Q2 2025 Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to The Clorox Company Second Quarter Fiscal Year 2025 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Ms.

Lisah Burhan, Vice President of Investor Relations for The Clorox Company. Ms. Burhan, you may begin your conference.

Thanks, Jen. Good afternoon, and thank you for joining us. Joining me today are Linda Rendle, our Chair and CEO; Kevin Jacobsen, our CFO; and Luc Bellet, our Treasurer and incoming 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 that are based on management's current expectations but may differ from actual results or outcomes. In addition, these remarks may refer to certain non-GAAP financial measures. Please refer to our earnings release, which identifies various factors that could affect forward-looking statements and provides information that reconciles non-GAAP financial measures to the most directly comparable GAAP measures.

The Risk Factors section of the company's Form 10-K also includes further discussion of forward-looking statements. Now, I'll turn it over to Linda.

Thank you for joining us today. Before we start the Q&A, I think you all know that we announced a CFO transition last week. I want to take a moment to thank Kevin for his nearly 30 years with Clorox. He has been an essential change engine through our IGNITE strategy in transforming our company.

I deeply appreciate his partnership, leadership and countless contributions to Clorox, and I wish him the very best in his retirement later this year. I also want to welcome Luc Bellet as he steps into the role of CFO starting on April 1st. Luc is a strong and experienced leader who I've worked with in many roles over my career at Clorox, and I'm confident he'll build on the strong foundation established by Kevin. With that, Kevin and Luc will take your questions.

Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] And our first question today will come from Andrea Teixeira with J.P. Morgan. And Mr. Teixeira, your line is open.

Andrea, if you're speaking we cannot hear you. Jen, let's move on to the next Q&A person and then we'll come back to Andrea.

Thank you. Our next question will come from Dara Mohsenian with Morgan Stanley.

Hey, good afternoon, guys.

Hi, Dara.

So congrats to Kevin and Luc. Maybe first, was just hoping to give your perspective on your ability to continue to drive gross margin expansion beyond fiscal 2025, your forecast to get back near peak levels based on your guidance. How confident are you in continued expansion over time, A, and then B, what are the longer-term drivers? And then maybe I'll come back with one other.

Yes, Dara, let me start there on gross margin expansion as we look forward. As we've talked, Linda and I for quite a while, our first priority has been to fully rebuild gross margins back to 44%. And as I'm sorry -- I'm sure you saw in the prepared remarks, we feel very confident in our ability to do that this year. And then we really want to get back to is building EBIT margins in that 25 basis points to 50 basis points per year going forward.

And your question was how confident we feel about that. I feel very good sitting here today about our ability to continue to do that. And there's a number of drivers. I mean, as we've talked quite a bit, and I'll talk about EBIT margin maybe a little bit more than gross margin, but it certainly benefits both.

We're going to continue to drive productivity. We've got the next important phase in our transformation with our ERP conversion at the start of next year. That's certainly been an opportunity to drive even more productivity across the organization. So I feel good about the contribution there.

And then as we've talked, we've really expanded our historical cost savings, what we're calling more margin transformation, which means a lot more focus on design to value, a lot more focus on net revenue management. These are all additional tools in our toolbox that we're going to use to continue to expand margin. As we talk about that really gives us the fuel either take to the bottom-line and reinvest in the business. But without giving an outlook for next year, I feel pretty confident sitting here today about our ability to start on that 25 bps to 50 bps starting in fiscal year 2026 and then our intention is to continue that going forward.

Great. That's helpful. And maybe switching gears, Linda, on the Glad JV change, why did this happen now? But with this change and the strength in financial profile in recent quarters, maybe you can just talk about if M&A is expected to be a more important piece of the strategy going forward and what some of the areas of opportunity you see in potentially filling in white spaces in your portfolio?

Thanks.

Sure. We're excited to assume full control of our Glad business coming up a year from now. And really the timing is related to the end of our agreement and both parties mutually agreed not to renew. And we think this is the right time for us given the transformation that's well underway at our company, our confidence in our ability to drive innovation through our enhanced capabilities across the company, and the fact that we retain very important IP that we've worked jointly with Procter for a number of years that sets the foundation for that.

So this is the right time given the contract expiring, both parties came to this conclusion and we feel fully confident in our ability to continue to drive value in this business moving forward. And then to the question on M&A, no change there. In terms of we're always looking for business opportunities that can be accretive to our portfolio, we're going to do deals though that are right for our shareholders and that we think will offer a strong return. We continue to evaluate our portfolio with our Board, as you would expect us to on an annual basis.

So no change to our priorities or uses of cash. And certainly having full control of this business is a great thing for us moving forward and we're excited to have it a year from now.

Thank you.

And our next question today will come from Peter Grom with UBS.

Thank you, Operator. Good afternoon, everyone. Congrats, Kevin. Congrats, Luc.

So I was hoping to just get some perspective on the organic sales outlook from here. And I know there are a lot of moving pieces. But just given the wide range of 4% to 7%, it seems like there's a lot of variability in terms of how you might exit the year after backing out the ERP shipment benefit. Can you maybe just speak to what you're embedding in the outlook for 4Q after backing out this benefit and how should we be thinking about that exit rate as it pertains to fiscal 2026?

Thanks.

Yes, Peter, happy to answer that. And I think I might -- it be helpful to talk about Q3 a little different than Q4 because they're going to look different in terms of how they play out. Let me just start with Q3 you may have seen this in our prepared remarks. We expect from a reported sales perspective, we'll be down mid-single-digits.

That's kind of about 5 to 6 points of impact related to our divestitures of Argentina and VMS. And then we've added about 1 point of FX headwinds. Now keep in mind, we started the year not expecting the FX headwinds, but as we've seen the dollar continue to strengthen on the new administration, we've got 1 point headwind loaded in the back half of the year, including Q3. And as a result of that, you get the organic sales growth, I'd say, in low single-digits for Q3. But also keep in mind, that includes the impact. We pulled forward some new distribution we secured at a major retailer on our Kingsford business, the retailer placed the order in December, we fulfilled in December, but we essentially shipped ahead of consumption.

