Good day, ladies and gentlemen, and welcome to The Clorox Company Third Quarter Fiscal Year 2023 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. If you would like to ask a question, you may press star one on your touch tone pad at any time. If anyone should require assistance during the conference, please press star zero on your touch tone pad at any time. 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. Thanks, Jen. Good afternoon, and thank you for joining us. On the call with me today are Linda Rendle, our CEO, and Kevin Jacobsen, our CFO. I hope everyone has had a chance to review our earnings release and prepared remarks, both of which are available on our website. In just a moment, Linda will share a few opening comments, and then we'll take your questions. During this call, we may make forward-looking statements, including about fiscal year 2023 outlook. These statements are based on management's current expectations that may differ from actual results or outcomes. In addition, we may refer to certain non-GAAP financial measures. Please refer to the Forward-Looking Statements section, which identifies various factors that could affect such forward-looking statements, which has been filed with the SEC. In addition, please refer to the Non-GAAP Financial Information section of our earnings release and the supplemental financial schedule in the Investor Relations section of our website for reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures. Now, I'll turn it over to Linda. Hello, everyone, and thank you for joining us. We delivered strong results in the third quarter amid a challenging operating and cost environment with organic sales growth in all four segments, gross margin expansion, and double-digit adjusted EPS growth. Our performance reflects solid execution by our team, the strength and resilience of our portfolio, the superior value of our brands, and the relevance of our IGNITE strategy. Based on our strong performance, we're raising our fiscal year outlook. During the quarter, we made great progress rebuilding margin while maintaining top-line growth. Net sales grew above our long-term target, and we delivered our second consecutive quarter of gross margin improvement, supported by cost-justified pricing and decade-high cost savings. We also made further progress on our IGNITE priorities, investing in our brands and innovation pipeline while advancing our digital transformation and streamlined operating models to create a stronger, more resilient company. While we're encouraged by our progress to date, we're relentlessly focused on controlling what we can to drive and appropriately balance both top-line and bottom-line growth. Looking ahead, we expect the operating environment to remain volatile and challenging. Despite recent moderation in pockets of input costs, overall inflationary headwinds continue to be strong. In light of this and ongoing macro uncertainty, we're watching consumer reactions very closely, given the potential for them to come under greater pressure, and we are prepared to adapt plans as necessary. Regardless, we have trusted brands and essential categories, which we continue to invest behind. I remain confident that our actions position us well to navigate this environment and deliver consistent, profitable growth over time. With that, Kevin and I will take your questions. Thank you. Ladies and gentlemen, if you have a question, please press star one on your touch-tone telephone. Our first question will come from Andrea Teixeira. Please go ahead. Thank you, operator, and good afternoon, everyone. My question refers more on the quarter coming in better than anticipated. Linda, you and Kevin and the team had highlighted that elasticity kind of came in better. Of course, you're not lapping and not assuming that's gonna continue. If you can talk a little bit about that. You called out Kingsford being one that you potentially have to work out the price gap. Any other area that you think would be an opportunity? Regarding VMS, just as a clarification, are you putting the assets for sale or just right-sizing it? Andrea, this is Kevin. Thank you for the question. Maybe I can start with our expectations for Q4. As you saw, we delivered 8% organic sales growth in the third quarter, which is stronger than we anticipated. You may have seen, Andrea, in our prepared remarks, there was about 2 points that were one-time in nature, and I'm happy to talk about those. If I set those aside, we delivered about 6 points organic sales growth. If you look at our outlook for Q4, our full-year outlook, you can back into it, we're projecting about 3%-6% organic growth. I would say at the high end of that range, it would look very much like it did in Q3. We expect continued strong consumption. The business is performing well. I think the one watch-out we have, and you mentioned it, is our Kingsford business. While we had very strong performance in the third quarter, Kingsford was the one business that came in below our expectations. You may have seen in our prepared remarks, we're seeing an increased level of competitive activity, and we're not seeing competition move to the same degree we moved on pricing. That was one of the businesses we priced in December, and we've seen price gaps widen. As a result, we saw our shares decline in the third quarter. The team, with that in mind, they've gone back and they've adjusted their plans in Q4, so we're increasing our support for the business in the fourth quarter. It's certainly something we're watching. Andrea, you may know this, that business has an outsized impact on our fourth quarter. We do about 50% of our total sales on Kingsford happen in the fourth quarter, so it's clearly something we're keeping a close eye on. We think we have good plans in place that we've adjusted to reflect what we learned in Q3, but, you know, we're watching that closely. Particularly around the key holidays, it's a little early to tell how Memorial Day or July 4th plays out. I think if we have a good successful season, you know, we'll be at that top end of that range, which is pretty consistent with Q3. If it delivers below our expectations, I think that would be a reason why we'd be towards the lower end of the range for the fourth quarter. Andrea, I'll take VMS. As you all are aware, VMS is a small portion of our portfolio. It's about 3% of sales right now. And it's continued to face challenging market dynamics from a category perspective, what we're seeing coming out of COVID. Of course, you know, we've highlighted the performance issues on that business. And we've reassessed that business as it relates to the role it plays in our portfolio. As Kevin highlighted, you know, we're seeing strong results across the majority of our businesses, and we think it's the right step now to look at resource allocation and allocate resources to businesses we think have higher growth potential, and therefore making a bigger focus on profitability in the VMS business. That's what the team will be laser focused on moving forward. That includes, like I said, moving resources to businesses that have growth potential, as well as continuing to narrow our focus on core brands. We think that's the right