Clorox Company (The)

on your touchtone 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. Lisa Byrne, Vice President of Investor Relations for the Clarks Company. Ms. Byrne, you may begin your conference.

Thank you, Paul. Good afternoon, and thank you for joining us. On the call with me today are Linda Rendell, our Chair and CEO, and Luc Belay, our CFO. I hope everyone has had a chance to read our earnings release and prepared remarks, both of which are on our website. In just a moment, Linda will share a few opening comments, and then we'll take your questions. During this call, we may make forward-looking statements, including about our fiscal year 2025 outlook. These statements are based on management's current expectation, but may differ from actual results or outcome. In addition, we may refer to certain non-GAAP financial measures. Please refer to the forward-looking statement section which identifies various factors that could affect such forward-looking statements, which has been filed with the SEC. In addition, please refer to the non-GAAP financial information section in our earnings release and the supplemental financial schedules in the investor relations section of our website for reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures. Now, I'll turn it over to Linda.

Thank you for joining us today. I'd like to welcome Luke to his first call as CFO. Looking back to the start of the fiscal year, we expected a tougher consumer environment with increased competition and slower category growth. For the first half of the year and the first half of the third quarter, we saw just that. During the second half of the third quarter, however, U.S. consumer sentiment weakened substantially, and macroeconomic and geopolitical uncertainties drove changes in shopping behaviors, resulting in temporary category impact and lower than expected sales. Despite these headwinds, our fundamentals remain strong. We held overall market shares and delivered our 10th consecutive quarter of gross margin expansion, which enables us to keep reinvesting in our brands, our innovation pipeline, and in the transformation of our business. As we look ahead, we anticipate consumers and retailers will remain under pressure, which is reflected in our updated outlook. That said, we are confident in our portfolio of trusted brands and the essential role they play in consumers' daily lives. Our proven resilience and execution equip us to navigate the uncertainties ahead. For this year, that means we continue to expect to deliver organic sales growth and another year of strong earnings growth while continuing to progress our long-term strategy. With that, Luke and I will take your questions.

Thank you, Ms. Rendell. Ladies and gentlemen, if you have a question, please press star 1 on your touchtone telephone. And our first question comes from Dara Mosenian of Morgan Stanley.

So just take a step back. I'd love to hear your perspective on what's driving the category weakness we're seeing. Traditionally, your categories have been pretty defensive and resilient. Obviously you mentioned the weakness in the back half of the quarter. with the macro uncertainty, but the reality is the broader market concerns ramped up more in April than the weakness we've seen in the household products categories beginning in February. So just a bit of additional perspective would be helpful on the category weakness we're seeing, how long you think this sustains, and maybe difference versus what we've seen in past cycles.

Sure, Darragh. I'll get us started. Thanks for the question. I'll start with a step back. I think, Dara, to your point, we've been around for a long time, 112 years, and we've seen a lot of different economic scenarios. We've seen inflation. We've seen recession, certainly in the recent years with COVID, et cetera, and absolutely the case that our categories are fairly resilient during times like this. We play in household essentials, so we tend to see our categories at the high point in the low single digits positive, and at the lowest points, we see them low single digits in the decline. And what we saw in this period is, on average, low single-digit decline. And there is some nuance in that I think would be helpful to break apart. And maybe I'll just start with Q3. I'll talk about what we're beginning to see in Q4 and April and maybe just how we're thinking about it moving forward. But if you look at Q3 through mid-February, generally in line with what we had expected. And to be clear, for fiscal year 25, we expected a more strained consumer. So categories going from about two, two and a half, down to about plus one. And that's what we saw through the first half of the year and the first half of the quarter. And then with a lot of the uncertainties coming with different macroeconomic policies, what you were seeing with tariffs, we begin to see that change in mid-February. At the beginning of that change, what we really saw was changing baskets within the retail locations people shop for our brand. So we saw people prioritizing food a bit more. We saw that market basket shifting within the store. Then, as tariffs came out, we saw consumers actually changing their wallet much more broadly, well beyond the market basket that includes our goods. So we saw things like people buying more automobiles, people buying iPhones. The wallet was changing pretty dramatically, and what we saw was conserving behavior in many of our categories.

That resulted in our categories being down significantly. It's flat, so I'm going to take a sip of water. Sorry, hold on for a second.

All right, that's better. Our category is being flat to, again, down low, and pretty volatile in that period between mid-February and the end of the quarter. And I think what we're seeing is consumers react. You know, the news cycle every other day is changing, and so consumers are thinking about how they meet all of their needs, across a broad range of market basket and ensure that they have their essentials at home. What kind of, you know, buoys our confidence is what we're not seeing is consumers change their at-home behavior in our categories. So we're not seeing people, for example, trade down to private label in any meaningful way in our categories. We're not seeing people decide to not participate in our categories. What we're seeing is people buying smaller sizes or larger sizes in our portfolio. We're seeing they're using every last bit of what they have at home. And what they're trying to do is prioritize the purchases they need to prioritize given the environment that's going on externally. So that gives us confidence that our categories will continue to be resilient because we're not seeing that behavior change in any substantial way. And, again, we play in those essentials. So what does that mean for what we're seeing maybe in Q4 and just how we think about, you know, the timeframe on this? For Q4, April was a very similar look to what we saw in the back half of Q3. We saw a range from category being flat one week to down two and a half and pretty volatile, up and down. But I would say what we expect for the quarter, the categories to be down low single digits based on what we're seeing, and that's what we've contemplated in the outlook. A big question for all of us is how long will this last? And at this point, it's very difficult to say because it's difficult to say exactly what will happen as it relates to tariffs, the geopolitical environment, which continues to be pretty volatile and uncertain. But the thing we're certain of is our categories generally are pretty resilient. I still think they're pretty resilient given what's going on right now. Consumer behavior in our categories remains largely unchanged. People are pinching pennies right now to try to make it work. And what we're just looking at really closely is, you know, does that behavior start to change, and do we start to see behaviors? Again, nothing yet, but we're watching closely private label. We're watching trade down really closely. We're watching channel shift. And then at what point do consumers feel more confident in their ability to navigate whatever's coming, and we see our category, you know, growth return to that low single digits that we would expect. That timing is uncertain, but we just feel confident in our ability to navigate it until we get to that point.