That will be consumed in Q3 as they do some early season merch support around the Super Bowl. So that had not shifted and we had shipped close to consumption in Q3. I'd expect this to be somewhere around 2% to 4%. But since we pulled that forward, I think we'll be around low single-digits for Q3. And then Q4, to your very good point, it's going to be noisy. While we said the ERP transition will add 1 to 2 points of growth over the course of the year, it's all going to happen in Q4. So as a result, I expect organic sales growth in the fourth quarter to be somewhere between mid- and high single-digits.

That's a combination of continued growth in the base business and then the impact of this temporary transition where we see increased sales this year and then that will reverse out in the front half of next year.

Got it. That's super helpful. And then not to get too technical, but just on the earnings guidance, when you back out the benefit from the ERP, it seems like that the guidance raise is entirely that, but you also lowered your tax rate outlook. So has anything changed from an underlying basis that's offsetting the benefit from a tax rate standpoint?

Yes. There's a few puts and takes in the plan. So to your good point, if you set aside the ERP benefit, you just talk about our base business for ERP, I would highlight two benefits we've seen versus when we talked last quarter. The first is the tax benefit you highlighted, which is about $0.07 in the quarter.

And then you may have seen, we have modestly reduced our supply chain inflation expectation for the year. So we're getting a little bit of benefit there. And then the flip side of that is we've added about 1 point of FX headwinds in the back half of the year and we've added a little bit more trade spending as we're seeing some increased competitive activity in the Bags and Wraps category. And so I describe that as a number of puts and takes, but it very much keeps us on track for the year.

And as you saw, we just brought up the low end of our outlook before we put on top of that the impact of the ERP transition.

Thank you so much. I'll pass it on.

And our next question will come from Filippo Falorni with Citi.

Hey, good afternoon, everyone, and congrats, Kevin and Luc. Firstly, just a quick clarification, on the Q2 organic sales, the beat relative to your guidance, was that entirely driven by the Kingsford shipment or any size of the benefit from the Kingsford shipment?

Yes. Hey, Filippo. I would say it's a combination. So as you know, we thought our sales on an organic basis would be down in the low teens and we were down about 9.5%.

I'd say if I separate the Kingsford item, a lot of that was based on -- as we came into this year, we expected the consumer to be under pressure and category growth would slow to somewhere between flat and 1%. Through at least the front half of the year, we've been operating at the higher end of that range and that was true for Q2 as well. And then we continue to make very good progress on our share growth. We had another 1 point to share.

So we're seeing good strong results from our demand creation plans. That was a primary driver. And then shifting Kingsford shipping in front of consumption in Q2, that was worth a little less than 1 point in the quarter. So it certainly contributed to the over-delivery in Q2, but it was not the primary driver.

That was really the strength of the business was the primary driver.

Got it. That's super helpful. And then bigger-picture, the call out that you made in the release, Linda, about Litter and Glad, is this increasing promotional activity more than what you were expecting? Like does it -- does it require incremental spending from you guys in the back half?

I think, Kevin, you alluded to it in the gross margin question, but any thoughts on like how competitive the category can get from here and your potential actions there? Thank you.

Yes, thanks, Filippo. Maybe just take a broader comment on our categories and what we're seeing. And I think you saw in the release that largely our expectations around what we expected for the categories are playing out. And that also plays true for what we're seeing from competitive activity.

And I would include Litter in that. So we expected Litter to be more competitive and it's in line with our expectations. So certainly, promotion is up, it's up for us as well, but it's in line with what we expected. Glad is a little bit different, where we are seeing more competitive activity than we originally anticipated.

Now if you put that in perspective, this is not -- this has been true of our Bags and Wraps for a number of years and it's something we feel really well equipped to deal with. And we grew share in Glad trash in Q2 despite all of this, but we are seeing some more deep discounting from a price promotion perspective and just more dollars from our branded competitor than we had expected. We have reacted and we have addressed that and that is included in the outlook that we provided. And again, we feel really well equipped to deal with this.

Our innovation is resonating, and we're growing share, but we know the long-term way to grow the Bags and Wrap category is not through deep discounting and price promotion. We want to make sure we're driving that through trading up consumers, et cetera, and we're going to stay focused on that. But in the short term, we will absolutely react to competitive pressures we have. And again, we've accounted for that.

So, I think that the high-level takeaway is mostly in line with our expectations and the only exception to that would be the trash category, we're seeing increased competitive promotions and we're handling it.

Got it. Thank you so much.

Thanks. Our next question will come from Anna Lizzul with Bank of America.

Hi, good morning and good afternoon. Thank you so much for the question. Congratulations also to Kevin and Luc. You mentioned in the prepared remarks that consumers continue to be choiceful in their spending and their shopping behavior.

Just wondering if you could talk about the dynamics that you're seeing more specifically on sales across different retailers and different channels and also purchasing behavior such as buying in larger versus smaller quantities? And then just a follow-up on the prior discussion here with Litter and Glad across those categories, just to clarify, it sounds like you're continuing to use promotion as a primary means of gaining back market share here. Is that expected for the rest of the year? Thank you.

Why don't I stick on the Litter, Glad for a moment just to clarify that. So, we are certainly returning to a promotional environment that's more normalized of returning to that environment we saw pre-COVID and that was our expectation for both Glad and Litter. But those are highly competitive categories and we're seeing temporarily Litter higher than that. And right now, we're seeing Glad a bit above that as well.

But I would not say that that's the only way we're driving the category. It's just a suite or part of a suite of tools that we're using, primarily focused on ensuring that we're getting the right value messaging to consumers on the benefit that our products offer and the category offers. So for things like our lineup, we offer a stronger bag, we offer a better scent, we control odor. So we're really focusing on those value-added levers that we have in the trash bag to ensure that we get consumers to buy those as well as innovation.

And Glad has been a category driven by innovation for a number of years, and we're continuing to do that. We're seeing all of our innovation really resonating with consumers. Bahama Bliss is a great example of that and it was off to a fast start and we'll be building on that platform coming up here in the back half. So no, promotion plays an important role in the category, but it is not the main driver.