role for the business moving forward. Given that's what triggered the non-cash impairment, but we feel like we have the right plans moving forward. As it relates to our portfolio, you know, we're always doing that work with our board. We'll continue to do that. Right now we're focused on driving more profitability in the VMS business as we own it today. That's very helpful. If I can squeeze one question on, if I can, on the wipes business. It seems as if there wasn't any call-out of, it seems that it has normalized. Any changes in potentially regaining some shelf space that was lost at the time, given the private label taking more share, and you didn't have enough capacity? How did that normalize? Anything in the dynamics of the timing of promotions in doing a club or anything I could call out that happened in the quarter? Yeah. Certainly for wipes, that was a business or one of the business most impacted by COVID. As we noted in Q3, we were lapping the Omicron variant, and then began to get to a period where we're more normalized from a COVID perspective with wipes. It definitely has been bumpy over the last few years as we've gone through that. We've been very pleased with the performance on the wipes business. We've continually grown share quarter after quarter, for the last well over 18 months now on wipes. We've regained significant distribution. Our merchandising plans, while lower than they were pre-pandemic, are stronger than they have been, and that's behind our ability to supply, and we are able to fully supply that business now. We continue to see consumers turn to us in times of cold and flu. You know, even with a season that was moved up, we saw strong consumer reaction from a cold and flu perspective. We feel good about the future of that business. We continue to have a good innovation pipeline. You know, if you look at our shares, they certainly support the fact that what we thought would happen with all of the tertiary brands launched did, as we return to strong share leadership and continue to grow that share position. Very helpful. Thank you. I'll pass it on. Your next question will come from Peter Grom with UBS. Thanks, operator. Good afternoon, everyone. Maybe just two questions on gross margin, maybe one more near term and one looking out longer term. You've been making some nice sequential progress this year in 3Q of almost 42%, which is quite strong. The guidance implies a step down in 4Q. I know there's a lot of noise, but if I go back and look at gross margin progression pre-pandemic, it's pretty rare that you see that sequential step down. Just any color on what may be driving that. Hi, Peter. Yeah, thanks for the question on gross margin. You know, I would not look at it as a stepping down in Q4. If I look at our Q3 performance, and as you mentioned, we delivered a 41.8%, there's about 1 point of benefit from the one-time items we highlighted. If I set that aside, sort of on an ongoing basis, we're a little under 41%. If you look at our raised outlook for the full year, we're now looking at 38.5%-39%. You can back into the fourth quarter, that would suggest we get to about 40%-41%. I would say our fourth quarter is very much in line with what we delivered in the third quarter, if I just set aside the one-time benefit we had. We expect the good, strong performance we delivered this quarter to continue on into the fourth quarter. That's super helpful. I guess, you know, maybe looking out longer term, I recognize, you know, you know, being hesitant to provide goalposts around, you know, a timeline of returning to pre-pandemic profitability. Just looking at the 3Q performance, the 4Q exit rate, the broader trends around inflation, it just does seem like the light at the end of the tunnel might be approaching faster than anticipated. Yeah, I would just love some perspective on the margin recovery and whether based on what you're seeing right now, whether returning to pre-pandemic levels is in the cards as you look out to next year. Yeah. Peter, as it relates to gross margin, Linda and I remain committed to getting back to pre-pandemic levels. That's work that's well underway, and we intend to get there. You know, I'm gonna be cautious about providing any outlook for fiscal year 2024. We're still in the process of developing our plans, so it's a bit early for that. I would say at a high level, you should expect when you see our plans, it'll be very much focused on the same priorities we've been driving this year. We're gonna continue to drive top-line growth. We fully expect to continue to make progress, expanding gross margins and rebuilding them. We'll continue to advance our strategic priorities. The challenge with gross margin, I know there's a lot of interest in exactly when we get to pre-pandemic levels is, you know, on the, on the elements we control, I feel very good about the progress we're making, and we've talked a lot about those drivers. The reality is there's real impact from the areas we don't control, either supply chain disruptions or inflation. As I said in the past, I really think that inflationary component will either accelerate or delay our time to recovery, depending on how that plays out, you know, over the next 12 to 24 months. I frankly don't think anyone's got a particularly good crystal ball right now to predict that. We're gonna continue to focus on those things we can control. We're making really good progress. I expect that progress to continue in fiscal year 2024. I think it's a little premature for us to make an exact call on where we think we'll be by the end of 2024. Got it. Thanks so much. I'll pass it on. Yeah. Thanks, Peter. Your next question will come from Anna Lizzul with Bank of America. Hi. Thank you very much for the question. To continue the theme on gross margins, I did wanna just follow up. You know, understanding that commodity costs are still a headwind, but directionally, keep moving in a better direction and less of a drag on margins here. I mean, do you see commodity costs largely stabilizing at this point, into fiscal Q4? Also, do you see a bigger benefit, you know, acknowledging that the mix and assortment on margins was a benefit in fiscal Q3, would you expect a bigger benefit on that in fiscal Q4? Thanks. Yeah. Thanks, Anna, for the question. You know, as it relates to commodity inflation, it is still an inflationary environment. Now, it is moderating, that level of inflation, but to give you a perspective, you know, in Q1, we had 330 basis points of commodity inflation. In Q3, we had 230 basis points. We've seen some moderation, but still an inflationary environment. You know, as we've said, resin is the one product we buy that we are seeing deflation. We've seen that for a good part of the year, but that's being more than offset by most of the other products we purchase. It continues to be inflationary. We had called about $400 million in total supply chain inflation, about half that from commodities and half from other areas at the beginning of the year, that still looks like the right call. We still expect about $400 million of inflation. I expect to exit this year still operating in an inflationary environment as it relates to commodities. Now, as it relates to