered strong gross margin and earnings in the quarter. At the same time, when consumers are stressed, the bar goes up and we didn't deliver on all elements of our plans for value superiority on some of our businesses this quarter. We also lapped abnormally high demand creation activities from last Q4, as we continued to rebound shares following supply restoration from our August 2023 cyber attack. This led to lower-than-expected sales for the quarter when we exclude the ERP retail inventory build. Looking ahead, we are excited about what we need to do to win in the marketplace and deliver clearly superior experiences and value to our consumers in this environment. We see opportunity ahead as consumers continue to seek better experiences and we will lean into this with our innovation pipeline in the back half of the year. Importantly, we're excited to advance our transformation and begin to fully unlock the new modernized capabilities we built. While we have more work to do, I'm confident we have the right plans, capabilities and investment levels, not only to win with consumers, but also to deliver strong financial performance in fiscal year 2026 and beyond. With that, Luc and I will now take your questions.

I wanted to start by asking about the sales performance in the quarter. We can see from the data and trends from your peers that the category performance has been disappointing. However, if we exclude the ERP benefit you mentioned, the organic performance appears to be weaker than the data suggests and slightly below the expectations set in your earlier guidance. Could you help us understand the difference between the expected performance and the consumption data we have? I realize that it's challenging to have clear visibility in the short term with all the variables at play, but how did everything unfold compared to your expectations?

Peter, this is Luc. Why don't I just give you the breakdown of our sales performance and the way to consumption? So if you look at our organic sales growth was about 8%. And if you back out the 13% to 14% related to the inventory build at the retailers, you get about negative 5%. And remember, at our last earnings, we had estimated that excluding the impact of the ERP, we were expecting to be maybe negative 3%. So that's lower than we expected. That's also lower than the consumption, which was about negative 3%, but the gap is the inventory destocking that we had mentioned in our last earnings. So really negative 3% consumption is lower. We would have expected to be in line with the category, which was slightly negative. And the difference is really a lower share performance than anticipated.

And Peter, maybe I'll take on what we experienced and share where we missed versus our expectation. This was a pretty dynamic quarter, and we knew it was going to be. We are lapping a quarter from last year that had very high spending and had high merchandising, and that was due to many of the activities we put in the marketplace to recover from the cyber attack we had experienced the year before. So we knew we were lapping that, and we had made a lot of decisions to adjust spending and adjust our merchandising plans. At the same time, we saw a very, very dynamic consumer environment as consumers were trading off, trading into smaller sizes, moving to different retailers. And then, of course, we were preparing for our ERP transition. So a lot going on. And just quite frankly, in a few businesses, it didn't go as we had expected to. Some of those elements we didn't execute as well as we could have. And things were more than expected. On the flip side, there were some businesses that were exactly as we expected, cleaning is a great example of that, where we continue to grow share. Innovation plans worked extremely well. The changes we made to merchandising played out. And so that's really the delta between where we thought we were going to be in Q4 and where we landed. We are not satisfied with that, but we see clear opportunities to improve moving forward and our plans for '26 contemplate that and really begin to ramp up in the back half, and we feel good about that. But this really just comes down to a very dynamic quarter, and we didn't get it all right, but we're clear sighted on where we didn't and what we need to do moving forward. The other thing I'll note is really importantly for us, we look at our brands to say, was this a brand issue or was this an execution issue? And our brands continue to be incredibly healthy with consumers. We grew household penetration in fiscal year '25 and although we lost share in Q4, we grew share for the year, and we came off of a quarter in Q3 where we maintained share. And if you look at our consumer value metric, that remains at a high point in fiscal year '25. So we know it's not our brands. They still resonate with consumers and have every right to perform, and we're going to make sure that execution comes through for fiscal year '26.

And I guess maybe just to that point, you just mentioned kind of the sequential improvement, it was mentioned in the prepared remarks that consumption trends would remain sluggish but improve in the second half. Can you just unpack that a bit and kind of what drives the confidence that trends are going to improve? Is that a category-based assumption? Or is that a reflection of some of the actions you're taking to drive improved share performance?

Yes, Peter, it's both. But let me focus on what we control and kind of walk you through it. We're really seeing in the front half of the year is continued sluggish categories, and we've adjusted our plans, which will take effect over time to address what we're seeing in consumer behavior. We're going to see those types of activities ramp up through the front half of the year, but really take hold firmly in the back half. The other thing I would mention is we have a very strong innovation plan in the back half of the year. As you might recall, we talked about in fiscal year '25 that we would be building on current platforms, innovation platforms that we had, and we would be launching new platforms. And that really was a result of the cyber attack we experienced. We decided to double down on what we had instead of launching new, but now we're at that point, we'll be launching new innovation in the back half, which we're excited about. And that will support not only category growth, which we care first and foremost about but also we believe market share improvements. So looking at the category lens, I would say it still remains uncertain. Consumers are definitely still under stress. We continue to expect our categories to perform below what they normally do. But we can't tell you with certainty what the categories will look like, but what's under our control will sequentially improve throughout the year.