And we would see over the long-term, it will continue to play the role that it always has, a way to drive traffic, a way to ensure that we're introducing innovation and making sure that consumers are reminded of the great value that Glad has. And then getting to just what we're seeing from the consumer, overall, I would say the consumer environment has largely been steady and in line with our expectations. Consumers are continuing to exhibit value-seeking behavior and that shows up in a number of ways. And I think first and foremost, I want to reemphasize that it shows up that they are looking for better and enhanced value in the products, which means they are trading up to innovation, which is working really well for us, even though it might be a trade-up on a price per use basis, but we're seeing that across our categories.

They want us to make their lives easier and they're willing to pay for an innovation. We're also seeing it as they trade up to both larger sizes to get the very best cost per use and smaller sizes for those consumers who may not be able to have that single outlay of cash depending on where they are in their pay cycles. We continue to see all of those behaviors. What we're not seeing is any material change in private label.

So private label shares were down this quarter. They're off their peak of when we were out of stock due to the cyber issue and we're not seeing any material change. And in fact, if you look at the three categories where we compete most heavily with private label, they're down in share across all three of those that being in trash and bleach in our Kingsford business. So I think it's pretty steady.

Our categories are certainly a little bit depressed given the environment, but we feel great about our brand's ability to compete in that. And I'd just emphasize, we continue to invest strongly in our brands. We increased our percent of sales against advertising and sales promotion this year, and we did that intentionally to remind them of the value. We continue to invest in innovation is working really well.

And if you look at the outcomes of that, we grew share in seven of our eight categories. We're growing household penetration and our consumer value metric is stronger than ever. So feel great about the position that we're in.

Perfect. Thank you so much.

Thanks, Anna.

Our next question will come from Kaumil Gajrawala with Jefferies.

Hey, everybody. Can you maybe just give some more details on this 1% to 2% from turning ERP on, just -- I just don't -- I guess, I don't understand how it works from a practical perspective. Is it a shift in inventory one direction or the other in just one time or is it something ongoing because there's data and information you seem to be able to see that you think can drive slightly faster growth?

Thanks, Kaumil. Maybe just a couple of sentences and then I'll actually turn it over to Luc, who has been a key leader for us in our digital transformation and is very close to the details on this. Yes, broadly, of course, this ERP transition is a very important step in our digital transformation, continuing to ensure that we have data and can move at the right speed with the right capabilities to enable the growth and productivity that we're driving. Really excited about this step.

And what you're going to hear from Luc is there is noise as volume moves between quarters and years as we deal with this. But Luc, why don't you go ahead and outline how we think about this and how an ERP transition works in terms of retailers and our own planning.

Yes, sure. Sounds good, Linda. Well, as a reminder, at the beginning of the year, we implemented a new ERP in Canada, which was our test market. The launch went very well and we did not experience any material disruption.

But as you can imagine, the team has been taking a lot of the learnings from this Canadian implementation and building them into our implementation plan for the US. Now in July, we're going to go live with our new ERP solution for the US business operations. That includes all of the order management and fulfilment activities for the entire business operations, and we're also going to begin transition some of manufacturing locations. The plan is to transition all of US locations in a phased approach over a period of six months starting in July.

So to prepare for this transition, we're working closely with our US retail partners and we're in process of finalizing plans. But we're going to -- we're planning on shipping ahead of consumption in Q4. That will build retail inventory levels and make sure that we maintain the product on the shelf while we're going through the transitions. In addition, we're also going to build our own inventory to be fully prepared during the transition. So it's really the inventory build in Q4, both with the retailers and within the company that is going to reverse in the front half of the fiscal year.

And obviously that creates some noise and some timing impact between the fiscal year. And this is what we're reflecting in the outlook.

Got it. Well, Luc, I didn't intend to give you such a softball for your first question, but good answer. Congratulations to you and Kevin as well. Thanks, guys.

Appreciate it.

And we'll move next to Bonnie Herzog with Goldman Sachs.

All right. Thank you and congrats to both Luc and Kevin. And Luc, if I may just clarify everything that you mentioned, I just -- I definitely want to understand what you're doing with the retailers. Is it to avoid any potential risk that they can't get the product that they need?

Is there some concern on your side just given the transition that you want to ship ahead of consumption or are they just trying to build inventories and worried about not being able to get enough product? I guess I'm asking because thinking about the continued volatility in your business, I mean, I just feel like now, unfortunately, there will be a lot of noise in the next few quarters. So trying to think through that.

Yes, Bonnie, I'm going to jump in on this one. This is a very standard way that our manufacturers go through an ERP transition. There's a period of time where we have to shut our systems down, we have to turn on the next system. And so we -- you would see this about any business that ever does this, we tend to build up retailer inventories and our own to account for that period where the systems are actually physically transitioning.

And we're well within the normal range of what any manufacturer has done. Obviously, we've done a lot of benchmarking. And given we're one of the later people to transition on this ERP, we have a lot of learnings from our peers. So just reemphasizing what Luc said, this is really just a timing issue.

This is just a standard procedure that everyone uses to ensure there's no disruption given the shutdown of one system and the bringing up of another. And for us, this is just noise between quarters and years. Obviously, we want to execute the transition with excellence, but really, as we see it from a consumer perspective, our goal is to have zero impact to the consumer and this is how we manage it behind the scenes.

Okay. That's definitely helpful. I appreciate that and respect that because you're right, you don't want any volatility for the consumer? And then if I just may ask another question just is on tariffs, which are incredibly topical right now, recognizing that things keep changing, but could you talk about your sourcing exposure from some of the impacted regions?

I guess, which part of your business do you see the most potential impact? And then how are you planning to mitigate any potential impact? And also want to just verify, is this being considered or any potential tariffs being considered in your guidance? Thank you.

Sure. Hey, Bonnie, it's Kevin. As you can imagine, we've been evaluating this for several months now because this has certainly been topical for the last several months. And to your question, this is not in our outlook specifically.