Great, thanks. Our next question comes from Filippo Filorni of Citi.

Hey, good afternoon, everyone. I wanted to just expand on Dara's question a little bit longer term, Linda. Obviously, you have a 3% to 5% long-term algorithm on organic sales, which assumes a healthier level of category growth. So assuming the categories remain relatively softer, how should we think about your underlying opportunity from an organic sales standpoint as we think about exiting fiscal 25 and into 26? Thank you.

Thanks, Filippo. Obviously, we're not setting guidance for fiscal year 26 or beyond now, but I'll just make some kind of overall comments. The first would be you're absolutely right that our 3% to 5% growth algorithm is predicated on having category growth back to what we would normally expect it to be, you know, around 2%, 2.5%. And we don't have visibility to that category growth at this moment. But, again, would expect based on the consumer fundamentals over time that we'll come back. In the meantime, we would expect, you know, our category growth to be suppressed given the fact that our categories are down. So our growth will be reflecting in that. When we talk about fiscal year 26, we'll talk about what we expect, again, not setting that right now. But certainly for Q4, you're seeing muted growth, and you see that in the remainder of our outlook for Q4, given what we're seeing in the categories.

Great. That's helpful. And maybe one for Luke. In your guidance, you mentioned the impact of tariffs. um on a gross margin on that basis but can you give us a sense of like what the the gross impact from tariffs that you're expecting and your plan to mitigate that impact thank you yes thanks filipo um maybe just as a piece of context we talked about it in the past but our exposure to tariff you know is relatively limited as you know when you look at your

Our portfolio, we tend to manufacture closely to where we sell our products. Having said that, given the maturity of the tariff rate, the unmitigated impact that we expect is a 12-month run rate of about $100 million. Now, you'll see less than a fair share in Q4. We expect about $10 to $20 million in the outlook. That's because we currently have inventory, and it's going to take time for the tariffs to work through that inventory and hit our P&L. Now, I would say this is fairly material, but all in all, we think it's manageable, and we expect that we'll be able to offset that over time. Now, obviously, we already started working on mitigations, and we're looking at a broad set of levers. We're looking at changing sourcing or make other changes to supply chains. looking at potential reformulations, of course, considering product improvement, as well as some levels of strategic pricing. Now, we don't expect to see some broad-based price increase, but we're certainly looking at targeted and price increase that would be more modest in magnitude than what we've seen in the past few years.

Great. Thank you so much.

Our next question comes from Peter Graham of UBS.

Thanks, operator, and welcome, Luke. I wanted to ask, you know, a little bit on gross margin guidance, just in the context of the fourth quarter, just, you know, the year-to-date performance applies a really, you know, kind of tough exit rate. And look, I know the guidance always included that assumption, but I'm curious if the driver's And I guess what I'm trying to get at, is there anything that we need to kind of take away from the implied poor Q pressure that we kind of need to take into account as we think about fiscal 26? I know we just touched on tariffs in your response to Philippa's question. You aren't giving guidance on 26 right now. I totally get that. But, you know, is there anything else that's really changed as we think about kind of the puts and takes for gross margin in the fourth quarter?

Thanks, Peter. I would say if you look at our gross margin for the fourth quarter, let's say it's about 44%, so it's fairly close to the average for the full year, which is going to be about 44.5%. The other thing I mentioned is a lot of our assumptions remain consistent with our prior outlook. There's a few changes, and let me walk you through them. First, we had some timing that was favorable in Q3 and unfavorable in Q4. And this has to do with some manufacturing expenses that were shifted from one quarter to the other. So that's about alpha point that's favorable on Q3 and alpha point that's unfavorable in Q4. The second thing I would say is generally, both Q3 and Q4, our cost savings are coming a little stronger, as well as some other expenses coming slightly more favorable. So that adds up a little bit. And then, of course, there's the impact of tariff. In Q4, I just mentioned it, it's going to be about $10 million to $20 million. So a few put and takes, but all in all, you know, we expect gross margin in Q4 to be about 44 basis points, very much aligned with what we're seeing for the year. And, you know, that gives you a good sense of what kind of what is our exit gross margin coming into next year.

That's super helpful, Luke. And then I guess just – I wanted to ask, I think in the Prevera March, you touched on some retail destocking that happened at the end of the quarter. Is there any way you can put some guardrail around how much of an impact that had? And has that kind of continued at all? Or is that contemplated at all in kind of the fourth quarter sales guidance?

Sure, Peter. Q3, that happened very late in the quarter. And What we're seeing from retailers generally is not broad inventory retail destocking. This was limited to our household business and came late in the quarter based on some things that they were doing to adjust to the ever-changing environment. We do expect some impact in Q4. I'll have Luke walk through the impacts for both quarters. As we look at this and as we understand retailers' plans, I think it's just helpful perspective to We don't view this as a strategic issue. We're not seeing any consumer out-of-stocks at shelf that's putting any of our category at risk. This really is retailers doing everything possible to manage their complex supply chains given the changing environment. And I'll pass it over, Luke, to talk about just how it impacted Q3 and how we're thinking about Q4.