Initially, I wanted Linda and Luc to review the NAV for returning to previous levels, similar to what you did with the ERP, and then discuss the pull forward. It appears that the negative impact is actually more significant than the positive effects. I would like to analyze the numbers or consider how other peers in the industry are experiencing the same challenges related to destocking. In other words, is the current destocking, driven by a shift towards e-commerce, worsening the situation? Is this additional destocking occurring on top of what we are already experiencing due to the ERP?

Got it. Why don't I hit 2 things? Let me address your more just industry destocking question, then I'll get into the ERP. And I'll pass it to Luc to walk you through how to think about Q4 as it relates to the ERP from a performance perspective and then how to think about '26 coming out of that and what will happen in numbers because we acknowledge there is a lot of noise right now going on in that, and we'll try to provide as much clarity as we possibly can. So first on destocking, as we talked about at the end of Q3, we did expect some destocking to continue in Q4, and largely what we saw was in line with our expectations. We saw a bit more in a couple of our businesses. We don't look at that as a structural issue. We look at that as more retailers continuing to do what we do, which is get better at inventory management. We're not experiencing out-of-stocks. We do not have any material retailer destocking outside of the ERP, which we'll talk about, which is a different thing in our plans for fiscal year '26, but we continue to watch it very closely. And that wasn't the big story for Q4 and as we think about fiscal year '26. With that, let's turn to the ERP, and I'll do some framing and then again hand it to Luc. First of all, we're on track to complete the implementation of our ERP this year in the U.S., which is terrific. And I think it's helpful to remind everybody that the ERP happened at the beginning of July, and it happens in phases that the year, but the big portion really went live at the beginning of July, and we are now in a stabilization phase. So I wouldn't say we're done, but we're still in the ramp-up phase. And to put the size of this ERP transition in context, this was not an upgrade of an ERP. This was a complete greenfield implementation of an ERP in the U.S. And that's because our current ERP was 25 years old. So we really needed to start from scratch. And that means this was incredibly complex, and it took years of planning. And of course, these types of implementations come with exceptionally high complexity. And as you think about what we just executed over the last, call it, 8 weeks, we had to build our own prebuilds ensure that retailers have the right amount of inventory for when we shut our system down because there's a period of time you can't take orders and then you have to bring the system back on. You have the nervousness of when you turn the system on and turn it off and turn it back on and then, of course, beginning to ramp up those processes. And the good news is, most of that went exceptionally well. We experienced the normal bumpiness as we're in the ramp-up phase. And the good news is retailers have been terrific partnering with us so that as we encounter issues, we're able to solve them quickly and move on. But we are still in the middle of that ramp-up phase here and will be for the next few weeks, and then we'll finish the implementation for the rest of the year. So as I hand it to Luc, just the takeaway is there is a lot of noise between fiscal year '25 and '26 because of the size of this implementation, and we have to make sure that we have the right inventories at the right places to ensure that this went smoothly. And that's why I think you're seeing more than what you might for other companies that are much bigger prebuild. And then, of course, we have to deal with that in the year. And again, it is just noise between years and nothing structural. But I'll hand it over to Luc to walk through the different timelines.