We have not baked anything in. Now we have a range, but we have not specifically baked in any impact from tears. You know what I might remind you, and I think we talked about this in the past is, based on the nature of our portfolio, for the most part, we manufacture product very close to where it's consumed. So, we have fairly short supply chains.

The other benefit for us is, you might recall several years ago, during all the supply-chain disruptions, we've done quite a bit of work over the last few years to onshore nearshore production. Now at the time we did that work, it was really to reduce the risk of our supply chain, but there will be an added benefit here that it reduces our exposure to tariffs. And so the team has been working on this. We've already taken a number of actions to minimize tariffs.

The team is going to continue to work to do that. As you know, this is a very dynamic environment, certainly even over the last 72 hours. So our exposure, I'd say, is certainly less than you'd find at many other industries or other companies just based on the nature of our portfolio. And we will continue to work to minimize it.

But right now, it's a little difficult to know exactly what the impact is because it's changing so dynamically. But feel like we're in good shape this year to manage through it.

Okay. Appreciate that.

Yes.

Our next question will come from Chris Carey with Wells Fargo.

Hey, Chris.

Hey, Chris.

I want to ask two connected questions on sales. Excuse me. I think number one is, maybe it's a little bit what Peter was getting at or trying to. The organic sales outlook for low-single digits in fiscal Q3, okay, two to four, but low-single inclusive of Kingsford.

And that would be sort of the lower end of where you would want to be from a longer-term perspective, right, from a longer-term top-line target. But when I also look at the consumption data, it's running flattish, right? And obviously, there's non-track channels that are growing faster and the likes. But I think there is -- because there's been so much noise and so much inventory shifting, how do you view that low-single digits from a clean perspective?

Are you still recapturing distribution points or do you view that as a clean underlying number that you would extrapolate going forward? Like are you executing right now at your longer-term algorithm or are categories a bit more muted right now as some of your peers have said and you're not, right? And I think this gets to the kind of exit rate that you could be at going into fiscal 2026 because obviously, we'll have to overlay the negative impact of ERP in fiscal 2026, but the underlying run-rate, we're going to have to make an assumption, right? So it's all kind of connected to that.

The second thing would be from a category perspective, can you just talk about how you feel about trends in your cleaning business relative to your household business? Because again, I think the consumption data has been a bit weaker in cleaning, a bit stronger in households, but you're seeing increased promotional activity in Glad. Maybe just comment on how you see these two businesses. So thanks so much for that.

Sorry, that was a lot.

Sure, Chris. I think I got it, but remind me if I don't get to something in your question by the time I get to the end of this. So, I think maybe it would be helpful on just how we think about getting back to the algorithm, set the stage, and then we can talk about specifically what's going on in Q3, et cetera. But I think it's helpful to recall two things we talked about going into this year.

The first that we spoke about was there was going to be noise between quarters given the lap that we had recovering from cyber, et cetera. And you're certainly seeing that play out, obviously in-between Q1 and Q2, and even there's still noise in Q3 and Q4 that we spoke about. And then you have small things that happen like Kingsford, where a retailer shipped something early. So that's one, it's playing out and -- but no large changes to that assumption.

The second thing that we spoke about was that we expected a more difficult macro-environment. And we saw that playing out in lower category growth rates than we would normally see. So normally, we see low-single digits, 2%, 2.5% and we expected to see low, low-single digits and we said about 0% to 1%. The good news is that's playing out with what our expectations are, but what we would expect to see over the long-term is getting back to those category growth rates that look more like we've experienced for many, many years.

And I think the question mark will be for us when that happens. And certainly, we're seeing that across the industry. But that's really a big question. If we think about what we control in addition to those categories and feeling really good about where we sit right now.

And that means that I feel really good about our long-term algorithm of 3% to 5% growth. And just how we think about it is you get back to that 2%, 2.5% category growth. We continue to drive share, which we certainly demonstrated over the last two quarters that we're able to do. You expect benefits from things like NRM and pricing as well as the work that we're doing on our digital transformation and how that flows through in both growth and productivity.

And then, of course, we have our professional business and our international business that we expect both to be delivering above company average growth rates and we certainly saw that again this quarter. So we remain confident in the long-term algorithm. I think the question mark is when will the macro-environment improve? When will we see our categories return to that more normalized growth rate and we're doing everything feasible in our power to continue to do that through innovation, through investing and our good category growth ideas as well as growing share.

But that's the open question mark. And I think we all can agree the environment is certainly uncertain and volatile enough to say it's not exactly easy to post when that -- when that transition will happen. I think maybe when you talk about specific categories and you talk about household and cleaning, actually cleaning is doing incredibly well right now. If you look at the consumption trends on that business and share results, we've consistently posted share growth results in that category.

In fact, our share results are higher than they were two years ago. So it's like the cyber-attack never happened. We're winning in most of those segments and cleaning and the trends look good and our business is still bigger than it was pre-COVID from a volume perspective even after all the pricing that we took to deal with inflation. So I feel like our business in cleaning is performing just as we want it to be growing share, growing categories the right way.

Innovation is really resonating with consumers, whether that be innovation like Scentiva where we've reinvigorated that platform and invested more money at or brand-new innovation that we have in those categories. So feel terrific about that. As well as terrific about a number of our household businesses as well, but cleaning is a real gem right now. And cleaning is also playing into our strong international results and you saw the organic growth rates for international this quarter, very strong again.

And of course, cleaning is the majority of our international business and helping that to perform.

There was a lot there. I appreciate you entertaining that. Thanks, for that.

Thank you.

Our next question will come from Olivia Tong with Raymond James Financial.

Great. Thanks and congrats, Kevin and Luc. First, just on Litter, whether you could talk about the level of promotion you have embedded into the second-half outlook versus what you did in first half, similarly on advertising? And just broadly, the level of flexibility that you have built into your promotional plans in case any other competitive battles brew up like what's happening for Glad?

And then on cough-cold season, we've seen some flu data that suggested a sort of slower start to the season. It seems like it's picked up since then. So, if you could give any color on that, that would be helpful insofar as how it helps or hurt your cleaning and disinfecting business. Thank you.