manufacturing and logistics, I'd say the one area we are starting to see prices come down year-over-year, at least that's our expectations, on transportation. It has stabilized in the third quarter, our expectation is the fourth quarter, we'll start to see transportation on a year-over-year basis be lower. Keep in mind, when we talk logistics, there's really three pieces in there. There's transportation, which I think is moving to a deflationary market as we're seeing less demand for goods and more trucks available, but that also includes warehousing and what we call our diesel surcharge, and we continue to see inflation in those other two elements. Logistics continues to be a headwind, but the transportation piece of logistics, we're starting to see that decline. At least that's our expectation for the fourth quarter. Okay, thanks very much. Then just on the mix and assortment part of margins, are you expecting to see a better benefit from fiscal Q3 to fiscal Q4? I don't. I mean, a little bit of the Q3 benefit in mix and assortment is our cleaning business, and particularly wipes, because we're lapping Omicron. Our wipes business was down, and particularly when you get to large multi-packs. That was a benefit in the quarter that I expect when we get back down to a more normalized mix of our cleaning portfolio. I would not see that continue in Q4. Great. Thanks very much. Thanks, Anna. Your next question will come from Dara Mohsenian with Morgan Stanley. Hey, guys. Good afternoon. Good afternoon. Couple things on the gross margin side. I guess I wanted to re-ask Peter's question, and I understood the answer in terms of on an underlying basis. At least the high end of full year guidance is in fairly similar levels in Q4, fiscal Q4 versus fiscal Q3 adjusted. You did see a lot of sequential improvement in Q3 relative to Q2. As you mentioned, there's some things getting better in terms of logistics. In theory, some of the commodity costs are less of a pressure point next quarter. just wanted to understand why we wouldn't continue to see a path of sequential improvement, given as we look at fiscal Q3 on an underlying basis, you saw that versus fiscal Q2. Also just looking at the underlying performance in fiscal Q3, can you just highlight based on the pressure points of the individual buckets, where did you come in better than expected versus what you originally expected in fiscal Q3? Thanks. Sure. Yeah. Thanks, Dara. You know, as it relates to Q4, I'd say the one item I would add to your list, Dara, and you're exactly right, we expect some moderation in cost inputs as we move from Q3 to Q4. The counterbalance of that is on pricing. We believe Q3 will be the strongest benefit from pricing. As we move into Q4, we're now lapping two price increases, the first two rounds we took. I would expect that we'll see less benefit from pricing in Q4, essentially offset by more moderating cost environment. Collectively, we get back to that 40%-41%, which is fairly consistent with Q3, seeing a little less inflation and a little less benefit from pricing, about offsetting. As it relates to Q3, probably the biggest benefit above what we expected is volume deleveraging. We went into the quarter expecting, based on elasticities, that we would see volumes down in the mid-teens range. As you saw, our volume was down about 11%. That stronger top-line performance, that really drove through the entire P&L. We over-delivered on sales relative to our expectations, but it also contributed to a strong gross margin expansion as well as EPS. That was really the biggest change versus our expectations. As I mentioned earlier to Peter, the cost inflation is generally in line with what we expected. That was true for Q3, and we still expect about $400 million of the cost inflation for the full year. Great, that's helpful. Then just on price gaps, you obviously talked about Kingsford. Are the plans on Kingsford mainly to adjust promotional spending? Are there other plans as you think about managing that business, particularly heading into the peak season here? Can you discuss if you're comfortable with price gaps elsewhere across the portfolio, or are you seeing anything worrisome elsewhere? Thanks. Sure. I'll start with the portfolio and then get a little deeper on Kingsford. From a price gap perspective, you know, the pricing we took a few months ago went generally as expected, and we've seen pockets of price gaps, and frankly, we're still closing some of those, and we've adjusted some of our plans on the businesses where we've had issues. For the most part, our price gaps are in line to where we expected them to be. Kingsford, as you call out, is the biggest gap that we have right now as competition did not follow that price increase in full. That's one that we are making adjustments to our plan, and we have those already beginning to show up in market in Q4. Part of that would be trade-related. We're ensuring we have the right merchandising plans to support the right price points, but we're also focused on market baskets with retailers, which is one of the biggest opportunities given the overall basket for the consumer in the grilling space is under pressure, with protein prices being up and of course, the rest of the things that go on the grill. We're focused on supporting those enhanced merchandising plans, and we'll expect to see that play out as we head into Q4. That being said, though, you know, we are laser-focused on any price gap issues that we have in pockets, and we have plans ready to adjust, and we will do that on select other areas of our portfolio where we continue to see gaps. What I'd say is there's so much noise as prices fluctuate and as promotion starts to come back into the marketplace, that we're being incredibly cautious to ensure that we have the right value for our brands and maintain that superior brand value with consumers, but not get ahead of ourselves from a trade perspective. I think that balance has been working, and we'll continue to do that in Q4 and beyond as we manage price gaps. Great. That's helpful. Thanks. Our next question will come from Filippo Falorni with Citi. Hey, good afternoon, guys. Question on pricing. You mentioned obviously in Q4, you're gonna cycle some of the price increases from last year. You still have the December price increase flowing through. Can you give us a sense of the magnitude or the sequential change in pricing that you're thinking for Q4? Then longer term, you've talked in the past about shifting from list price increases towards more price pack architecture. Can you give us a sense of the potential contribution from those initiatives as we look for fiscal 2024 and beyond? Thank you. Sure. Hi, Filippo. As it relates to Q4, you know, I won't give a by-line forecast for the fourth quarter. You should expect that the price benefit to margin we saw in Q3 is a high water mark this year. Now as we really start lapping that second price increase, you'll start to see that pull back, I'd say more in the range, somewhere in that Q1 to Q2 range, generally in that area. We'll see that start to step down. That should continue to play out that way for the next three quarters until we fully lap the last round of pricing we took