Yes. Thanks, Linda. Let me offer a couple of comments on what happened in Q4 because it was a little different than our expectations. And once I do that, just let me walk you through the impact of the early shipments to the outlook. So the retailer inventory build ended up being much higher than we anticipated. If you remember, we had anticipated that the retailers would order between 1 and 1.5 weeks of inventory, and that was equivalent to about 2 to 3 points of annual growth. Now in discussion with retail partners in the spring, they all indicated about 1.5 weeks. And based on the learnings from the pilot we did in Canada, also based on some benchmarking we have done versus prior implementation, we expected actual orders to be a little lower than a commitment. Well, most of them ended up ordering more, not less than their commitment. In fact, actually, many retailers ordered the maximum allowed. I think it speaks volumes of the past experience with those types of transitions and the risk involved for those transitions. So we ended up shipping about 2 weeks of inventory, which is equivalent to 3.5% to 4% growth. Now why do we have a range? We do have a very robust tracking process in place, but there’s still an element of triangulation. Many of our customers have an algorithm-based ordering system, which makes it challenging to separate all the prebuy orders and regular orders. So we expect that we will have a better perspective and some point estimates sometimes after the inventory drawdown. We appreciate that this creates even more complexity. The last thing I mentioned on Q4 is that the gross margin impact was higher than what we had anticipated. We anticipated a fairly minor impact on margin, about 50 basis points for the quarter and about 10 basis points for the year. And there were 2 drivers. First, we expected the benefits from operating leverage from the higher shipments. Second, we were actually planning to incur incremental expenses like external warehousing as we build up our own internal inventory. The reason the gross margin impact is higher, about 50 basis points for the full year and 150 basis points for the quarter is twofold. One, the higher shipment created higher operating leverage. Second, because we ended up shipping a lot more than we anticipated, we did not build inventory internally. So we did not incur the expenses that we had planned. So let's just give you a little bit of perspective and kind of bridge the actual impact of the ERP in Q4 relative to the expectation that we had set. Now looking at the impact of the ERP on the outlook. And again, we appreciate that this is both material and complex. And so maybe what I'll do is first, let's step back and let me describe a little bit what happened in the transition because I think that will provide the right context to understand what happens from a timing standpoint. As we transition to a new system at the beginning of July, essentially, we had a blackout period where for about a week, we were not able to process orders. And after that, just as Linda mentioned, you start processing orders, but you ramp up and you do so progressively. Retailers know that they will not be able to receive product for a period of time in July. As a result, they really ordered about 2 weeks of July orders in June, temporarily building their inventory for that period of time. So really, when you look at our sales, June sales were higher than what they would have been if there had been no transition, and July sales are lower than what they would have been if there were no transitions. Because those 2 of inventory are worth about 3.5 to 4 points of annual sales. Fiscal year '25 sales are higher by 3.5% to 4% and fiscal year '26 sales are lower by 3.5 to 4 points. And when you look at the P&L, the same thing happened in margin and EPS. There are 2 quarters in fiscal year '26 where the year-over-year growth will be impacted. The first quarter, as I just mentioned, the absolute dollars in sales are lower because we're missing 2 weeks of sales. That impact would be about negative 14% to 15%. But then you will also have the fourth quarter because you will be lapping a prior year quarter that had 2 additional weeks of sales. So those are the 2 quarters that will be impacted. I hope that helps frame a little bit the year-over-year impact, which gets pretty material and complex. The main thing to remember is it is transitory. And just when you start looking in aggregate, we're looking at 7 to 8 points of organic sales, 100 basis points of margin, and 22% to 25% of adjusted EPS growth. When you exclude that, essentially, our outlook assumes minus 1% to plus 2% organic growth, gross margin being flat to 50 basis points, and adjusted EPS growing 2% to 4%.

That's super helpful. I just wanted to figure like the 7% to 8% volume impact is greater than the positive 3% to 4%. That's why in fiscal '25, that's very simplistic to say, but just to feel how the impact is bigger this year, this upcoming fiscal, I guess, what the benefit was in fiscal '25.

Andrea, I think what it is, is you just have a higher base than '25, and so you have to take that out and then you have the reversal, and that's why it's not double the impact. It's simply the math between years.

That's right.

Starting with the top line guidance, excluding the ERP sector impact, the range is negative 1 to positive 2 on an underlying basis. Can you provide some insights into the category growth you are anticipating within that guidance from an organic sales perspective? Additionally, we have noticed that many of your categories have been quite promotional, influenced by competitors and your own actions in the cat litter segment. How do you foresee the promotional environment evolving in fiscal '26?

Thanks, Filippo. Yes. Let me provide a little perspective on the organic sales growth range. And I believe I can just provide a little more on the promotion. We have a fairly wide range. And this is really a reflection that we continue to assume that external environment remains volatile and challenging. We continue to expect that consumer will continue to display value-seeking behaviors. We continue to expect competitive activity to remain at a heightened level, and we also expect the tariff environment to remain uncertain. As I look at the organic sales growth range, it might be easier to talk about what we assume for the middle and then just talk a little bit about the high end and low end. For the middle of the range and the midpoint of our estimate, we essentially assume that U.S. category would be stabilized but not yet normalized. So essentially growing at an average of 0% to 1%. Now we could and may see numbers outside that range in any specific month because of the volatility. From a share standpoint, we assumed a little continued pressure in the front half and as Linda mentioned, just improving sequentially and especially in the back half. We're clearly not satisfied with our current performance in the back half of fiscal year '25, but we feel really good about our plan in fiscal '26. We have strong innovation plans and strong net revenue management plan as well in the back half. Volume growth would be fairly close to organic sales growth. We expect price mix to be maybe negative 1% or slightly better, which is an improvement on what we've seen this year. While we continue to expect to see some headwinds from consumers seeking value behavior, channel shifting, and promotions, that will be generally partially offset by strong net revenue management initiatives. As I mentioned, a lot of them are in the back half. So from a phasing standpoint, if you look at the front end, it’s probably we expect negative low single digits and in the back half, probably positive low single digits.