Sure, Olivia. Why don't I start with cold and flu. Basically, cold and flu, we always assume an average year unless we have a significant data that would help us assume else otherwise. But it's played out largely in line with expectations.

In average, it's been about an average cold and flu season, to your point, we're seeing pockets of things that are popping up here and there. But certainly for Q2, it was an average season, and that played out in the cleaning results. If you look at the data over the last couple of weeks, it's a little bit stronger, too early to say there's anything there, but we continue to assume on average for the entirety of the cold and flu season, it's going to be about what we normally expect. And then we'll see how that plays out in Q3 coming up here.

But again, our assumption continues to be on average a normal cold and flu season. And when you think about Litter, we expect Litter to continue. So an elevated promotional environment, but that was already contemplated in our outlook, no change to what the expectation was. As well on advertising, we are -- we have heavier advertising in the back half to support innovation across our portfolio.

For litter, we are launching a new heavy-duty litter, which we're really excited about. So we'll be spending behind that launch and ensuring that we have great execution as we get that on-shelf coming up here in Q3 and Q4, but no change to our Litter plan and largely in line with expectations and what we had in the front half. And then if you think about promotion, maybe I'll return to the statement I made about our financial flexibility and our ability to invest, and we're certainly able to do that as we've seen what's happened in the trash category. We feel very good given the progress we've made on restoring gross margin on our earnings growth that we have the financial flexibility to make investments, whether that be in promotion, a great innovation that we have or any competitive pressure to respond and react.

We certainly did that already with Glad, but feel like we're in a very, very good position and have the right level of spending in to deal with what's coming our way. And we've been able to make adjustments to our plan where things have been a little different, certainly in the case of Glad and we feel, we'll be able to do that in any category that might have that competitive pressure moving forward.

Thank you so much.

Thanks, Olivia.

And we'll move next to Andrea Teixeira with J.P. Morgan.

Thank you and congrats, Kevin and Luc. Linda, I appreciate you elaborated how you've been seeing like -- and you're gaining share, in particular with all the issues we've had in the past. Maybe if you can kind of give us the distribution, kind of, pace that you had? I mean, I assume that you regained distribution.

You had said before many times that you regained the distribution, perhaps if you can kind of comment along with the innovation that you not only in Scentiva but also bringing in more transformational innovation. And as you have the ERP solution now rolled out, we -- can we see a little bit more of that distribution gain or anything that you can elaborate as you get the momentum into market share going? Thank you.

Hi, Andrea. I'm glad we got you back on. Obviously, distribution is such an important part of how we drive our business and we had talked about at the end of the year that we had fully recovered the distribution that we had lost from the cyber-attack and in fact, had higher levels of distribution than we did prior to that. And of course, that varied by business, but in aggregate, we had made significant progress in returning to the distribution levels we're at.

If you look at Q2, that held true. So our share of distribution was up versus a year ago, but that wasn't consistent with what we saw in Q1. So I think with the headline would be distribution fully restored and now we continue to try to build distribution and share of distribution the way that we always have, like you said, through innovation, through bringing better consumer ideas to retailers. And that's how we'll continue doing the normal distribution that we work over time, but we have fully restored what we lost during cyber. And so that base is back to normalized levels and then we'll do the work from here investing in our brands and through innovation.

Yes. And then there is any -- that's helpful. Is there any timing of that, that you may have pushed back into the second half because of all the ERP solutions or no? I mean, the cadence is similar to what you had last year.

No. No impact to that. We have timed everything so that our normal innovation cycle happens and that we can support retailers during their shelf transitions. So no timing impact as it relates to distribution.

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

Thank you.

We'll hear next from Robert Moskow with TD Cowen.

Hi, thanks. I think most of the questions have been asked and answered. I guess I'd like a little more color on what's driving the strong growth in professional and also international. And what are the insights you're picking up from your customers in the professional channel that are driving the growth? And maybe just a little color on international. Thanks.

Sure, Robert. On international, for a number of years, we spent prior to our IGNITE strategy getting the right asset base to grow from this. And so we've done a lot of work to clean up and ensure that we had a profitable base. And what we turned to in IGNITE was doubling down on the growth opportunities that we saw.

And the primary one was to have less exposure to FX volatile countries in Latin America and businesses that we thought that had really good runway. So, I'll call it a couple of things. One, as I noted, our cleaning business continues to perform very well all around the world and we have leading shares just like we do in the US and countries all around the globe in many of our cleaning businesses. In addition, we have businesses like Cat Litter where we've been able to enter new markets.

We've been able to do that in an asset-light way and we're seeing very strong growth in our litter business in those markets that we've entered, in places in Europe, places in Asia, and we've been taking advantage of that -- those opportunities. And we see the same role that innovation and brand building plays in international, working just like it's working in the US. So, we have a strong suite of innovation across the globe in a number of categories that are resonating well with consumers. And as well, we've been able to take pricing.

As you noticed, that's the only place that we continue to take pricing in as we are dealing with different issues around the globe and pricing has gone very well in addition. So I would say overall, all the fundamentals are working really well and then we have been able to take advantage of the regional opportunities that we have, having a more stabilized portfolio from a geographic perspective and then the category opportunities that we have. And we will see that continue and believe it will for the coming years. On Professional, that's an interesting business where it had a dramatic impact during COVID.

One, it had a dramatic upside as we dealt with hospitals and people wanting to stay safe and that it had a corresponding decline as office occupancy decreased and our business in Professional plays in a number of places. We play in hospitals, doctors' offices, and janitorial as well as businesses like Glad Trash and Kingsford, but really again are primarily a cleaning business. And so that was a headwind for a while. But what we were confident in was the way that we've always grown in Professional.

There's lots of verticals that we don't play in, lots of opportunities for us to offer that base a great solution for their cleaning needs and that's exactly what's happening today. So we've made some penetration into some verticals. We're working in government verticals, we're working in different healthcare verticals and those are going very, very well and we continue to see opportunity to win. In addition, we are growing share in our base business, including in healthcare and janitorial and seeing businesses like our wipes, et cetera, take off.

