Good day, ladies and gentlemen, and welcome to The Clorox Company Second Quarter Fiscal Year 2023 Earnings Release Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Ms. Lisah Burhan, Vice President of Investor Relations for The Clorox Company. Ms. Burhan, you may begin your conference.

Thank you, 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 our fiscal 2023 outlook. These statements are based on management's current expectations, but may differ from actual results or outcomes. In addition, we may refer to certain non-GAAP financial measures. Please refer to the forward-looking statements section, which identifies various factors that could affect such forward-looking statements, which has been filed with the SEC. In addition, please refer to the non-GAAP financial information section of our earnings release and the supplemental financial schedule in the Investor Relations section of our website, for a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures. Now I'll turn it over to Linda.

Hello, everyone, and thank you for joining us. As I mentioned in our prepared remarks, despite persistent macroeconomic headwinds, we delivered better-than-expected Q2 results, with organic sales growth in 3 out of 4 segments, gross margin expansion, and double-digit earnings growth. Our performance reflects the strength and superior value of our brands, strong execution across a broad set of actions, and the benefit of some timing shifts. As a result, we've updated our full-year outlook. During the quarter, we made good progress by building margin, driving top line momentum, and executing against our IGNITE Strategy to strengthen our advantages and accelerate profitable growth for the long term. This includes advancing our innovation pipeline, delivering cost savings, and taking additional cost-justified pricing actions while maintaining record high consumer value superiority. Overall, we feel good about our progress, but we're relentlessly driving additional improvements as we continue to invest in our brands, categories, and capabilities. Looking ahead, we expect the operating environment to remain volatile and challenging, and we'll continue using all the levers under our control while protecting the value proposition of our products to recover margin and drive long-term growth for our brands and categories. We are confident that our leading product portfolio in essential categories, coupled with our proactive actions, will enable us to navigate this environment and return to more consistent profitable growth over time. With that, Kevin and I will take your questions.

Our first question today will come from Peter Grom with UBS.

Thanks, operator, and good afternoon, everyone. So maybe just to start, when we think about the Q2 performance, and I know you outlined a few things on the script, but just from our perspective, plus 4% organic versus the original guidance of down low single digits and kind of gross margin coming in at 200 basis points or so above the midpoint of your outlook, it's a decent amount of upside versus what you were expecting. So can you maybe just help us understand where were the biggest surprises versus your forecast for those 2 items?

Sure. Thanks, Peter. So the first thing that I would just start with, and I'll hand it over to Kevin to walk through the quarter in a bit more detail, we're doing exactly what we said we were going to do. We are maintaining top line momentum, which came in better than we expected, and Kevin will walk you through those factors while also doing the hard work to improve margins. And so from that perspective, we're feeling good about that balance. We're going to continue to be focused on it for the year. And Kevin, why don't you take them through the details of how the quarter should go.

Sure. Peter, I would say in terms of the strength of the quarter, if I think about the top line, as Linda said, really good strong fundamentals on the business. We saw consumption up 6%. We held share in direct channels in the U.S. We continue to grow shares internationally. We delivered record cost savings for the quarter. In fact, we had to go back and look; this is the strongest quarter we've had in the last 10 years, so really great execution by our team. Another area I'd highlight is we hit a record case fill rate since the pandemic has begun. And so our team continues to make very good progress improving our supply chain operations in spite of the ongoing disruptions we're dealing with. And so I'd say from a business fundamentals perspective, the team has done really good work this quarter. And then I'd also say, and you saw in our prepared remarks, we've had some benefit from some timing shifts. One we'd call out is cold and flu season. We saw the season start earlier than we anticipated, and we think it's peaked in our Q2. Typically, you see cold and flu season peak in our January-February time frame, which is our Q3. So we think that's pulled forward into Q2 some of our shipments for cleaning and disinfecting products. We also had a little bit of merchant timing shifts, and that's pretty typical moving between quarters that it won't have any impact on the year, but provided some benefit to the quarter. And then lastly, as I said, cost savings, while it was certainly a record quarter, and we're on track for the full year to have a very strong year. The team was able to pull forward some of that benefit. And so collectively, the good strong fundamentals of the business plus a little bit of timing benefit were the primary drivers of the really strong performance in the quarter.