We've seen largely the promotional environment fairly rational, and we're not seeing significantly elevated levels in aggregate. There are a couple of pockets where we're seeing more competitive activity, particularly in our trash business as well as cat litter, where we're continuing to see some pretty high promotional levels and some very deep discounting. But that is pretty consistent with what we've seen over the last several months, and we do expect that to continue for fiscal year '26. So largely a rational promotional environment with a couple of pockets in cat litter and trash that we would expect to continue to be more competitive. As we think about this in our approach, what we've really thought about for fiscal year '26 is continuing to pull all levers of superiority in our plan. We want to ensure that we continue to drive profitable growth. Merchandising will be an important part of our plan to remind people that we have new innovations and to capture them during periods like back-to-school and cold and flu. We want to ensure that we're leveraging our claims and advertising, and we will continue to spend strongly next year. Focusing on innovation, communicating value, ensuring that we have the right promotional activity going on in the categories, etc. So that'll be our continued focus to ensure that we have superiority across our brands and across all the elements that we control. And you will deal with those categories where it's a bit more promotional, but we want to ensure that we are continuing to preserve good profitable category growth.

Great. And maybe a quick follow-up. On the tariff front, what are your expectations in terms of tariff impact for fiscal '26?

Yes, we expect higher costs from tariffs to be around $40 million. Now this is based on tariff announced as of today, and we also assume USMCA exemption for some of the imports that we have from Canada and Mexico. We expect to offset the impact through a broad range of mitigating actions, which includes sourcing changes, sometimes reformulations, productivity improvements, but that will also include some level of strategic pricing, although I would say it's fairly targeted and surgical and generally very modest in magnitude. The situation continues to be very fluid and dynamic, so the exposure could change, and we're staying very close to it.

I was wondering if you could clarify your expectations for an improvement in the back half of the year. I was wondering if this is based on your expectations for improving underlying consumption given innovation or also an assumption of an improving consumer environment? And then I wanted to follow up on the promotion question, just to better understand the dynamics around trade promotion. You did mention in your prepared remarks unfavorable timing. But given the consumer environment, I was wondering if this makes sense to be continuing with promotion if you are seeing unfavorable mix. And basically, where do you expect these promotional dollars are best allocated in your portfolio? Do you expect to cut down on promotion if this is unproductive and not meaningfully lifting a more challenging consumer landscape?

Yes. On the back half, we expect what we control to be the main driver of what we will experience from the back half improving. That includes things like innovation that we talked about, and again, we are launching some new platforms and continuing to expand on existing platforms we have in the company, very excited about the innovation plans for the back half, and they have good spending behind them. As well as Luc mentioned, from a net revenue management perspective, we start to see many of the benefits flowing through in the back half of the year and so we expect the fundamentals, our execution, and the things that drive value in our categories over time, like innovation and good net revenue management to take hold mostly in the back half, and that's why we see the improvement. At this point, we are not predicting a significant change in the consumer environment. We expect our categories to be above flat to 1-ish sluggish, but that's very difficult to predict quarter to quarter, moment to moment, and we're really focused on reinvigorating our categories through good advertising spend, pulling on the levers of superiority, including innovation. And then that leads to your point on promotion. We've always felt that promotion is a very strategic activity in the way that we view it. It is a great way to remind consumers at times when they have a life event going on. Promotion is fairly strategic and helps bring in new consumers and remind current consumers to stock up when they need to for those events. It also allows us to introduce innovation. So, in the back half, you would expect us to use promotion to introduce the new innovations that we have to the consumer and put it in a place where they can easily find it in the store. That being said, because the consumer is so dynamic, we are absolutely being dynamic with our promotional spend. And I'll highlight that's 1 of the things we didn't execute as well as we could have in Q4. As consumers have been buying smaller sizes, we need to adjust our promotions to ensure that we are giving them the right options and promotions. So those are the things you'll see us do throughout the year is ensuring that we have the right promotions at the right place on the right items to ensure that we communicate value and superiority to our consumers. What I don't anticipate, though, is using promotion as a way to differentially reinvigorate the category. We don't want to put spending in there that isn't good and efficient. We want to use it strategically, and we see that mainly in our categories. Again, it's fairly rational. That's what we're seeing from competitors. We think that's the right way to grow our categories given most of the volume for our businesses is done off the shelf and not on promotion. We want to continue to use it that way. That being said, it's very dynamic right now. And if that changes, we'll adjust our plans. But it is an important tool for us, and we feel like we have the right mix for fiscal year '26 and have a good line of sight on what we expect to happen in the categories and how we can drive them.