The good news is, although it hasn't been that material, we're starting to see office occupancy come back a little bit. We'll see where that goes depending on that, we're not counting on that being a material driver, but what we're really seeing is opportunities in new verticals and that's how we've grown our professional business mid-single-digits for a number of years prior to COVID.

Okay. Can I ask a quick follow-up? Do you have any way just to quantify what percent of your raw materials come from Mexico and Canada? Is it like less than 5%? I know you've done a lot of work to reduce it, but it's hard for us on the outside to figure out what the exposure really is.

Robert, I'd say it's in the single digits. So we have fairly limited exposure.

Great. Thank you.

Our next question comes from Kevin Grundy with BNP Paribas.

Great. Thanks. Good afternoon, everyone, and congratulations to Kevin and Luc. First question for [indiscernible] just a follow-up on an earlier discussion on the category growth being flat to 1%, which seems like it's still your expectation.

How do we get back to the 3% to 5% and over what time frame? And I ask that in the context of a relatively fatigued consumer. There's not a lot of pricing to be had at this point. Some of your categories seem to be going the other way, right, in terms of some of the intense levels of promotion.

So I think it's a really important question relative to what the expectation is going to be around relative to the 3% to 5% and the company's ability to grow going forward. So, Linda, any additional color on that and maybe just the composition of price and mix and volumes given the constrained pricing environment? And then I have a follow-up. Thanks.

Sure, Kevin. First of all, maybe how we're driving category growth right now. And you're right, it is certainly depressed as we talked about versus what we normally see in a 2% and a 2.5% in our categories were in 0% to 1% and we've been at the top-end of that range in the front-half. What we're seeing though is volume-based growth that is being somewhat offset by promotion.

And that's exactly what we expected this year is as we rolled off pricing, we expected to return to volume growth and then we saw an offset as we expected a more competitive environment as the consumer is seeking more value and we frankly just return to a promotional level that was what it was pre-COVID. And I think that's a healthy place to be and we've certainly seen that return. So what needs to be true to get back to our more average category growth rates? One, I think the consumer needs to feel that certainty and strength and we've seen this time and time again.

Whenever there's a time, where consumers are a bit more stretched, they do those things, they tighten their belts. They think about ways to make sure that they can extend the usage of a product, they stuff the trash bag. They get every last drop out of a spray cleaner. They're thinking just as ways to save every penny possible.

And when you get to a place where they're a little less worried about that, you see them more willing to try a premium trade-up product. They move from a dilutable cleaner with a sponge to a wipe. And we've seen that time and time again as we go through these economic cycles. People know how to spend a bit less.

In our categories, they're essential. So it's not a big delta. Going from 2.5% to 1% is not a huge delta. But on the reverse, we can really pick up that trade-up as consumers start to feel that they don't have to engage in those value-seeking behaviors as much as they are right now.

So again, I feel confident once we get through this cycle that that will happen. The question mark is when and we'll do our part to ensure categories are healthy. We continue to invest strong levels of advertising and promotion. We continue to be focused on innovation.

We're ensuring we have the right distribution. We're ensuring that we're in every channel that matters to the consumer regardless of where they shop. We want to be there if they walk into a club, if they walk into a mass retailer, a grocery store, a drugstore, we want to be there and we are. And we'll just continue to ensure that we're giving consumers those opportunities with great innovation to trade up over time.

And I feel confident we'll get back to those category growth rates, it's just when.

Okay. But just to play that back, steady-state macro, things don't change that much. The low end of the three to five would be a good outcome perhaps. Is that fair?

Yes, I think that's fair.

Okay, very good. And then Luc, one for you. Just in terms of as you think about taking on the role and Kevin has done a fantastic job, what are you thinking in terms of opportunities, right? There's always a way to do things a bit differently.

You have a great background, particularly on the treasury side. So anything from a capital structure perspective, uses of cash, buyback, et cetera, would love to get your thoughts there just in terms of what investors can expect and then I'll turn it back. Thank you very much.

Thanks for the question, Kevin. When you can expect a lot of continuity, I would say. I've been -- over the past few years, I've been very involved in both the design and implementation of the IGNITE strategy. I've also been very involved in our transformation efforts.

And so this transition should be relatively smooth. Certainly, we're going to continue to be very consistent from financial discipline and capital allocation. I think what changed is less a factor of strategy or focus, but just a matter of where we're at. We're in a place where we finally rebuilt our margins to the pre-pandemic level.

We're in a place of operational strength. So of course, a lot of the discussion we're having right now are really about growth and transformation. We talked about the importance of focusing on the fundamentals and innovations in this challenging consumer environment. And then on transformations, I think we're entering a new phase that's really important.

I think this -- as Linda mentioned, on this new ERP implementation is going to fundamentally modernize the backbone of our operations and allow us to really modernize a lot of capabilities, which will set us up for really strengthening our competitive advantage for years to come. And so that -- it's a big transition. First thing, we have to work before we can run and we have to make sure that seamless. But after we done the transitions, there'll be a lot of opportunity to capitalize on it.

Okay. Very good. Thank you, for all that. Good luck.

Thank you.

And our next question comes from Linda Bolton Weiser with D.A. Davidson.

Yes, hello. Best wishes to you, Kevin. So I was just wanting to follow up on the conversation about the consumer, the health of the consumer. And I'm wondering if you could put a number to it more.

Michigan consumer sentiment is something that some of us look at. Is there a level that has to be where historically you see that higher category growth and more confidence. So would that be in the 80s or 90s? Is there any color you can give on that?

No, Linda, it's an interesting avenue to take. But what we have seen is it's not consistent because there are so many things that go into how consumers shop our categories that are everyday essentials. And so we haven't looked at anything that is 100% correlated to saying this is when it will return. But I think it's a number of factors.

It's people feeling like they have steady employment, that they understand what inflation looks like, that they feel confident in their ability to meet all of their liabilities, that they are willing to open their wallet a little bit more because they have that flexibility and they're not worried about what's coming. But we haven't found one marker that 100% correlates. What we're watching in aggregate is all of those things that are going to impact the consumer and their wallet and spending. And certainly, if you look back at things like COVID, et cetera, there were different factors that played into how consumers engaged in our category.