Got it. That's helpful. I would like to ask a broader question regarding gross margin. You have clearly made significant progress this quarter. Kevin, could you share your insights on how we should be thinking about gross margin development over the next 18 months, considering the current 40% exit rate? It seems reasonable to believe there could be considerable margin expansion beyond the 37% guidance for this year. Is it possible we can expect sequential improvement from the 40% into the first half of next year? Any thoughts on the margin recovery and what to anticipate for gross margin expansion in the coming 18 months would be appreciated.

Yes, Peter, what I'd say is I'm not going to provide an outlook for our fiscal year '24 today. I'm going to resist doing that because there's so much volatility right now. We want to get a little further into this year, finish the plans. We're just starting to develop our plans for next year right now, so it's a little premature to talk about that. But what I would say is we feel very good about the progress we're making. As you folks know, we believe this quarter was an inflection point for us where we returned to gross margin expansion. We've done that, as you saw in our prepared remarks. We expect to build on that in Q3, looking to get to 200 to 300 basis points of additional expansion and then continue in Q4. And then as you think forward beyond fiscal year '23, at a very high level, you should expect us to continue to prioritize what we're doing right now, which is maintaining our top line momentum and making the investments necessary to do that. We're continuing to work to rebuild margins, and we said that'll take some time, but that work is underway. And then we're going to continue to drive our strategic initiatives, our digital transformations, our streamlined operating model. Those will continue to be our priorities. But we'll give you a better feel for that as we get closer to fiscal year '24.

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

Just a point clarification on gross margins. You came in better than expected in both Q1 and Q2. Is there some offset in the back half of the year as we think about full year guidance not changing? Or is it more conservatism just given the volatility out there? And then secondly, you took some pricing in December. Any initial thoughts on competitive response, if you're seeing any big pushbacks from retailers? Probably too early to judge consumer demand, but any thoughts on that front would be helpful also just relative to the December increases.

Sure. And let me start on gross margin and then Linda can comment on pricing. As it relates to gross margin, as you said, we did overdeliver our expectations for Q2. We came into the quarter targeting a 100 to 200 basis point improvement. We delivered a little over 300. If you look at the drivers of that over-delivery, I'd point to 2 items. The first is less operating deleveraging. So because of the very strong top line performance and it exceeded our expectations, volume was only down 10% for the quarter. We had anticipated it to be down more, and we're expecting more deleveraging. So we see the benefit of that item, which tends to be discrete in the quarter. And then we did have some benefit of pulling cost savings forward. Now we remain on track to have a very good year. We're not changing our full year view of cost savings, but the team did some nice work pulling some of those projects in early and I'm always happy to get cost savings projects started early, but that was a benefit as well that will have a bit of an impact on the back half of the year. And so I think this is a balanced forecast for gross margins where we continue to believe we'll get to about 38% in the full year. And Dara, you made this comment, and I agree, it's still an environment with lower visibility and quite a bit of volatility. And so I want to see how this fourth round of pricing plays out. It's a little early for us to read. I want to get another quarter under our belt and see how that's playing out, and I think we'll have a better perspective on the full year. But with that, let me turn it over to Linda to talk a little bit more about pricing.

Yes. As Kevin mentioned, we executed our fourth round of pricing in early December. It is too early to gauge the consumer reaction. However, everything appears to align with our expectations regarding elasticity thus far. We have not completed a full purchase cycle yet, and the changes are still being reflected in the market. Regarding competition, we took the lead in this round of pricing, and while there has been some movement in pricing in certain categories, there are others where we have not seen competitors adjust their prices yet. We are closely monitoring this situation to understand how it will unfold and are prepared to respond if our price gaps become misaligned or if we observe consumer reactions that differ from our expectations, especially since the entire category hasn't changed. Overall, it is still too early to make a judgment, but some categories have not seen competitors react to our pricing increase.