Great. Very helpful. And just 1 follow-up. On private label, I know you mentioned you haven't seen a significant change overall, but we are seeing some uptick in certain categories like wipes, for example. Are you seeing this starting on your end? Or is this maybe certain household income tiers or retail channels that we're seeing just the greater penetration of private label starting to uptick here?

Yes, overall, we are not experiencing any significant shift to private label except for one instance with Glad, which is primarily related to retailer assortment as consumers transition to different channels. This is affecting our Glad business more than others. However, on the whole, we are not observing a shift. There are some variations on a quarter-to-quarter basis, and we have seen a slight increase in private label within the life category. Yet, our life business has shown strong growth, particularly with our new Scentiva wipes, which grew at four times our overall growth rate. At this moment, we remain confident in our brands and believe that consumers are still choosing our offerings, which we support through various sizing and price pack options.

I just had a quick follow-up question on the ERP transition. Was there a greater build in certain businesses or segments versus others? And then I did want to ask about Kingsford. Linda, you mentioned the pressure on the business or at least it was called out in the prepared remarks in your quarter, but it sounds like trends improved in July and you're optimistic for the rest of the summer. So could you maybe talk about how Kingsford is positioned to win? And maybe touch on some of your innovation and activation plans and essentially how you're also thinking about the price gaps within or with the rest of the Charcoal category?

Yes. Starting with the ERP, Bonnie. No material difference between businesses that I would call out. The only thing you might have noticed in the press release would be that we do have some export business. So there was a lower impact for international simply because the size of the export business isn't corresponding to the size of what we would ship. But on all the rest of the businesses, there's nothing material to call out in terms of the differences in the segments, etc. Particularly for Kingsford, we did call out that was a business where the execution just didn't meet our expectations for the quarter. There was a lot going on. I think you all know there was some pretty terrible weather in Q4 for Memorial Day. But frankly, it came down to us not executing to the degree we know we can and must execute on Kingsford in the key holidays. And that's what happened in Memorial Day. We had slightly less merchandising and not necessarily all on the right sizes as we shifted our plan. The good news is we adjusted our plan for July 4, and we saw improvement in the plan, and we're seeing the trend on share move in the right direction. Bonnie, I don't think this is an issue of our price gap versus private label, our value versus private label, all that remains what it was before. This was really just execution, and we are adjusting our plan to ensure that we do that. An example would be, as we can see consumers want some smaller sizes for those who just want to have 1 or 2 grilling occasions. We are doing that to ensure that they have a smaller size and we're able to do that, and we're not just offering them a very large size for them to stock up on when they don't have that out-of-pocket. Those are the types of adjustments that we're making for Labor Day coming up here in a month. But don't feel like this has anything to do with our value equation between us and private label. It really just was execution.

I believe that when we face situations with fluctuations in sales from one year to the next and significant volatility in the figures, it really becomes a search for our true direction. In that regard, Luc provided some insights into how the business is expected to perform for fiscal '26. However, since it is still early, we will be looking ahead to fiscal '27 to evaluate the business with a bit more clarity, at least from a broader viewpoint. With that as a starting point, how are you envisioning the business's medium-term expectations in terms of top-line growth? The 3% to 5% target has been a longstanding discussion. Many of your competitors have category growth targets that provide some leeway. Are you still optimistic about your gross margin potential with the ERP and the shifts in product mix? Do you still view selling and administrative savings as long-term goals? I realize this is a broad question, but understanding your perspective on the medium term and whether some of these discussions have influenced your views would be valuable for us.