And so that's why I'm hesitant to say there's one single thing we would look at. But you start to see it in the behaviors. And the good news is we were at the top end of what we saw from a category perspective in the zero to one, which is good. And so we're seeing a little bit more resilience on the higher end of what we saw might be resilient from a consumer perspective.

But we're going to be watching all of those factors very carefully. We'll continue to update everybody as we see things evolving over the next couple of quarters and what we think it means. But I think the headline is near-term visibility good longer-term, it's not 100% clear right now, but we remain confident in the long-term it will bounce back and we'll be watching all those things, including consumer confidence core to glean when that might happen.

Thanks. And then can I just ask also about your investment spending, which is, I guess, about $0.70 per share in the fiscal year? Can you remind us the trajectory of when that starts to taper off? Is this the peak year of spending or -- and how long does it continue? And is there a year when it becomes zero? Thanks.

Yes. Sure, Linda, this is Kevin. In regard to our digital transformation, you might recall, if I step back, our expectation is we'll invest $560 million to $580 million over a five-year period. We are in year four of that investment.

I mean, as you said, about $0.70 we'll spend this year, that will put us just a little over $500 million, I anticipate by the end of this year. And so next year will be the final year of the program. You should expect the investment level to be less than this year as we start to wind down the program and then after fiscal year 2026, we have completed the program and there wouldn't be any charge.

Okay. Thanks a lot.

Thanks, Linda.

And our next question will come from Javier Escalante with Evercore ISI.

Good afternoon, everyone. My question has to do actually also with SG&A spending and you itemized these digital capabilities and ERP. Is this the same thing or not? Are these two different kind of spending?

And something that has stood out from one of your peers is that they are doing an upgrade to the same SAP system that you are upgrading to and the price tack is much lower and $550 million and $580 million is kind of like a lot. And I always stumble upon why this is so expensive and what is your confidence that once you stop accruing these as one-timers, what is your underlying SG&A? Thank you.

Yes. I think let me take the first part and then I'll hand it over to Kevin to talk about your specific question on SG&A. But Javier, what we're doing with this implementation is fundamentally upgrading the backbone and technology capabilities of the company. And the last time we made an ERP transition was well over 20 years ago.

And so I'm not sure what the case is for a number of our peers, but we're doing a full implementation greenfield upgrading to S/4HANA. In addition to that, we are putting in global finance. We're putting capabilities around innovation. We've invested in AI.

We've invested in ensuring that we have an accurate data lake so that we can fully capitalize on the power of that data through Insight. So this is a comprehensive digital overhaul of the company to catch us up to where capabilities are in the industry. I mean, the good news is we have taken the steps to fully do that. So, we are changing the processes in the company.

As you know, we put a new operating model to fully take advantage of this digital transformation in place, but this really is about modernizing the capabilities and data infrastructure and backbone of the company. And again, I can't speak to someone else's transformation, but that's the cost of doing that and we feel very confident that this has a strong return for our shareholders. We wouldn't have invested in it if it didn't. And that comes in the form of enhancing growth as well as productivity.

And we have owners for each one of those line items who are accountable delivering that value. But we feel this is a great program for our company, as Luc mentioned, for our future and the things that we can continue to unlock as a result of having this digital infrastructure in place. And we're going to do that with a strong return focus in mind that we intend to deliver and have been delivering to date.

And then Javier, I can just talk a little bit about the admin. As you might recall, before this transformation, we've historically operated about 14% admin as a percent of sales. This year will be closer to that 15% to 16%. That's really that investment in this digital transformation Linda was just talking about.

Now the benefit of this is we believe between the investments we're making in new technology plus our streamlined operating model, we believe that positions us to take admin down closer to 13% of sales going forward. Now that will take a little time to get there as we implement the new technology and then drive the productivity associated with that. But this really just creates more investment opportunities for us as a company as we become more productive on the admin line based on these investments. We can either take that as the bottom-line or if we have good investments, we'll reinvest that back in the company, believe we're positioned very well though to do that as we look forward over the next several years.

But mathematically, the assumption to get to 13% has to do with hitting 5% topline growth. So how do you get to 13% as a percentage of revenues once you have put more depreciation in the P&L and probably people that has higher salaries?

Yes, Javier, I think it gets to exactly what Linda mentioned. We expect to deliver very strong value on this investment. We have a very clear business case where value will be created. And so we have owners for each of these areas.

We're putting in new technology and replacing a 20-year-old system. There's tremendous opportunity to drive additional value through that increased technology. And so we will deliver that business case. I think that positions us well to take cost-out.

Keep in mind, right now, we're maintaining in our admin line, we're maintaining two system infrastructures and paying for our legacy system and we're paying for a new system. Once we do this conversion, we're going to be able to shut off the legacy system and you'll see costs start to come out in the back half of next year and then we'll continue to drive productivity to take that down even further going forward.

But financially, has this costs even come into the numbers because you have [Multiple Speakers]

They're in the numbers.

Yes.

In that...

They are not in consensus though.

There in the numbers right now, Javier, that we are the sheet licenses for the new technology, we're already expensing those. Those are ongoing operations. We're not backing those out. We are backing out the one-time investments for the transition, but the ongoing cost of the system, we're starting to current our P&L, not an adjusted item. That's in our adjusted earnings.

Okay. Thank you. Very helpful.

And our next question comes from Steve Powers with Deutsche Bank.

Great. Good afternoon, good evening, everybody. Congrats, Luc. Congrats, Kevin?

Okay, actually, Kevin, I wanted to talk on just the sort of the cash flow run rate of the business. I think as the year started, we had talked about free cash flow coming in around 12% of sales for the year. And at least that was our expectation. I think year-to-date, we're running closer to 9%.

Just want to get a sense for your satisfaction with the cash generation of the business so far, the trend line, et cetera. And then just with the ERP shift at the end of the year, how do we think about the cash impact of that? Do the cash -- does cash follow earnings or is there lumpiness that we should think about as we kind of contemplate cash flows over the balance of the year?