Yeah, certainly. So as you look in Q3, this was fairly modest. It was big when you look at the household segment, but when you look at total company, it was less than a fourth. And we expect most of the impact to actually come in Q4. So it's hard to just put specific numbers because there's a lot of volatility in Q4, but that's embedded in our outlook range.

Great. Thanks so much. I'll pass it on.

Our next question comes from Anna Lezoul of Bank of America.

Hi, good afternoon. Thank you so much for the question. I wanted to ask on the promotional activity that you mentioned, the prepared remarks as being largely normalized at this point. But it does appear you still have some promo activity in certain categories, like GLAD maybe, where promo activity might not be as productive at this point. So I was wondering if you could talk a bit about promotional activity by category. And then secondly, on the introduction of innovation, just wondering how you're squaring the introduction of more premium products with a weaker consumer sentiment and a greater need for product investment here. Thank you.

Sure. So on promotion, we are seeing at the aggregate level promotion normalized and about what our expectation was. And so that's going back to levels that we saw pre-COVID, and that continues to be true. But we absolutely are seeing by category nuances and differences, some categories promotion is slightly lower than that, some categories promotion is higher. You called out GLAAD, and that is one of the categories where we're seeing higher promotion. And we're seeing from competition some fairly deep discounting going on on different sizes at some large retailers. And we've seen that behavior since our second quarter, and we're seeing that persist through the third quarter and into the fourth quarter. So definitely, you know, competition, looking for share of wallet in that category. We've responded, but we're also trying to be very rational. We don't grow these categories by doing deep discounting and promotion. We use that strategically to remind consumers to buy, to grow market baskets, to be in promotional activities with retailers at times that are important to them. So we're trying to be disciplined on this, but we're watching it really closely and ensuring that we have the right value at shelf. And that leads to your next question on innovation. And what we're seeing is consumers are absolutely willing to pay a premium for innovation that delivers them superior value and a better experience. We're seeing many of our innovations. Centiva is a great example. That's a premium that's doing very well, as well as the recent launches in Toilet Lawn. It's a premium. We're seeing our premium cat litter executions doing very well in market. Our premium Burt's Bees, Hidden Valley launches, all doing well. And at the same time, we're seeing consumers that are also looking for value in different ways, whether that be pack sizes, and we offer pack sizes that address all of those needs, whether they be low out-of-pocket opening price points or very large sizes to get the very best value per use or per ounce. And we're seeing consumers go there, and we feel good about the mix that we have across the retailers. And, of course, you know we're broadly assorted in all the retailers where consumers shop. So we feel good about our ability to continue to innovate, innovate in premium segments, and it will also be very important for us to continue and ensure that we have the right promotions in place, again, at the levels that we expect that are normalized. We don't see that environment changing in any meaningful way at the moment outside of those small category examples that I called out, and then continuing to ensure that we have the right price value as we do that limited strategic pricing that Luke talked about in response to tariffs. But overall, I would say, you know, our value continues to be strong with consumers. If you look at the consumer value measure that we have, we're still significantly up than we were at the beginning of the strategy period and pre-COVID. Actually, household penetration is up for us last 52 weeks. Clorox is a brand that's up significantly, over two points of household penetration in the last 52 weeks. And as you know, our Clorox portfolio is very premium in the category. So feeling good about our ability to deliver on that core value equation that we have, which is more premium products and premium experiences, and consumers continue to be willing to pay for them.

Okay, that's super helpful. Thanks so much.

Thanks, Anna.

Our next question comes from Bonnie Herzog of Goldman Sachs.

All right, thank you. Hi. I was hoping you could provide an update on your upcoming ERP transition. And how does the current and you know backdrop impact your shipments and then the inventory build out? I guess I'm I'm trying to understand why you're now expecting a greater list on organic sales from the from the transition in Q4 than you previous. Visibility do you have on this? Also curious if you expect to unwind to be evenly split in Q1 and Q2 next year, possibly a greater impact in Q1.

Sure, Bonnie. I'll start, and then I'll pass it over to Luke to talk about the impacts and how we're thinking about that playing out over the couple quarters. First, from an ERP perspective, we remain on track to our execution to make this transition coming up here at the beginning of next fiscal year. We're working really closely with retailers right now on the plans, and our team feels prepared and ready to go. And as you know, we had a successful transition on our ERP in Canada last year, as well as a successful transition in our financial planning tools. So I feel good about coming up on this transition and anxious to get the capabilities that this will unlock for the company. As it relates to the demand, this was something we gave an outlook to last quarter, but knew that this would be refined as we worked with retailers on their specific plans. And that's what you're seeing in the new outlook, is that refinement as retailers have come back and given us a better idea of what they will take from an inventory perspective. Before I pass it to Luke, I'll just say one more thing, which is to the degree that the environment is volatile is just how we're thinking about this and how retailers are putting this in perspective. given a very clear idea of what they're going to take. But I would say, you know, we have a wide range in our outlook, and these results could vary a bit, given the fact that they are adjusting their inventories real time. This is what they want to have in stock to ensure that our categories remain in stock. They have a lot of history of doing these. But as you can imagine, this is an interesting time to be doing this, given what's going on. But we feel pretty good about these estimates, given retailers have worked at a very detailed level with us on exactly what they need by category. With that, I'll hand it over to Luke.