And our next question will come from Andrea Teixeira with JPMorgan.

So I wanted to go back to the top line outlook improvement. So I think that probably, as you mentioned, it's a function of price elasticity or maybe the pull forward of shipments at this point. And is that the reason why you also did not raise guidance as much as you could have given the beat? Is that something that perhaps the retailers took more shipments ahead of the price increase in December and therefore, you can see some of that pull forward corrected in the third quarter fiscal? Is that how we should be thinking?

Andrea, I would say, overall, I feel very good about where we're at from a top line perspective. And as you saw, we narrowed our range and we moved it to the top half of our range from an organic perspective. We're now targeting flat to up 3%. If you look at our performance through the first half of the year, organic sales growth is a little over 0.5%. So that success suggests much stronger performance in the back half of the year. And so the outlook, I think, really reflects a good start to the year, but it would project acceleration in the back half of the year in terms of organic sales growth really driven by, again, good strength in the business plus the ongoing impact of the pricing actions we're taking. I think if you look at the range right now, you can do the math. It would suggest the back half would be anywhere from flat to up 5% on an organic basis. And we've got still a fairly wide range in the back half of the year. And I think that reflects exactly what Linda was just talking about. There is some uncertainty about how this fourth round of pricing will go. And so we think it's appropriate to maintain a bit wider range until we see exactly how both the consumers react to this round of pricing as well as what we see from other manufacturers in terms of if they choose to follow or not.

And with the fourth quarter price increase, just a fine point, I'm sorry, the December price increase, the fourth round, can you remind us again how much would be the average pricing that you're getting to the beginning of the third quarter as we enter the third quarter?

Yes. This fourth round was a bit more moderate than we had taken in July, if you recall, July was the largest of the four price increases. This one was around mid-single digits and fairly broad across the portfolio, but more moderate than we had taken in the past. And again, too early to judge on what the pricing looks like and what the impacts are. But this one was definitely more moderate than what we saw in July. And if you look at July, the elasticities are exactly in line with our expectations across categories. So we would expect our models to continue to hold in December, but it's dynamic out there and consumers are certainly facing a lot of inflation in their broader basket, so we're watching it closely.

That's helpful. So in general, on average, you're probably running around mid-teens. This implies that in the midpoint of the range, if it's 0 to 5, you're looking at 2.5%, and you're probably looking at elasticities running around 12% to 13%. Is that how your model projects the second half?

Yes. Andrea, what I'd say, in terms of elasticities, our expectation is elasticities for this December round of pricing would be very similar to what we saw in July, which is consistent with our historical levels of elasticities. You might remember in the first few rounds, we were seeing lower elasticities than historical levels. Consumers were less price sensitive. But now that's really reverted back to historical level elasticity. And then I would say on the back half, be a little careful because we do have some shifting as we talk about between quarters. I think maybe a better way to look at that, if you try to take out the noise of some volume shifting between Q2 and Q3, Q2, we had 4% organic sales growth. You saw in my prepared remarks, you may have seen, we're projecting 2% to 3% growth organic sales growth in Q3. Over that 6-month period, we're looking at organic sales growth a little over 3%. And so clearly, an acceleration of where we've been based on the fundamentals of the business we're talking about. But consumers continue to be resilient. Our categories have been resilient to date, and I think that's reflected in raising our outlook.

And the elasticity is about 0.7, right, if my math serves me right on average on all the categories?

Yes, say, Andrea, we don't comment specifically on elasticity. And as you can imagine, they're quite different by category, by geography. And so it's something we don't comment publicly on the elasticities of the brands.

And our next question will come from Kaumil Gajrawala with Credit Suisse.

Can you talk a bit about supply and about inventory? You mentioned that fill rates were great. Maybe just a little bit more on your ability to supply through your variance, maybe digging into the categories a little bit? And then how do you feel about trade inventories as well as maybe inventories in the pantries?