in December. It'll continue to step down in value over time. At your question on list price changes is, I think you may have read in our prepared remarks, we do not have any additional large- scale pricing in our plans for the balance of this fiscal year. We will continue to work on price pack architecture changes, and then we'll evaluate. We're developing our plans for 2024. We'll come back to you in August, and we'll share more details about our plans about how much would be pricing, and how we would execute that pricing. It's a little too early to have that conversation. What I would say, though, maybe longer term is, I think as we get through this inflationary cycle and we get back to an appropriate level of margins, I would expect us to get back to a more normalized level of how we grow the top line, which is more volume dependent and we'll continue to focus on innovation, consumer trade-up, and some price pack architecture, be much more volume-driven than price mix driven. I think you'll see that evolve over time. We're still very much in the mode where it's being more driven by price mix, and I expect that to continue for another three quarters until we lap all this pricing. Great. That's helpful. Thank you. Yep. Our next question will come from Lauren Lieberman with Barclays Capital. Great, thanks. Hi, everybody. In the prepared remarks, Linda, you talked about, you know, being pleased with market share performance. You know, that's, you know, readily apparent, on a, on a dollar basis. I was just curious how much you guys think about volume share and whether or not that's a metric that's important to you, it's something you focus on? I've a, I've a follow-up related to that after I kind of hear the answer. Thanks. Sure, Lauren. On share overall, you know, we were happy to maintain share in aggregate, and we grew share in five of our nine businesses and continue to grow share in the growth markets around the world. you know, that being said, of course, our goal is to grow share, and I've been transparent about that we're not satisfied until we're in that zone. you know, we are really pleased to see, given the level of pricing that we've taken, that our shares have held up. Of course, we are talking about dollar share. If you recall, you know, earlier, we were growing volume share pretty steadily as pricing hadn't fully taken hold in our categories, that was something that we were looking at too. Lauren, we're balancing both of them. You know, our focus is usually on dollar share as the primary metric that we wanna focus on. We think that conveys well our overall superior value and how we think about consumers thinking about value in the category, and dollar share is a better representative of that. Again, we are watching volume and unit share to see how consumers are making decisions, et cetera. The good news is that because the categories have mainly moved in line with us, you know, with some exceptions, Kingsford being notably, you're seeing, you know, adjustments in volume share that in some places are larger, but most of the time in line and just have to do with normalizing price gaps. We watch it. Primary metric is dollar share. Happy to see where we are and happy to be growing in five of the nine businesses. The work is certainly not done yet. Okay, great. When I was thinking about gross margin, and Kevin had mentioned it briefly, about the operating deleverage, and it was better this quarter than expected, but it's still a headwind to gross margin. As you think forward, you know, what should we be thinking about in terms of volumes? Stable at the new lower level, albeit given all the pricing? Is it volume growth? Kind of, you know, how should we think about where the business is geared to, on an absolute volume performance basis, such that if we're really talking about restoring gross margins versus pre-pandemic levels, we also need to be mindful of where volumes stand relative to that pre-pandemic period. Hi, Lauren. You know, I'd say a few things on volume. I think one thing that continues to benefit us, as you know, is we chose to use contract manufacturers during that significant spike, so we did not overbuild our facilities. That allowed us to, as volume moderated, we were able to shut those agreements down and not be left with a lot of unused capacity internally. I think that's benefited us. You know, I think, as I mentioned, I think, to Filippo, as we move forward now, depending on where pricing goes in fiscal year 2024, but given the pricing we've taken, I would expect price mix to continue to moderate and the volume declines to moderate as well as we cycle through this pricing. As I said, you know, short of any future pricing being taken, I think we've probably got three more quarters or so where we're seeing price mix driving the top line to a greater extent of volume. I think that'll level and balance out as we look, you know, further out into our fiscal year 2024. I think that's when we get to a more steady state of volume. What we've tried to do is be thoughtful about ensuring we're building our manufacturing capacity to be in line with these plans and not getting ahead of ourselves. That's work we've been doing with our supply chain team to try to make sure we don't end up in a position where once we get to the steady state, we've got too much capacity in our facilities. I think we're in pretty good shape, but that's something we continue to evaluate and continue to adjust our plans, but certainly something we're keeping a close eye on. Okay, great. Final question was just in the expenses excluded from earnings this quarter and in the outlook, that's on the operating model changes that just things are moving more quickly, so, you know, higher expenses in this year, but no change to the overall program. On the digital expenses, they are higher, you're now excluding, I think it's, I forget, it's an additional $0.07 or something like that. Just be curious if we could explain a little bit, you know, what's incremental? Is it just the estimated cost of the program has gone up? Is there an incremental savings? Just curious about that change. Thank you. Yeah, sure. Thanks for the question. As it relates to our digital transformation, that program is very much on track. As you know, it's a five-year program. We plan to spend $500 million. No change in our expectation. We are seeing a little bit of shifting between years. This is the second year of the five-year program. We started the year out expecting we'd spend about $150 million, $90 million of OpEx, about $60 million of CapEx. That $90 million equates to about $0.55. We have now raised our total spending to about $160 million, so from $150 million to $160 million. That's just a little bit of shift in timing between years. We're not changing the overall expected spend. As a result of pulling a little bit of that forward into fiscal year 2023, we've raised our expectation about $10 million, and that's that $0.07 you mentioned, Lauren. Okay, great. Thank you so much. Sorry for all the questions. Yeah. Thanks, Lauren. Our next question will come from Olivia Tong with Raymond James Financial. Great. Thanks. Good afternoon. My first question's on advertising, and your view