Yeah, no, thanks, Linda. Yeah, so I think at that point, the plan is going as expected. We heard final confirmations from most of our retailers. Now, as Linda mentioned, there would be some, you know, there's a little bit of variability around the numbers. But net, in aggregate, we expect retailers to build about one and a half weeks of inventory. And again, they're building their inventory ahead of us going live in the new system to make sure that they can mitigate any potential risk of out-of-stops. Now, as you look at the range, just for perspective, one or two days of inventories could equate to one or two points of growth in the quarter. And so that's why you see a fairly wide range in our outlook. Now, as far as the reversal, all of it, not only the impact on the P&L, but there will be also some impact on the balance sheets, will reverse in the front half of next year. with the vast majority reversing in the first quarter.

Okay, thanks for that. I guess, Linda, what you were mentioning earlier, I guess that's why I'm a little surprised given the selling demand backdrop that REITs now want to buy more. And then maybe just a quick follow-on question related to this. You know, what should we expect in terms of short and long-term margins? you know, impact as a result of your ERP transition? I can't recall if you ever quantified that for us, but I know it's a positive. Thank you.

Sure. Yeah. You know, this is for retailers. This is a very important transition for them because they want to make sure that we meet our mutual goal, which is ensuring no impact to their shopper and to our consumers. And so it's very important to them during a time like this to ensure that they have that backup inventory, just like we have backup inventory planned in our own system to accommodate that. And they wouldn't want to put this at risk regardless of what's going on in the environment. I think the volatility that we're referring to is the fact that they're managing this and just base inventory at the same time, and that's why there's such a wide range. range around it, but they feel very strongly as do we that we hold excess inventory across the supply chain to ensure if there are any little bumps that we can cover them. So they remain committed to that as do we. Maybe just framing the margin piece, you know, obviously we have built a toolbox with our holistic margin management program to return margins to what they were pre-COVID, and we've done that from a gross margin perspective. From a long-term perspective, this continues to buoy our confidence in being able to deliver our EBIT margin goal, which is 25 to 50 basis points annually, and this set of tools, the ERP, all of the technologies we're putting in place to not only help us grow but also help us be more efficient are part of our confidence in continuing our margin expansion program, even in an environment that's pretty uncertain and volatile.

All right. Thank you so much. Thanks, Bonnie.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. And our next question comes from Robert Moscow of TD Collins.

Hey, I actually had two questions. One was I was wondering if you could give us a little more like broad perspective on when you do give us a tariff impact, what do you think will be included in there? Will it be finished goods, packaging? Will it be exports to Canada that you will include in that estimate? And then a quick follow-up.

Yes, Rob. Most of it is packaging and raw supply, not very little finished goods. And then we did mention there is some import coming from Canada and Mexico and the U.S. It's relatively small. I think what we shared is about single digits of our total cost. And we do have some exports, you know, to Canada as well. But again, it's a fairly small amount of the total product supplied in the country. So that's the extent, you know, that's the extent of our exposure.

Okay. And then the follow up, I think you're the first CPG company I've heard who's talked about the pull forward of spending on electronics, automobiles. I mean, I totally get it, but Do you have any evidence that that impacts grocery baskets, like purchases at Staples? Do you think there's money that comes out of one and goes into the other?

I think it's safe to assume that consumers have one wallet at the end of the day, and they're making distributive choices on that wallet. And what we're watching carefully is that wallet and what's happening. And certainly the evidence would point to the fact that they are spending more in certain categories, given what we're seeing broadly across industries well beyond ours. And then correspondingly, at the same time, we're seeing what we're seeing in our categories. I think the piece that cements it for us is the fact that we're not seeing at-home consumer behaviors change yet. So that really points to the fact that they're changing the shape of their wallet and spending versus changing their behaviors and deprioritizing different categories. But at the end of the day, they have a limited amount of money, and they have to distribute that based on their choices. And I think certainly they're reacting to an environment where they're not exactly sure what things are going to cost coming up in the future, and they're thinking about those big purchases, and they're trimming others. And anecdotally, we've talked to consumers, and they have said just that. That's exactly what they're trying to do is manage their overall wallet. Can we provide a one-to-one causal relationship? No. It would be too early to do that and difficult. But certainly all of the evidence points to the fact that consumers are adjusting their spending, and that's the reason why our categories are being impacted.

I got it.

Makes sense. Thanks, Robert.

Our next question comes from Camille Garawala of Jefferies.

Hey, everybody. I guess still digging into this consumer slowdown, which obviously you guys are not alone. But when I look between divisions and I see that, you know, how much more it seemed to impact households than some of the other divisions, which at least to me I would have guessed is a division that would be a little bit more resilient, particularly so many sort of at-home categories in there. So a couple of follow-ups on that, which is, do you feel like maybe there's excess inventory within the consumer's pantry? Obviously, you talked about retail. And then second, what is it about those particular brands or category that led to them being impacted a lot more?