Sure. Thanks, Kaumil, for the question. On supply, I would say the supply chain, we're definitely seeing improvements from the disruptions we're dealing with over the last year or two. It continues to normalize, and that certainly helped benefit our inventory levels. So as you know, we have raised safety stocks to try to help manage the supply chain disruptions we're dealing with and create less impact on our ability to ship product to our retailers. As the supply chain is normalizing, we are able to go back and reduce the safety stock levels. And so as an example, in Q2, this is our fourth straight quarter that we've been able to reduce the inventory levels. I think year-over-year, we pulled another 4 days out of inventory on hand, and that's really a reflection of an improving supply chain. And you heard my earlier comment, one example of that is we've hit the highest case fill rate we've been able to deliver since the pandemic began. Now we've done that through some very good work by our team. But I would tell you, we are still dealing with intermittent supply chain disruptions. And I'm sure you'll remember last quarter, we talked about a few disruptions on our Glad and our Burt's Bees business, so that continues to occur. But it's certainly starting to normalize, and we're seeing less disruptions than we did a few years ago. And so that's allowed us to continue to work to optimize our supply chain. And one of those elements is reducing inventory levels. And then from a retailer perspective, the only place we saw some change in retailer inventory levels was on our Brita business in Q2. So we did see a little bit of a reduction in retail inventories on that business. Nothing else to speak of. And I would tell you in our outlook, we're not anticipating any additional material changes to retail inventories. That always goes on every quarter. You'll see some noise, but nothing that we think has any meaningful impact on our outlook, and that's what's assumed right now. And then maybe I know, Linda, do you want to talk about consumer pantry levels?

Yes. What we're seeing is very similar to what Kevin highlighted just in retail. We are not seeing significant pantry loading by consumers or changes in behavior as it relates to the pantry. What we are seeing, and I think we'll highlight it in probably some discussion around what's going on with pricing with the consumer, we are seeing consumers continue to drive value-seeking behaviors given what they're facing. So we're seeing some purchase cycles extend as people try to make products work longer for them. They're purchasing different sizes. So that's changing the purchase cycle. But that's largely in line with what we would expect from the elasticity impact that's in line with our expectations. And we're not seeing any other consumer behavior that's abnormal outside of that normal elasticity impact.

I understand. If supply chains and inventories at both retail and consumer levels are back to normal, does that mean we have a more optimistic top line outlook? Can we say that many of the challenges from the past couple of years are behind us?

I wouldn't say that we are in a normalized situation. That might be overstating it. We are still experiencing supply chain disruptions, although the frequency of these disruptions has certainly decreased. However, I wouldn't characterize our environment as normal, as we continue to face several challenges regularly. While it is less frequent now, we discussed last quarter that many of the issues we are still working to resolve are mostly behind us. I expect we will continue to see disruptions in the future, and I don't think we should assume otherwise. So, I would say that we aren't in a normal environment.

Got it, better than before, but not normal.

And we'll hear next from Chris Carey with Wells Fargo.

I wanted to discuss the supply chain situation in relation to your gross margin expectations for Q3. It seems similar to the volume outlook, but I'm a bit confused about why it should potentially improve significantly, especially given the deliveries in Q2. Unless productivity declines, pricing is expected to stay strong, and raw materials are likely to improve sequentially. You mentioned manufacturing and logistics, which also seem poised to get better. From a volume perspective, it looks like you will be performing similarly to Q2. So, why is the operating deleverage projected to be so much worse in Q3? Is there something I'm missing? What could deteriorate sequentially?

Yes, Chris, thank you for the question. I agree that we expect gross margin to improve in Q3. As mentioned in our prepared remarks, we anticipate a gross margin of 38% to 39%, which is a significant improvement from just over 36% in Q2. It's important to note that we do not use spot rates for our outlook; we rely on forward curves. Thus, our expectations have always included declining commodity costs as the year progresses, which hasn't changed. Additionally, we may see more volume deleveraging in Q3 compared to Q2. Remember, the fourth round of pricing took effect in December, which didn't have a significant impact on Q2. We should start to see that impact in Q3, leading to a bit more volume decline than what we experienced in Q2, due to the new pricing and its associated elasticities. Despite this, we plan to continue benefiting from pricing and cost savings, which should allow for consistent sequential progress. We expect to see an increase of 200 to 300 basis points compared to Q2, keeping us on track to reach around 40% by Q4.