on reinvestment levels, especially with A&P up pretty substantially in Q3. We certainly saw some nice acceleration following the gross margin improvement. Just wondering on your views going forward, if gross margin continues to recover ahead of your expectations, where do you think advertising goes? Then just to follow up on that, this is the biggest increase in advertising margin that on a year-over-year basis in quite a few years. Can you talk about where the incremental spend was and your view on the ability to generate the same level of ROI on that spend versus what your going-in expectations were? Sure, Olivia. You know, advertising continues to be an incredibly important part of how we support the superior value of our brands. We believe fundamentally in it, and it's why we've done everything to continue to maintain spending what we think is about the right level over a year, which is about 10% of sales, and we'll continue to be on track for doing that this year. As you noted, Q3 was significantly higher than other quarters, and that's given innovation that we launched and timing of merchandising. And again, we don't manage quarter to quarter, but this was the right time to spend this money to support our brands, and coincides with having our fourth price increase in the market, which is good timing. We continue to believe that about 10% is the right spending. We adjust that and look at that depending what, you know, the businesses require, and we're not afraid to move or adjust that, moving forward. Again, right now, about 10%, we're on track to do that for the year. If you look at our ROI on marketing, it has been terrific and is another reason why we continue to feel strongly that that investment contributes to the value creation that we can get from our brands. Our focus, as you know, has been on improving our ROI, given the fact that we are driving personalization. We wanted to get to know 100 million consumers in the U.S. What getting to know 100 million consumers does is it allows you to know them better and it allows you to personalize to them. We've had the added benefit of driving efficiency and effectiveness by doing that. We're getting the right people, the right message at the right time, and spending our money more effectively. If you look across, you know, the advertising, we said in our prepared remarks that that was more heavily concentrated in the U.S., where we had lots of good opportunities and was pretty widespread across our businesses. You saw that in the strength across all segments with organic sales growth across all four. Again, as we head into fiscal year 2024, we'll let you know what we think the right level of advertising spending will be. You can hear that our commitment to that as a way we create value remains steadfast. Got it. That's helpful. Then I just have a few specific questions on Kingsford. If you could just remind us first where Kingsford margins stand relative to company average. Then, obviously a lot of pricing this quarter. How much of that pricing acceleration that you saw in Q3 was driven by Kingsford versus the other brands where you, where you saw competition follow your pricing? Olivia, I'll answer on gross margin, and we don't provide gross margin at individual brand level, but it's a nice profitable contributor to the company. I'm sorry, Olivia, can you repeat your second question? I'm not sure I was tracking. Sure. Would you mind just giving us a sense in terms of Kingsford relative to company average then? How much of that pricing acceleration that you saw in Q3 was driven by Kingsford versus other brands where you did see the competition follow your pricing? Yeah. On the margin, you know, we don't share other than I'll just give you direction and say it's a nice business for us. We're quite happy when we get increased sales in Kingsford. As it relates to pricing, I'm not sure I'm fully understanding your question, but I would say overall, Kingsford is not as large in Q3. If you're questioning about how Kingsford visibly contributed to pricing. As I mentioned earlier, we do about 50% of our sales in our fourth quarter on the Kingsford business, so it has a very outsized impact on the company. In Q3, that's really early season for Kingsford, it's less meaningful in terms of the impact it has on our performance. Got it. Thanks so much. Thank you. Your next question will come from Christopher Carey with Wells Fargo. Hi, everyone. Hi, Chris. I'm just, you know, digesting a lot of the questions on this earnings call around sequential momentum and gross margin, which was great. Sounds like the underlying momentum will continue into Q4. I guess, you know, the question I wanna ask is just, you know, philosophy on investment, right? If this gross margin trajectory continues, and you don't materially step up spending, you're gonna be looking at, you know, a very significant year of earnings growth in fiscal 2024, right? I know you're not gonna comment on fiscal 2024, but certainly, you know, certainly this is the reality when you flow through these gross margins, you know, through the model. I think these questions on investment are well taken and where you wanna spend. If, you know, 10% of sales is the right number, then it would imply that you're gonna be spending an enormous amount on SG&A. I guess just, you know, maybe help us understand, you know, where, you know, the types of areas where you might want to lean in if you're now clearly over-delivering on the gross margin line. If not in advertising, is, you know, are there areas of SG&A that you felt like, you know, have been underinvested in that you have opportunity over the next four to six quarters as, you know, as you look at, you know, the normalization of the P&L over the next couple of years? Just connected to that, you know, there's been this target of, you know, 13% SG&A as a percentage of sales out there. You know, is that still a relevant target, you know, over the near to medium term? Thanks for those. Sure, Chris. I'll start and then ask if Kevin wants to add anything, after I finish. You know, just maybe taking a step back in what we're trying to accomplish. You know, we've talked about the balance that we wanna strike between maintaining top line growth and rebuilding margins. Ensuring, given the incredibly volatile and uncertain environment, that we're taking all the actions we can control to do both of those things. We are pleased with the progress that we've made on both of them. You know, if you look at our growth, If you look at any kind of three-year average over quarters, et cetera, it puts us at the top end of our growth algorithm, then we're making nice progress on margin. I think Kevin highlighted, you know, why Q3 between one- time less deleveraging than we expected, what we expect in Q4, you know, really happy with the margin performance, but that it's nothing that we should expect as outsized in Q4. Obviously, not providing a fiscal year 2024 outlook, but let me just give you how we're thinking about the environment and what's going on out there. You know, we wanna continue to maintain that balance on top line growth and margin improvement. We still think it's a multi-year journey to rebuild margins, and we think