Yeah, Cormel, this one, I think, requires us to get into retail sales versus our sales. And that's where you're going to see a lot of the difference in what went on with household So if you look at retail sales, those categories generally looked like the categories did for the rest of our portfolio and, frankly, looked well beyond what you'd see in scanners. So we certainly saw that in international. We saw that in professional. All of our categories impacted given what is going on. For household, as it relates to why sales was down, there's a few things going on. One, we talked about the inventory that Luke called out, that the adjustments happened all in household for us. And that is impacting our sales, but not necessarily consumer takeaway or retail sales, because certainly we were in stock in those moments. We saw some timing and weather issues Easter's later. We had weather issues impacting Kingsford, even though we grow share there. And then litter, we had a promotion last year that we didn't lap this year, and so there was a timing issue. But what I would say is generally those categories don't look any different than our other categories do. It's just a number of factors impacted our sales and household this quarter. And then Luke talked about the fact there will be some impact in Q4 as that inventory correction continues to happen. But we would largely expect those things to normalize once you kind of take a step back and just don't look at the quarterly to quarterly impact, but over time. The one place that we would say is being hit harder right now is GLAD, given the promotional environment. That was less about consumers adjusting their behavior, given what's going on in the atmosphere, and more around competitive activity. But that's no different than what we've seen in GLAD over time. And so, you know, we feel decent that there's not a category that is having a wildly different impact than another. On the positive, what I would call out is a good example of cleaning. And that's a place where we grew shares significantly. The category was down, but not as much as some of the other categories were. And you can see the performance on our sales were very strong, as well as all the other line items from a margin and EBIT perspective. So, again, the impact varied. All of our categories were impacted to some degree, but the difference in what you're seeing in our sales number and retail sales would say that some of this, again, is timing and just impacts of lapping. versus anything structurally different in our businesses.

Okay, got it. Thank you.

And our next question comes from Javier Escalante of Evercore ISI.

I would like to go back into your guidance for fiscal 25 organic sales is two if you exclude the erp transition um a sensitivity you know point that q4 organic sales you are guiding to minus four around is that correct and why is it that you know such a low growth given the easy comp from year ago

Yeah, I'll take that, Javier. Thanks for the question. So maybe let me just, there's a few moving pieces as we think about Q4, so let me unpack this a little bit. First, our organic growth is 4% to 5%, and so with one quarter remaining, that means Q4 organic growth of 4% to 8%. Now, we talked about the impact of the ERP transitions. This is 2% to 3% for the full year. So that equates to about 7% to 11% for Q4 because our Q4 is generally a little higher sales than the remaining of the other quarters. So if you back that out, you kind of get to Q4 organic sales growth excluding the impact of ERP of about negative 3%. So not far from what is the number you shared. Now, of course, there's a range around that, and we talked about And then essentially, if I impact on minus three, there's really two parts to it. There is the, you know, we're assuming that recent consumption slowdown persist in Q4. And, you know, we talked about this. And there's also some headwinds from retailer inventory reductions that we start seeing in household in Q3 and will continue in Q4.

Thank you, Luc. And a follow-up to Linda. And it's kind of like, digging a little bit into the household sector that was weak. And I appreciate the Kingsford piece. You also, I believe, advanced a little bit of shipments in the second quarter. But the other two big businesses there are GLAAD and Tech Leader. And what they have in common is that you have very strong value players. So if you could talk about the traction from your innovation in these two categories, retailer reception and consumer reception, and to what extent, what gives you confidence that you do not have a pricing issue, a structural pricing issue beyond promotions, given that you have value players with with very strong business propositions in these categories. Thank you.

Sure. You know, I'll take them in turn, Javier, because GLAAD and Litter are two different sets of circumstances. Although, as you know, good tough competition in both of those categories. So GLAAD is, as we've noted, we're seeing increased competitive activity from the other branded player in the category. Reducing pricing, starting back in Q2, which looked like temporary price decreases, although those have not rolled off yet. And they're focusing those on some of the larger value sizes. And in some cases, that's putting them below private label pricing. which we view as not sustainable over the long term. We're watching it really closely. But if you look at that category, even with that, it held up pretty well. That was one that was down a little bit less than some of our other categories were. And so we see actually fairly resilient given what's going on with the consumer. They're not generating less trash. It's a hard solution to have to get rid of trash. So we're looking at that as one that will over time, you know, more normalized. We've seen that in GLAAD for many, many years. Our innovation is doing very well in that category. At Cagney, you might recall, Javier, we spoke about our Bahama Bliss launch in our force flights business, which is doing very well. We're expanding Bahama Bliss right now in different retailers. And we continue to see people willing to pay that premium for a better trash bag experience, whether that be a delightful color, a great scent. And we're making sure that, of course, we have the right value equation across that more premium line as well as our more base trash bag line as well. But we view this as just higher competitive activity in GLAAD, given what's going on in the category and with consumers. But nothing that makes us worried that our proposition around a premium trash bag won't continue to be successful in the future. And we're going to continue to spend advertising and sales promotion, innovation dollars, and continuing to ensure that we have the right mix across retailers, etc., The one thing that we are very concentrated on is this is a place where we're seeing channel shift happen quite a bit, and people are moving to club and online, et cetera. We have distribution wherever consumers shop, but that's something that we're making sure that we even sharpen that value proposition by retailer to ensure that we are capturing that channel shift now and into the future. And then for litter, you know, there's a number of brands in the cat litter category, and we play in two. We play in the premium segment, and then we have a smaller business in ScoopAway that plays in more of a mid-tier proposition. And we feel good about our ability to compete here. This is a place where innovation across our competitive set and our innovation does very well. There's a number of unmet needs in the cat litter category, whether that be odor control, lack of tracking around the house when cat litter gets stuck on cat's paws. clumping, et cetera. And we've launched recently a litter that has the strongest odor control claim on the market with 30 days. That's doing very well. And we're seeing consumers react to those enhanced benefits. But this is a category that is competitive. And we talked about the fact that we were making it a bit more competitive for a while there because we were using promotion to ensure that we got consumers back after we lost them due to the cyber attack. And we've made really great progress there. We have more to go. but continue to feel good that our investment in innovation, our investment in advertising and sales promotion is heading in the right direction, but we have more progress to make, Javier, over the coming quarters.