Thanks, Chris. First of all, I just want to acknowledge, it's never easy to go through these types of transitions, and we want to provide real clarity on the shifts because we know that it's difficult to do that. But I also want to emphasize how absolutely necessary. Unfortunately, this noise is to do exactly what you talked about, Chris, which is get back to a place where we're delivering that accelerated profitable growth as a stronger company moving forward. And so I just appreciate everyone's patience as we go through this. And we're frankly excited about what's ahead of us because of this transformation. What it does unlock is our ability to accelerate revenue having the access to data and insights that we've never had before being able to move as fast as consumers do. Seeing end-to-end to ensure that we're able to remove waste in new ways that we haven't done before, are all of the reasons we're going through this pain now to get to the other side and build a stronger company that does this more consistently. I know it's hard in the noise to get all that, but I want you to hear how excited we are and I am as a company to do that. That being said, it is a year where we have volatility. Also, as we've acknowledged, and I think everybody is acknowledging right now, it's a tough consumer environment. So unfortunately, our categories are lower growth. Of course, it's incumbent upon us to reinvigorate that category growth, and we intend to do that through innovation and good spending, which we have in our plan. We want to win share over that period of time. And very importantly, we have built a capability and a flywheel behind our margin improvement to fund that type of activity. We feel very confident in our ability to do that going forward, and that's reflected in the plan in fiscal year '26. If you exclude the variability that the ERP is driving, we’re not providing fiscal year '27 guidance or beyond that, and I know you all know that. Just if I take a step back, how do we get back to that 3% to 5%, obviously, we need categories to come back to what we thought they would be. And that was in the 2%, 2.5% range. We also continue to see good performance and better than company average from our international and professional business, and we would expect both of those over time to add a point. We would expect some share growth. You'll see that through the innovation capabilities that really start to take off in the back half of the year through net revenue management, which is ramping up. We would expect to continue in '27 and beyond. That’s what we're looking forward to. We remain confident in our ability to deliver our financial algorithm we’re going to have to get those categories back to what they were. We feel confident in the capabilities we're building. We have to execute them, and we intend to do that. We know this year is the year of a lot of noise, and we just appreciate everyone's patience as we go through it, and we'll continue throughout fiscal year '26 to show you those signs that we're seeing of the things that we are building and how they're taking hold. When we get closer to '27, we'll talk about what that looks like.

I'm here. Sorry about that. I wanted to discuss the consumer sentiment, as we're hearing from you and other household goods companies about a weak consumer. However, many other industries, retailers, and banks have a different perspective. Have you been able to identify what specifically makes consumers in the household goods and personal care sectors more value-seeking or sensitive compared to other sectors?

Yes. I think it's helpful to start and take a step back on the consumer overall. If you take a step back and look at consumers in aggregate, if you look at jobs, if you look at income inflation, if you look at the broader fundamentals. Yes, you see some strength in the consumer. And that was what made people very optimistic heading into this period that we would start to see improvements where it was a bit weaker. But the dynamic going on, I would highlight 1 word, it's uncertainty. I’d add volatility to that, as there are so many things uncertain right now for consumers as they see macroeconomic policy, trade, other things coming into life that they are making trade-offs based on the information they have at the moment. That information has changed pretty rapidly over the last number of months. We saw an influx of spending into edibles versus non-edibles. People were trying to be sharp on their spending in these stores to deal with the uncertainty they had in their wallet. At the same time that you see this value-seeking and this uncertainty behavior from consumers, interestingly, you also see this accentuated trend right now on convenience and experiences. Consumers are still buying things and experiences they like. We're seeing in our categories. For example, we're seeing significant movement to convenience. Our wipes business, which might be counterintuitive, is growing very strong right now. So we're seeing all these dynamics of consumers managing uncertainty, which means moving their dollars in their wallet across different places, doing it very dynamically. In aggregate, they’re pretty healthy, which is why we have confidence over the long term; this is going to work out because we are in essential goods. At some point, they will run out of pantry inventory, we do not see at-home behaviors changing that much. The strength of our brands, the strength of our plans, make us confident that we will control what we can this year to deal with that and hope to reinvigorate category growth. We see stronger numbers in our categories moving forward.

I wanted to ask about your plans for the next fiscal year to enhance your competitive advantage. You mentioned innovation in the latter half of the year and the possibility of increased promotions. Could you elaborate on your flexibility regarding promotions and brand support to effectively communicate that message? Additionally, could you provide insight into the main factors contributing to the current weakness, particularly beyond consumer trends? Some of this may be due to trade-down effects, but I'm also interested in how much the product lineup might need improvement, as well as your channel and category exposure, including where you are over-indexed or under-indexed, and how that affects your category mix.