the uncertainty from a consumer perspective in 2024 is gonna continue to remain high. That's very difficult to predict right now exactly what the inflationary environment will look like, when, if we will hit a recession, and then, of course, what the corresponding impact will be to the consumer. It is very likely that they could become under more pressure. What we're taking this as is another good quarter we need to continue to control. We're controlling. We wanna continue that into fiscal year 2024. We wanna make the right investments, to your good point, to support that business. We believe in advertising, supporting innovation, which we continue to feel very strongly about, ensuring we have the right capital plans against our business, which we feel we do. We'll look at all of those hard in 2024 to make sure that we're making the right choices. We're not afraid to invest if we need to support, you know, both that top line growth and rebuilding margins. We'll have more specifics, of course, when we talk to you again in August about what that means for 2024. Just know that's the posture we're going into, is we're committed to that margin growth, committed to maintaining top line, and then making all the necessary adjustments to do that at the right pace. Thanks, Linda. That's a very fair response. Just on the, you know, just one quick follow-up on Olivia's question. The way I understood it was, you know, did Kingsford atypically contribute to pricing in Q3? As such, you know, is there any giveback in Q4? I'm not exactly sure that's what she meant, but that was the question I had, so I figured I'd ask you as well. Thanks so much. Yeah, Chris, on pricing, as I think you may recall, we took pricing pretty broadly across our portfolio in December. Kingsford was one of a number of brands we priced. And so, as I said, Kingsford did not have a outsized impact. And because it was low season, it had fairly small impact. I don't expect to see any meaningful change in Q4 as it relates to the pricing we took and specifically what Kingsford contributed to that pricing overall. Again, pricing was just one brand, and we priced a good portion of our portfolio in December. Okay. Thanks so much. Yeah. Thanks, Chris. Your next question will come from Javier Escalante with Evercore ISI. Hi. Good afternoon, everyone. My question has to do with SG&A, and if you could first operationally, tell us what you have accomplished on this digital investment that you are making. Financially, it's $0.63. It's been excluded of consensus. What is reasonable to think as recurring cost going into fiscal 2024? Hi, Javier. I'll start just with, you know, a reminder of what our digital program entails and how we're thinking about it, then if there's any specifics we wanna provide, you know, Kevin can talk about the specifics of the spend for this year and how we're thinking about it moving forward. We're investing, as you know, $500 million to transform our company digitally. This, of course, is putting in the right technologies, including a new ERP, but it really is around changing the processes and the work that everyone at Clorox does to be faster and simpler. We see this supporting both our top line momentum as we put in place innovation capabilities, better access to consumer data to drive insight, and speed of decision-making, as well as efficiencies, as we have the ability to look across our supply chain, and make decisions that reduce costs. This investment is on track. I think Kevin highlighted that to begin with. You know, we'll see, you know, differences year- to- year. We're in the second year of the program. The, the team continues to be on track implementing against that. What we've said is, most of the investment is up front, but you get the majority of the benefit as you start to exit our IGNITE strategy, or in 2025, and that's because you're putting all of those capabilities and technologies in place and changing how the entire company works and operates. We continue to be on track for that. This is a very high return project for us. You know, when Kevin and I evaluated this, we looked at the return. We tracked that project by project to ensure we're getting that return. We continue to be on track to deliver good value on this over the long term. As it comes to specifics, you know, we talked about in our release that we are about to implement the first region of our ERP coming up this calendar year. That is on track, as well as some of the other technology improvements that we've made. Of course, we have paired that with an operating model change that is also on track and, in fact, a little bit ahead from a cost savings perspective this year as we were able to implement some of those changes faster. Those two things in combination are really about being that fast, simple, and more cost-effective company that we, that we wanna be and to develop the type of resiliency and strength we can to weather whatever comes our way, another pandemic or whatever else the macroeconomic or geopolitical environment throws our way. Just to clarify, there is no recurring cost associated with the $0.63 in digital spending that you are making in fiscal 2023? Sure, Javier. As you relate to the spending, what'll happen is the $500 million is the cost, the investment to put these new systems in place. I think through the end of this year, we'll be a little less than halfway through that spend, so we'll be somewhere around $230 million-$240 million, and then that'll continue as we complete the program over the next three years. That's the one-time investment to put this in place. Now, there are ongoing maintenance costs, which we have in our legacy systems now, that when those get shut off, there will be ongoing maintenance costs for a cloud-based system that we'll continue to pay. But the $500 million is the cost of the investment in this technology to get it put in place. That's very helpful. If you changing topics, if you can comment on underlying category growth on a volume basis so we can compare it versus your 11% decline, now that Omicron is behind us, and if you can give that assessment of volume category growth, when it comes to your household penetration, Clorox products versus 2019. Thank you very much. You know, as you would expect, given the elasticities of what we spoke about and the fact that our pricing is generally in line with category pricing, category volumes are down, and we've absolutely expected that to be the case. If you look at dollar sales, so if you look at consumption, you know, high single- digits in our categories, which continues to show the strength and resilience of the consumer in our categories. You know, given we compete in essentials, this is something that we expected. We're watching really closely as the consumer continues to react to pricing and, you know, as they continue to react to the macroeconomic environment. Right now, feeling very good about the category position that we're in and consumer response to pricing. You know, generally we would expect over time as we begin to lap category pricing, that you'd see category volumes return and get to that place where you see, you know, low single- digit growth in our categories from a volume perspective over time. We are certainly not at that point right now, as we have, you know, nine more months to lap pricing and then of course, you know, we'll see what plays out from a commodity perspective and any required pricing that happens in the future that would also impact that. You know, the only other thing that I would say as it relates to pricing, you know, and you think about volumes, you know, we're not seeing that type of trade down either as it relates to consumers making choices for private label, et cetera. That's been pretty steady. You know, as we highlighted earlier, our shares in aggregates are flat. We grew in five of nine categories. We have seen private label increase share a bit in some of our categories, but it's not coming from us. It looks like it's coming from other brands and that there is, you know, a simplifying of the category, and that all relates to the value that we offer consumers. 