Yes, Steve. No, it's a good question and really thinking about the impact of the ERP. Let me start with the base plan and then I'll talk about the impact of the ERP on top of that. As you know, Steve, we target 11% to 13%.

I would say right now, I think we're likely at the high-end of that range before we add the ERP impact to that. And so we're off to a good start. As you know, based on lapping cyber, there's some noise in the front half of the year as you described. But I expect us to land closer to the high-end of our targeted range prior to the ERP implementation.

Now specific to the ERP, we will invest some additional cash to manage this transition. Luc talked about it, not only will we be building retailer inventories, but we will also build some safety stock at our facility. So there'll be some increased investments in inventory and that's just another way to mitigate the risk of this transition, as well as there's some nuances here. Because you're down for a short period of time, we will prepay suppliers that we normally have to pay during that period.

And so you'll see our AP balances go down a little bit. That will happen in Q4. We anticipate that will be about $50 million to $100 million of cash. Now that all just reverses out in the front of 2026, so it's noise. But what it will do to our free cash flow this year is, while the base plan is probably close to 13%, once you factor in the impact of the ERP transition, we'll tie up some cash in Q4. I suspect to be in closer to the low end of the range closer to 11%, but that change is really just timing.

I'd say, operationally, we're closer to 13%.

Okay. And then it reverses that next year. Okay, makes sense. And then on the -- I think the estimated like the fair value of P&G's interest in the Glad joint venture was around $530 million exiting last fiscal year. Is that a good number to kind of anchor to in terms of the cash cost that you're likely to have when that transition takes place? Or is there another way to think about it?

Yes, exactly right, Steve, and I appreciate you're reading our 10-K from last year. But yes, so we estimate every year what we see as a fair market value for that business and then we recognize that in our disclosures and on our balance sheet. So, that's our estimate of fair value. Maybe I'll just connect the dots there.

So as you think about exiting this agreement a year from now, a few things will happen. As you said, Steve, we will repurchase the 20% that P&G currently owns and we'll determine how to do that through cash or some form of borrowing. But then the other impact you'll see on our P&L is, this is what I describe as a contractual joint venture where we pay P&G 20% of the cash flows every quarter and we charge those cost of goods sold. So results are buying back their interest.

We will no longer pay them that 20%. You'll see margin step up after the transaction is completed and you'll see earnings step up as well, net of any interest expense we have, but you'll see an acceleration on the P&L once we bought back the 20% we don't currently own.

Okay, great. That will flow through COGS essentially in -- show up in gross margin?

It will, because that 20% cash flow we pay them right now, we charge that to cost of goods sold. And so once that stops, you'll see a step up in gross margin in both Glad and the company as well as earnings.

Very good. Okay. Thanks so much.

Sure.

And we'll move next to Lauren Lieberman with Barclays.

Great. Thanks. Hi, everyone. Just two questions to kind of bring up the rear.

First thing was household. So household volumes were down quite a bit in the quarter, but you did call out Kingsford being so strong. So I just wanted to just check in on kind of what's going on in some of those other businesses. I know you talked about stepped-up competitive activity in Glad.

But just anything you can offer on the rest of the portfolio there? And then the second thing was just playing with my model, it looks like gross margins would have to be down pretty significantly in the fourth quarter and I wasn't sure why because I would think that you would have the higher absorption on from that ship ahead on the ERP. I know I'm guessing logistics costs are higher, but yes, I was just surprised there wouldn't be a positive on absorption to gross margin in 4Q. Thanks.

Sure. Hi, Lauren, this is Kevin. Maybe I'll talk about just sales or volume in Q2. When you look at household, I'd say household looks very similar to the rest of the segments as we're lapping the retailer restock from the prior period. And so volumes down about 11%, that's in line with all the other business units are generally down in similar vein.

So that's really just the impact of lapping the retailer restocking in the prior period. And then as it relates to and remind me, Lauren, your second question was?

Yes, gross margin in the fourth quarter.

Yes. So gross margin, you might recall in Q4 of last year, our gross margins up significantly. They're up almost 400 basis points and we had a bit of a unique issue at very favorable mix because Glad and Litter underperformed relative to the rest of our portfolio. And so we're lapping a significantly outsized gross margin in the year-ago period, almost -- I think it was almost 47%.

And so what I expect is good strong gross margins relative to our 44% goal. It should be well north of that, but it will be down a little bit from the prior year just because we're lapping an usually odd base year.

Okay. Okay. And are there higher logistics costs again with the ERP ship ahead? Or is it more about the -- like is it more a positive because of absorption?

Well, you're exactly right. There'll be two impacts from this. The first -- and they're both exactly what you said. We will have some increased logistics costs, some increased warehousing because we will build some safety stock and there's a cost of that.

We'll also get the benefit of the absorption because we'll be shipping more product that quarter and they generally net out and so there's not much net impact from those two items. They're generally equal in offsetting. And then you'll see the reverse of that happen in the front-half of next year, essentially equal in offsetting as well.

Okay. Okay, great. Thank you.

Sure.

This concludes the question-and-answer session. Ms. Rendle, I would now turn the program back to you.

Thank you, everyone. As we close today's call, I want to step back and look at our performance within the context of the past several years. We have navigated through significant disruptions, including a pandemic which led to an unprecedented level of demand surge and supply constraints, rampant inflation, and a cyber-attack and subsequent recovery. Simultaneously, we've taken significant steps to transform our company, including the implementation of a new streamlined operating model and divestiture of two underperforming businesses as we continue evolving our portfolio.

Throughout all of this, we've delivered strong compounded annual sales growth within our target over the last five years and more recently, stabilized and rebuilt our gross margin and delivered strong earnings growth, which enables us to further invest in our business. We're excited to continue building on this progress with our US ERP implementation early next fiscal year. This is another important step in becoming a stronger company that continues to deliver consistent, profitable growth and enhance long-term shareholder value. We look forward to sharing more with you in our upcoming presentation at the CAGNY Conference in a few weeks.

Until then, please stay well.

This concludes today's conference. Thank you for attending. The host has ended this call. Goodbye.