Sure, Olivia. Superiority is fundamental to how we win in our categories over the long term. It's incredibly important that our '26 plans improve that superiority. If you look at our categories overall, our consumer value metric is 60% superior, which is higher than it was even pre-pandemic. We've continued to maintain that even through tough times over the last few years. We want to do is in those categories where we already have good superiority, we want to continue to raise the bar through new innovation and continued good claims work to ensure their shopping experience is as simple as it possibly can be and being assorted wherever they are. We want to make sure we're really tight on all of the right locations have the right sizes, and that things are available on e-commerce as we see e-commerce accelerate. We have pretty good assortment now, but those are the things we want to sharpen every single day on our businesses. The places that are starting from a place of superiority, we want to be driving the narrative and changing what superior needs. We want to set the bar. There are some places where we don't have that superiority. Cat Litter is a fair example of that; we need to improve our superiority here. We need to ensure that we have better innovation, that we execute better on market. We absolutely have plans in place to do that. We feel confident in our ability to command a premium over time, but you'll see our plans this year take hold and realize that. Conclusively, our flywheel allows us to generate good savings that we can reinvest back in our business, and we feel good about our spending in fiscal year '26. We have the flexibility if we need to adjust our promotion plans.

Got it. That's helpful. And then just following up on gross margin for fiscal '26, you're still looking for something in the flat to plus 50 ex ERP despite the top line challenges. So can you talk about your level of confidence here on potentially driving continued expansion and just the key drivers there? Because you're already back to peak levels now. You don't have a ton, but you do have some exposure to tariffs. It sounds like there's going to be more promotion next year. So I'm just trying to think about the tailwinds that gets you to the flat to 50 when we know the headwinds that could be appearing.

Yes, sure. With our guidance, you’ll notice that we provided a fairly wide range excluding ERP from flat to 50 basis points. That's acknowledging there's a lot of uncertainty in the cost environment in the first place. I mentioned the current assumptions for tariff; we'll have to see how that evolves. We expect between $80 million to $90 million of headwinds. So, you're right with the tariff. This is slightly higher than what we normally experience. We feel generally good about offsetting the current cost assumptions. While the ERP creates a lot of effort and complexity and noise from a reporting standpoint, once we stabilize, this will provide a source of productivity for years to come. In general, we have confidence in delivering our guidance.

I also wanted to maybe pull out a little bit away from the quarter and ask a longer-term question, kind of along the lines of Chris Carey's question, but further down the P&L. So Luc, this may be for you, but Linda as well. So I think the way I understand it, some of the ERP benefits here, the idea is to get to around 18% operating margin. There were some norms, obviously, this year, there'll be noise again in '26. I think the expectation is you're probably around 16% or so operating margin this year, all in, including the noise from the ERP and the deleverage associated with it. So the question is, I think the target is to get to 18% with some of the benefits that the ERP will afford you. So I fully appreciate everyone on the call does the amount of volatility over the next 3 months, let alone the next 3 years. But I'm really curious when you guys are putting together the plan, how quickly you think you can get to that 18% before you kind of get back to sort of like a normal 25 to 50 basis points sort of cadence. I'm also curious, too, Linda, for you, if this gives you any pause, like what you thought was potentially going to flow through. Now it just seems like there's more necessity for investment up and down the P&L, whether this is artificial intelligence, supply chain, marketing share is not what you want it to be, etc. So what you thought was potentially going to flow through we can all agree, getting the top line going, what's going to drive the most value for shareholders. So how you're thinking about that? So sorry, I know that was a bit robust and a bit rambling, but I hope you get the gist, and I'd love your thoughts.

Yes, I would say we're pretty close to that 18% target, driven mainly by our ability to restore gross margin. We have a plan for next year and then once the noise settles down, we feel we’ll be essentially there by next year. We want to continue improving 25 to 50 basis points, and that can come from different places from the P&L. We're going to remain focused on driving the gross margin that's creating the fuel for strategic investments.

And I’ll just emphasize that point that Luc just made. That is exactly why we’ve made these investments. We invested in solidifying our supply chain to protect against dynamic events. We made investments in this transformation for both our digital transformation and the new processes for our team, including AI. We will continue to invest in our business, but that will be more of a normal rate. We believe we have the right spending in place to deal with that technology transformation over time. We feel confident in our ability to get the value from these investments. We know we must execute them, and we intend to do that. We’re focusing on ensuring that we deliver profitable accelerated growth moving forward.

I guess a question first for Luc. Could you help us understand why price mix in the quarter got so negative? I understand that you guys are not promoting. Is this channel or package? And then I have a follow-up for Linda.

Yes, Javier, that's right. It was abnormally high. Price mix was about negative 4 points in the quarter. We had some onetime items that increased trade spending for the quarter. We have a normal process at the end of Q4 to evaluate trade spending accrual. We had an adjustment that was onetime in nature. If you exclude this, price/mix would have been about minus 2%, which is generally about the average that we've seen throughout the year.