76% of our portfolio is still deemed superior by consumers. We've continued to invest in that. Volume is what we expect in the categories. Again, we expect that to bounce back over time as we continue to invest in innovation and advertising and in category growth plans with our retailers. The household penetration statistics, do you have them? Sure. Yeah, household penetration is still very high for the Clorox portfolio. We're still in about nine out of 10 homes. As we spoke about last quarter, you know, household penetration is something we expect to decline in a time when you take extraordinary pricing. That's not a Clorox phenomenon, it is a category phenomenon. What you see is people using those more, you know, price-sensitive behaviors. They're letting a trash bag, you know, fill longer. They're stretching their time in between cleanings. They're doing those things to make their wallet stretch, and that results in usually category penetration declining, and we are seeing that. What I would say though is we see no difference in our brands versus the category, and we would expect over time to rebuild category penetration as we rebuild volume. That's all for me. Thank you very much. Very helpful. Thanks, Javier. We'll hear next from Steve Powers with Deutsche Bank. Hey, thanks. Actually, that it's a good lead-in. I wanted to pick up on that household penetration discussion. You know, last quarter we were talking about it and I think the framing was that you were looking to, you know, rebuild household penetration, you know, over the course of 2024 and then looking longer term, obviously. Just in response to, I think, to Lauren's question earlier on volume growth, Kevin, your response, if I heard it correctly, you know, emphasized stabilization of volumes. I just wanna marry or kind of, you know, tie those two things together and make sure I'm grounded in the right takeaway 'cause if we're rebuilding household penetration over the course of 2024, I think that implies positive volume, whereas you emphasized stabilization of volume. I know it's maybe splitting hairs, but just wanted to think, you know, just kinda understand how you're thinking about it. Maybe it's a progression over the course of 2024, but just, you know, so I don't walk away with the wrong impression. Thank you. Yeah. Steve, thanks for the question. As it relates to volumes, I think for the next three quarters, given the pricing we just took in December, we would expect to continue to see volume decline, and we would grow top line based on price mix. As we get past that pricing and assume we don't have any other large- scale pricing in our plans, then I think the balance starts switching. As we target that 3%-5% top line growth, you're driving that more through volume versus price mix. Then I think it reverses, and then volume starts to be the primary driver of our top line, supplemented with our innovation and trading consumers up, but more volume driven as we target 3%-5% over the long term. I think we're probably still a number of quarters away before we get to that more stable environment, where we turn to a more traditional model of top line being more driven by volume than price mix. Yeah. Okay. Okay. Thank you very much. Yeah. Thanks, Steve. Your next question will come from Jason English with Goldman Sachs. Hey, good afternoon, folks. Thanks for having me. A couple questions. Let's start with maybe the trade down. To Lauren's question earlier, you're clearly losing some volume share in a number of categories. But you're seeing usage occasions, like they're not going to cheaper products or trade down. Where are you seeing those lost usage occasions to your brand? Like where is it going if it's not going through to trade down? You know, Jason, it's very dependent on category, the consumer behavior. What I would say is we notice big buckets of the following. First, we see consumers trading to larger sizes, and they're looking for the best cost per use, for example. We also see certain consumers trading down to lower sizes because they're looking for the lowest out-of-pocket price point, and they're willing to pay on a higher per-use basis because they only have a certain amount of money to get them through their shopping cycle for that period of time. We're also seeing people trade within our portfolio, for example. Where somebody might use a more expensive cleaner, they are using a dilutable cleaner or a bleach cleaner, and willing to put more elbow grease in to get that same amount of clean and trade off that price and convenience. Then we're seeing behaviors, and this is really consistent across the category, where people are just trying to stretch something more. You know, they're getting every last spray out of a bottle. They're using a wipe longer. They're stuffing a trash bag, and that's pretty consistent across the category. Really, those three first, you know, buckets are the really important ones as we see people trade into different sizes and then, of course, adjust their behavior. The good news for us is in many cases, we're able to capture that consumer 'cause we offer different levels of convenience, for example, in our cleaning business. Okay. Kevin, can you... You mentioned a couple of sort of one-time transitory benefits this quarter. Can you remind me what they were and quantify them? Then related, maybe do the adjusted math on this. Gross profit, we're all benchmarking as pre-COVID, right? How you... As you are too when you mention, like, co-recovery to margins. Your gross profit, I think, was up adjusted 19% versus 3Q 2019 on cumulative volume growth of three, suggesting that unit economics are up a lot, like 15.5% versus pre-COVID. Almost to Chris's question, like, wow, you hold this, like, you're gonna blow through a $3.2 billion-$3.3 billion gross profit next year at that level. What-- is anything unusual, or is that like, yeah, that's it? Like, your unit economics are that much better, and we can run rate this. Yeah, Jason, on the two questions, I think the first question you had was one-time benefits in the quarter. We had two. The first one was on trade spending. We have a normal process at the end of the second quarter. We evaluate our trade spending accrual. In this case, we're not seeing the promotional environment increase at the