Thank you very much.

Our next question comes from Andrea Teixeira of J.P. Morgan.

Thank you, Peter, and good afternoon, everyone. Linda, you talked about the bifurcated consumer and understandably, you have a portfolio that accommodates that the low end and the high end. But I was hoping to see if you can share some examples. You did share thank you on the high end, but perhaps, you know, give us some comfort on being able to pivot where the consumer is and meets the needs on a pricing on a value perspective. And also in terms of the channels, you regain in this high growth, including clubs, as you pivot away, and some of the drugstore exposure that you may have that may be corroborating with this acceleration, if you can explain to us that. Thank you.

Sure. Andrea, why don't I take the second part of your question first, and then I'll get into the portfolio question. So in channels, we're broadly distributed everywhere and happen to be very strong in the channels where consumers are moving. So as we see them move into mass and club, these tend to be channels where we have placed early bets and have very strong share positions. And so feel good as consumers are moving into those channels in aggregate that we are there for them and that we have the right value proposition there. And drug stores, just as you noted, we're not a very strong player in drugs. That's a place, given we don't have a big portfolio in more of the health and beauty areas that we are not overly distributed in. We're fairly distributed in. And, again, we tend to be stronger in the channels where consumers are choosing to shop today. So feel good about our ability to deal with that changing environment. It can have an impact on, as you saw in this quarter, mix. It can have those types of impacts but feel good about our ability to ensure consumers have what they need from Clorox. On the bifurcated side, this is a really interesting story. Maybe I'll tell you in cleaning how this is playing out because it's an area that worked really well for us over the last few years, but particularly if you look at this quarter, it's a great example. We have the most premium cleaning products. We have things like a disinfecting wipe, which is one of the highest prices per use, but they're very convenient and consumers love them. And we also have diluted forms that are very, very good value at a price per ounce, like Clorox bleach, like PineFall dilutable cleaners. And so what we've seen is consumers who are time starved continue to move into forms like disinfecting wipes. They're very convenient as you're dealing with things like cold and flu. So those segments continue to do well, as well as consumers who might be more stretched trading into things like dilutables and bleach. So, for example, the bleach category was down. Our share was up significantly. And then you saw the dilutables category both strong and our share position within it strong. So that consumer, as they're navigating their cleaning tasks at home, we have a portfolio that serves all of their needs, whether they're looking for something quick and convenient and they're willing to pay the premium, like a disinfecting wipe or a toilet wand. as well as when they're looking to get the very, very best cost per use, and they're turning to our Pine Sol brand or bleach. And that's a great example where we grow share significantly this quarter, that business delivered strong financial performance this quarter, and we feel really well covered. You look at some of our other categories, that's less of a dynamic because it's us and private label, and we feel very good about our ability to compete. Kingsford's a great example where we grew share this quarter, even though that category is had some puts and takes given weather and timing, but we grew share in the grilling category, so feel very good about that. But generally, our portfolio, you know, we are well insulated in places where consumers may trade between different occasions and value and price point. And then in certain categories where we have a limited competitive set, consumers continue to look for that premium and we're well suited as well. The other thing I would note is in categories like GLAAD, we have more premium trash bags and we have more core base trash bags. So if consumers don't want all the bells and whistles, they can certainly choose to have a trash bag with less of that at a lower cost per use. But that's something we'll continue to watch as we move forward. We use our innovation, price pack architecture, all of those tools to ensure that we have the right lineup but feel very good about what we have today.

So is it fair, that's super helpful, is it fair to say that other than GLAAD, the glad trash bags, you gain share in most categories.

In aggregate, Andrea, we held share for the quarter. And, you know, to be fair, that was less than our expectations, but I actually feel very good about it given what went on in the quarter from a category perspective. But we had puts and takes on that. So we declined in share in litter, for example, which we knew was going to happen because we were lapping in events. grew in grilling, grew in food, grew in cleaning. So it was mixed, but in aggregate, we held share for the quarter.

That's super helpful. Thank you.

Thank you.

And our next question comes from Kevin Grundy of BMP Barabas. Great. Thanks.

Good afternoon, everyone. wanted to ask just sort of given pulling the conversation together here and then ask about capital deployment a lot of discussion on slowing in categories hardly unique to your portfolio um growth rates well below long-term targets it looks like this may sustain and kind of be an obstacle as you think about guiding uh for next year it sort of potentially presents you and the board with the decision to leverage the balance sheet potentially and and look to move into growthier categories, not just even near term, but even longer term, I would say, structurally. The flip side to that, you know, the company's had, you know, some success, some maybe, you know, some shortfalls, if you will, from an M&A perspective. So that's all kind of a big windup. Linda, how are you? How is the board kind of thinking about M&A? Does this environment, does it change it? Does it potentially elevate M&A? importance or the opportunity of M&A. So I'd love to get your thoughts there. Thank you.

Sure. You know, Kevin, I think the headline will be, and as it has been for a number of years, we're going to control what we can. And I feel very good about our ability to control what we can. And, you know, as we look to what's important for us, we want to continue to deliver strong earnings performance in an environment that is very uncertain and very volatile. And we feel very good about our ability to do that. And that's, of course, behind the capabilities that we've invested in, whether it be technology, holistic margin management, innovation, give us a wide range of things to ensure we can continue to expand margin and deliver earnings performance. Obviously, we would like that to come with more top-line growth, but given what's going on in the environment, we're planning to ensure that we can protect that earnings growth while we want to be competitive in the marketplace, and that's what we're focused on. Let's do both of those things and do them very well. And that'll be the theme. And around M&A, it's the same. And we've done exactly that. So we've made two important divestitures in the last 18 months that strengthen the financial profile of our company, both supporting better top-line growth, better margin expansion, and an earnings profile. And we're always looking for ways to improve our portfolio over time. But job number one is ensuring that our core is healthy. And I feel very good about all of the investments we've made, the capabilities we've built to be able to control what we can. And if there are opportunities, we certainly have a strong balance sheet, good cash flow, and we would be ready if it was at the right value and we felt confident or vulnerability to navigate that moving forward. But again, job one, two, and three is ensuring that we can control what we can and deliver strong learning performance as we get through this period.