And particularly in household why it was down 6%. Which of the businesses experienced such a negative price mix?

This is driven by significant merchandising events that we didn't take place in the prior period. So the year-over-year was impacted by that. That’s an additional 2 points for the segment.

Sure. I got it. So Linda, more kind of like a bigger picture question, I understand the promotionality and the value-seeking behavior and these are transient, these are not structural. But the 2 categories where problems to reoccur are categories, Glad and the other is pretreater, categories where you have value brands. Have you considered a price realignment to stabilize market share? And if not, why not?

Javier, you're right that we've spent a lot of time over the last year talking about Cat Litter and Glad. These are very competitive categories with different dynamics. We primarily compete in the premium segments in both categories. Our FreshUp brand is a premium in Cat Litter. We've leveraged innovation to grow in both categories. I believe our superiority is not where it needs to be in Cat Litter. This isn't about price. It's about ensuring better innovation, execution, price pack architecture, etc. We're absolutely focused on that. With Glad, we created value by getting more out of every single trash bag, where we've launched various innovations to strengthen the bag and enhance the experience. We continue to see good consumer interest here. We are adjusting our plans to ensure value and execution are top-notch moving forward.

Luc and Linda, I wanted to ask about the $0.35 of spending on digital capabilities that you exclude from your adjusted earnings this year and $0.68 in fiscal '25. I assume this will eventually get down to 0. I think in fiscal '27 when you're done with your projects. But I think you might agree that the digitization and things like AI are a moving target, and you're probably going to have to keep investing in your capabilities and adjusting to an ever-changing world. Just to keep up. So what makes this spend so unique that there's an endpoint to it and it doesn't end up having to think about another investment a year or 2 from now?

Yes, Robert, you're absolutely correct that every business, including ours, will need to invest over time to ensure that they have modern capabilities and technologies. We intend to do that moving forward. But I would consider that to be normal course of business, which we have in our plan every year behind capital spending and operating expenses. This specific addition, however, is a one-off reset of our technology platform. We hadn't upgraded our ERP in 25 years, and the corresponding set of technologies needed to be updated. That's why it's one-time in nature. Moving forward, you would expect to see that in our normal capital spending and normal OpEx dollars. We'll still have spending in the future that’s part of the regular investment we make into maintaining our technology.

I had 2 quick questions. The first is that the advertising spend this quarter was down dramatically in dollars, the lowest level of spend since the fourth quarter of 2019. So just curious if you could comment on that. That was a big swing factor in the quarter. I know you're talking about it going back up as a percentage of sales next year. But just overall, I'm surprised the advertising was that low. And the other thing was earlier the question on drivers of gross margin next year. I guess this year now, I think the Glad JV was coming to an end, so just curious what kind of benefit that should look like to gross margins?

Yes. On the advertising spend in Q4, maybe just put this in context. We don't provide guidance at a quarterly level on advertising. We are lapping a very large spend of advertising from last Q4, which was about returning share growth to our business post-cyberattack. If you take a step back, we said we spent about 11% for the year. We spent 11% in the front half. We spent 11% in the back half, and we expect about 11% next year. So it's really just noise between quarters and not something that's an indication of our investment in the business. And on Glad, yes, we will repurchase 20% of what P&G currently own in January. When we buy back their interest, we will no longer pay that 20%, which is a charge through COGS. That represents about 50 basis points of gross margin annually, so the impact for '26 is probably around 20 to 25 basis points.

I guess 2 quick ones for me. Obviously, a long way to go before we get to the end of the year, but just to confirm your base case. Is there any reason why from where we sit today that we shouldn't be thinking about kind of the midpoint of your normalized earnings exiting the year at around $7 or maybe slightly higher? If I just take the midpoint of this year's headline EPS guidance range and add back $0.90 or so for the ERP shift. Is there any reason why that's not the right way to think through the noise and come up with a normalized base?

That's exactly right, Steve. That's the simplest thing to do. Of course, there's a range because we acknowledge all the noise that is relative to the ERP and, of course, on the uncertainty environment. But right now, our best indication is you should be looking at that midpoint.

Interesting question, Steve. The way I would look at this is no. And the reason why is this doesn't fundamentally change any retailer processes. This is not about improving their inventory. They don't give us more inventory in their system. They continue to manage their inventories. What it does provide is our ability to better manage our inventories, have a line of sight to where things are in our network, but there's no structural reason why our ERP should translate into a different posture from retailers on their inventories with us. They would continue to do what they were already doing. We would like to thank you for your time and thoughtful questions. Our next quarter is upon us, and our team will diligently work to ensure we execute. Thank you.