rate we expected. We reduced our trade spending accrual. That was a one-time benefit in the quarter. The other one-time benefit was one of our competitors had an out of stock in our dilutable category. Our Pine-Sol business saw a pretty nice performance, double-digit growth as a result of that out of stock. Now the competition is back on shelf. We don't expect that to continue back to a more normalized level of competition. Those two items were the ones we highlighted as fairly unique for the quarter that we don't expect to continue into Q4. That generated about 2 points of top-line benefit and about 100 basis points of margin benefit for the quarter. On unit economics, yes, you know, we're committed to rebuilding gross margins, and we expect to be a much larger company than we were before the pandemic. We went into the pandemic with a little over $6 billion in sales. As you know, we're sitting a little over $7 billion right now. You would expect gross profit to be higher because as we rebuild gross margins, and we are a bigger company, that will generate more gross profit. Ultimately, we expect that to occur as we rebuild margins over time. As Linda said, we think that's a multi-year journey to get there. You know, we'll have to see how much progress we make in 2024. We're developing those plans right now, but that is certainly our intent is to rebuild gross margin and have the result or the impact of gross profit as it relates to that, to a larger company. Okay. Yeah, sounds like this is a good benchmark to run rate then. Thank you. I'll pass it on. Thanks, Jason. Our next question will come from Kevin Grundy with Jefferies. Great. thanks. Good afternoon, everyone. A couple from me. A cleanup on the SG&A. Kevin, I apologize if I missed this. It looks like your SG&A on an underlying basis ex the digital moved up about 50 basis points from your prior guidance. What's driving that? Kevin, if you just talk. I'll talk Q3, I'll talk full year. In Q3, a little over 16%. We had a couple items. We had the digital transformation, which we highlight is about 150 basis points. We also had about 40 basis points from our operating model changes. A portion of those restructurings sit in SG&A, a portion sits in O&I. So you're seeing some of that flow through in SG&A. Then the other one was we have higher expected incentive compensation. We have a very strong pay-for-performance philosophy, as we've taken our goals up for the year, we expect our incentive compensation will be higher as well. We baked that in. As a result, we went from 15%-16% was our expectation last quarter, and now we're expecting closer to 16% for the year. Got it. Couple more for me real quick. Just to walk from, like, the 14.5% this year to the 13% ambition longer term, understanding, you know, it's going to take some time to get there. Sort of broad brushstrokes, what gets you from 14.5% this year to 13.5% over a reasonable amount of time? I would say one is if you just get to a normalized level incentive compensation, it's gonna be above target is our expectation this year. If you just go back to a target payout, you pick up, you know, 40 to 50 bps there. Our expectation, you start looking at the operating model we talked about, $75 million-$100 million. We're gonna generate about $35 million is our expectation this year, that's a nice contributor as you look at 2024 and beyond. You start getting the benefits from our digital transformation. We're still very early in that process, but over time, as we bring the new technology online, we're gonna see more productivity opportunities. Collectively, when you look at all that together, that's the path for how we believe we get to 13% as we look forward over the next several years. Got it. Thank you, Kevin. One quick follow-up if I can. I was gonna ask on trade promotion, then it kind of came up end of your response. Again, like from our perspective, hard to gauge sort of order of magnitude with the decision to take down the accrual. I think, like, collectively, everyone on the call would think promotion levels moving higher and not lower, and I guess particularly in your categories. A question for both of you. I was gonna ask Linda just how you're thinking about Trade promotion risk around that. Are you starting to have those conversations already? Are retailers starting to push already? They see what's going on with resin and inflation more broadly. They see what's happening with this gross margin start to inflect. Are you starting to get more pressure there? Kevin, maybe you could just jump in and sort of comment on the decision to take down a trade accrual with the likelihood the trade promotion is going to move higher over the next 12 months, then I can pass it on. Thank you for that. Sure, Kevin. Yeah, we're continuing to see the promotional environment normalize. The dynamic that happened is we expected the promotional environment to increase this quarter, but did not increase as much as we expected. That's a dynamic, Kevin can talk about the accrual as it relates to that. As we look just broader, though, in the environment on promotion, you know, that plays a very specific role for our categories. We've talked about in the past that more than 90% of our business is done off the shelf with no pricing discounts. Promotion plays a role to ensure that we talk to consumers about innovation. We talk to them around key holidays and pulse points where consumers, you know, are looking, for example, back to school, or back to college or around cold and flu. We use that to ensure that we're speaking to consumers about our products, the values they offer, and new innovation. That continues to be the focus that we have on the promotional environment, and those are the discussions we continue to have with retailers. We're not afraid to use promotional dollars if we have price gaps that we need to adjust on a temporary basis, and we will do that. We are doing that right now, as we have a couple of price gaps that are out of line that we spoke to earlier. Generally, you know, promo continues to be a strategic investment lever for us to ensure that we're in front of the consumer when we need to be and when it matters, from an innovation and pulse point period perspective. Kevin, I would just add as it relates to the trade accrual specifically, Linda said it well, which is it's not that we expect trade to go down. It's just not growing at the rate we expected. Before the pandemic, about 25% of our product was sold on some form of promotion. In our most recent quarter, it was at 20%. If I look at Q3 a year ago, it was at 19%. It is increasing. We expected we'd get back to more of that pre-pandemic level faster. The reduction accrual is just recognizing it's not as growing as fast as we had anticipated, but we do expect to continue to increase. Understood. Thank you both. I appreciate it. Good luck. Thanks, Kevin. Thanks, Kevin. That concludes the question and answer session. Ms. Rendle, I'd now like to turn the program back to you. Thank you, everyone. We look forward to speaking with you again on our next call in August. Until then, please stay well. This concludes today's conference call. Thank you for attending. The host has ended this call. Goodbye