Very good. Thank you. I'll pass it on.

Our next question comes from Olivia Tong of Raymond James.

Great. Thank you. First question is just why you think that the stocking was more substantial in household and cleaning. And does it make you more or less concerned that there's some picking and choosing by the retailers even within everyday use categories and what categories to work down more than others? And then a lot of your peers caveated the recent performance with a view that consumers and retailers will eventually have to replenish. But I'm not sure I heard that same sentiment shared by you beyond the ERP-related challenges. Obviously, one logically expects the consumer to replenish in the vast majority of these categories eventually, but do you think it takes longer for your categories? Thank you.

Yes, on household, as you said, Olivia, we didn't have broad destocking or inventory adjustments across our portfolio. They're fairly limited to household. And if you look at what's in that portfolio, that set of goods, they're pretty heavy goods that take up a lot of space. You know, we've got Kingsford, we've got litter. And so I think that's the mentality we're in. They're managing limited space. They're trying to think about how they deal with those goods. And again, importantly, they're really not focused on doing this at the detriment of the consumer. They're focused on ensuring consumer in-stocks at the shelf and the virtual shelf are available. They're just using more sophisticated technologies in some cases to ensure that they can manage that inventory more closely. And that's why it ended up in household, I think, is given just their heavy goods and they're figuring out ways to ensure that they can maximize the space. Again, I think this environment's dynamic. Could it happen in other places as they're adjusting? It could. Right now we have more inventory adjustments planned for Q4 in households for the most part, but working with retailers every day to ensure that they have the right level and we don't put consumers out of stock. And then to your point on replenishment, I think it's a really interesting question and it's something we're looking very carefully at is, you know, is there a bounce back for consumers as they potentially – empty their pantries or using what inventory they have at home. I would just say it's very difficult to tell. Our purchase cycle is 90 days. We haven't even been through a full purchase cycle. when the downturn started in the middle of February. You know, we're seeing some consumers buy smaller sizes. Does that mean they're going to stretch that smaller size to last that entire purchase cycle, or will we see them come back sooner? It's just really too early to tell. I think that'll be something we'll contemplate as we think about fiscal year 26 guidance. Certainly in Q4 that we're seeing, though, is the back half of that purchase cycle. We continue to expect categories to be softer. And it is definitely a question mark, you know, how much inventory will be left in the households for consumer perspective, and then what will that mean? But I think it would be logical to believe at some point consumers will go back to more normalized inventory levels, et cetera. It's just the question mark of when, Olivia. Great. Thank you.

And our next question comes from Chris Carey of Wells Fargo.

Hi, everyone. I want to ask about productivity. So, you know, you're going to have tariffs which are going to be, you know, impacting you next year. You're also going to have a bigger impact from ERP. The question this evening is obviously going to be, does that mean You know, you won't be able to grow earnings next year. Potentially, I suppose we'll see what you have to say in a few months. But can you just talk about, number one, what you plan to do around tariff mitigation? And secondly, does that, you know, involve accelerating productivity programs to cover that? And does that leave less to cover other headwinds like ERP or to – you know, drive incremental demand building activities. And related to that, Linda, you had a target around S&A as a percentage of sales around 13%. You're going to be, I think, about a point and a half higher than that this year. Does fiscal 26 give you some sort of impetus to accelerate that agenda such that, you know, earnings be what they will next year, you're exiting into fiscal 27? with a cleaner base, much more resilient, not resilient, but with the targets that you have wanted to achieve several years back. Any context on the productivity and also the S&A would be helpful. Thanks.

Sure, Chris. Maybe, again, this would be helpful, wanted to step back on and really just talk about the capabilities that we've built and how we think they apply generally, and then we're thinking about applying them in fiscal year 26. You know, we set out to build a stronger, more resilient company, and that included investing a significant amount of money in our technology transformation, investing in capabilities, a new operating model. And those were all designed to ensure that we could expand margin year after year. And of course, first, job one was return margins to gross margins to the levels that they were pre-pandemic, which we've done. but then continue margin expansion that will allow us to invest in our business and, of course, give returns to shareholders. And we feel very good about the capabilities that we've built. They have delivered outsized results over the last couple of years. You look at what we were able to deliver, and some of those are just getting started, and we talked about that at Cagney. As you look at the tools that we have around price pack architecture, etc., Those are things that we're just starting to implement and get value from. So when you step back, I feel very confident in our ability to manage this over time. But, yes, next year will be more of a challenge with more pressure given what Luke outlined on tariffs. You know, we're looking at about a year run rate of about $100 million worth of impact. Again, our exposure is relatively low, but when you look at the number, the amount of tariffs coming in these areas, it just ends up in that number. And we feel good about our ability to manage that $100 million and do that over time. So, yes, we've expected more productivity from our company already over the last couple of years, and we'll continue to put pressure on productivity as we look to fiscal year 26 and beyond with all of those tools that we built and we spoke about. Obviously, we're not committing to what that looks like at this point, but those are the discussions we're having. Um, we talked about, for example, our advertising spending is getting some of the best returns we've ever gotten. So what does that mean in this environment? How do we think about advertising spending? It's incredibly important. We're going to continue to invest strongly in our brands, but at what level makes the most amount of sense given the returns that we're getting. So those are things that we'll talk about when we talk about fiscal year 26. Um, but we feel good about our ability to manage this over the mid to long term. and have all the right capabilities in the company. And, yes, we will get to S&A over time, and we've said that that wouldn't happen right away. Right now, as you can imagine, we're spending more as we implement that ERP. But once we have that implemented, you'll start to see that S&A over time come down corresponding to that, and we're using all of the tools to drive that productivity once we get through that transition.

Thanks, Linda.

Thanks, Greg.

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

Great. Thanks. Good evening. So I guess, you know, going to the question of trade down, you know, for all the value-seeking behavior we've seen over the past several months and quarters, as you noted in your opening remarks, we really haven't seen trade down in the traditional sense. We've seen channel shifting. We've seen Pax size shifting, but pretty much everything but traditional trade down. So I guess a couple of questions in there. Number one, why do you think that is? Because it's not just you that's observed this. We've seen it on the outside and other companies have commented as well. And as you look forward and you think about consumers potentially resuming more normal purchase patterns, the replenishment that you talked about earlier, do you see an increased risk that as consumers do come back and buy you know, volume on a more kind of normalized cadence that they're trading down as they do that, or is that not something that you see on the horizon? Thank you.

You know, it's particularly in the U S and many of the markets that we're in, um, really consumers value getting what they pay for. They want a product to work. And I think fundamentally in our categories, we are essential categories. And you see that in essential categories, well beyond our portfolio, um, consumers outlay $4 or $5 for something, $10, $15, depending on the category, and they want to make sure it works. And we've spent all of our history building that trust, continuing to improve our products, ensuring that whatever a consumer buys, it does what we say it's going to. And consumers know that. And they've tried other things before. We have consumers who've tried alternatives, and they come back to us because they recognize that it is a difference. So I think broadly essentials hold up because companies have done the right thing. They've invested to ensure those products continue to be a superior value to consumers in all ways. And that superior value, Steve, is much more important than just whatever the juice or the stuff in the container is. It's how the container works. It's how it fits in their pantry. It's all of those design elements, the scent that they experience, the feel. and we've worked really hard on that, and we'll continue to prioritize it. It's why we talk about it all the time. That's what matters to the consumer. So I think that's what we're seeing right now is consumers know that, and they're doing everything, despite all the changes they're having to make to their external wallet, they're doing everything they can to continue to have that experience, even if that means buying a smaller size or changing channels, because they know what they're getting for their money. They're very, very savvy. As we look ahead, I would expect those value-seeking behaviors to continue. I think people will continue to channel shift. I think they'll continue to think about what sizes they buy. I think they're going to be very savvy about how they think about inventory at home. And I think they've been taught that over the last five years. Consumers going through COVID and inflation have had to be very, very savvy. And I think you're seeing what they learned in those last few years coming to fruition right now as they're dealing with what's going on. I think the question mark for us is, and for everybody, is to what degree does this volatility continue? Does it get worse for consumers and they have to make additional trade-offs and choices? Um, does that mean they have to take a smaller size and extend, keep the purchase cycle the same and just use it less frequently? Does that put additional pressure to see them do what you would call traditional trade down trade to private label? Again, we see none of those signs right now, but it's something we're watching very, very closely because it's just so uncertain and volatile out there. And you can imagine a scenario where consumers are having to make much greater trade offs than they are today. And what would that mean? Um, But for us, again, controlling what we can is continuing to invest in our brands, continuing to ensure that we have the right messaging, we have the right promotion, that we continue to improve our products, we continue to talk to consumers about the improvements that we're making in our products, ensuring that we're at all retailers, and that we offer them a great value wherever they shop, and we feel very confident in our brand's abilities to navigate this. I think it's just going to be what that shape looks like as consumers respond. And, you know, unfortunately, this is one where I don't have a crystal ball. I can't tell you what's going to happen next in the macroeconomic, but I do feel very confident in our ability to navigate it and that our categories will hold up better than others, given that we plan essentials.

Thank you very much. Appreciate it.

Thanks, Steve.

This concludes the question and answer session. Ms. Rendell? I would now like to turn the program back to you.

Thank you, Paul. As we close today's call, I'd like to step back and reflect on the number of macroeconomic environments we've weathered as a company over our 112 years. From inflationary to recessionary environments, we have navigated them well with strong execution and our portfolio of trusted brands. For sure, we are seeing temporary category impacts given the very dynamic environment today, but history tells us that our essential categories are stable and resilient over the long run. While it's challenging to predict just how long this period will be, we're confident in our ability to navigate this environment given our track record coupled with our enduring strategy. We have fundamentally strengthened our value creation model, including how we create the fuel necessary to drive growth. We're focused on delivering superior value through brands consumers love. We're creating a consumer-obsessed, faster and leaner organization by reimagining how we work and advancing our digital capabilities. We have taken steps to evolve our portfolio to reduce volatility and and drive more profitable long-term growth. This strategy has served us well as we transform Clorox into a stronger company poised to deliver more consistent profitable growth and enhance long-term shareholder value. Very importantly, we remain laser-focused on delivering in both the short and long term. Thank you, everyone. We look forward to updating you on our continued progress on our next call. Take care.

This concludes today's conference call. Thank you for attending.