Okay, I understand. Just to confirm, the volume you mentioned is primarily in the Health and Wellness segment, particularly due to the timing of cold and flu.

No, the volume deleveraging will be based on the pricing. And as Linda mentioned, the pricing is pretty broad-based across our portfolio. So as we take our fourth round of pricing, there will be an element of volume deleveraging because of the elasticities on those price increases. That will impact the third quarter. But I think the other point you're making also to keep in mind, we're lapping the Omicron variant from Q3 of last year. So that'll have an impact on our cleaning and disinfecting business as we've got a more difficult comp on that business. So I think really a combination of both those items, you'll see that play out in our volume projections for Q3.

Okay. All right. Great. Just one quick follow-up still on the gross margin front. This was a nice sequential improvement in the manufacturing and logistics clients, certainly relative to where we were, right? And so have we reached the end of this headwind? Can we start thinking about manufacturing and logistics normalization and maybe even it turns to a tailwind for your gross margins at some point in the back half of next year? And certainly, as we get into fiscal '24, it does seem like some easing in this line item could be an unlock, something which you don't necessarily have control over, but we're looking at freight rates rolling over and again, just the normalization of this line item, it seems like a good development, so I wonder how sticky you think this is and candidly, whether this line item will ever actually become a tailwind for you or just costs are higher and it's likely to remain inflationary over the medium-term horizon.

Yes, regarding manufacturing and logistics, we expect it to remain a challenge throughout this year. As mentioned, we are facing $400 million in supply chain inflation, with about half attributed to commodities and the other half to manufacturing and logistics. We believe this will moderate as the year progresses, with each quarter experiencing a smaller impact than the one before. However, we anticipate it will still be inflationary for the entire year, which we have incorporated into our outlook. Regarding the medium to long term, we are not ready to comment on fiscal year '24, as it's too early for us to make those predictions. For this year, you should expect continued inflation, though with moderation as we move through the quarters.

And our next question will come from Jason English with Goldman Sachs.

Two quick questions. I guess, logistics and manufacturing are now off the table. But in cleaning, you guys mentioned that professional is still lagging. And I think you cited in there, one driver is office occupancy, which seems odd. It seems like we're deep enough into COVID, where office occupancy is actually going the other way. So can you unpack a bit more of the headwinds on the Professional business in cleaning?

Sure. Jason, there were really two factors in Professional. One, which is a more midterm issue and then one that was a very short-term issue. That affected professional last quarter. And I'll start with that one, which was our Pine-Sol recall and that impacted Professional. We have a fairly large business in Pine-Sol in Professional, and we'd expect as we bring that distribution back, that just to be a short-term impact. As you look at the medium term, though, office occupancy is still down significantly as return to office has been delayed, and we've all seen the press on how hard it's been to get people to come back into the office to the degree that we thought we would. So that continues to be a headwind to the business. We're looking at other avenues to grow the business beyond just that, looking at our portfolio broadly and innovation. And we continue to have conviction that our professional business will be a growth driver for us in the future. And it's good to see it start to be a bit more normalized than it was in the past, but we are still dealing with that office occupancy headwind.

Okay. Okay. And Kevin, I've had a lot of debate with investors recently around sort of normalized earnings. I think probably everyone's having that debate. But one key point of it really does rest at gross profit. And I know you aspire to get back to historical gross margins in time. But one way we're looking at it is around unit economics with the notion that gross profit per unit is probably a more reasonable near-term target of what a normalized gross profit would look like. What, if any, holes do you see in that thought process? And if you think gross profit per unit should be a lot higher than it was in fiscal '19, can you give us an understanding or a better explanation of kind of why and maybe where you might be able to achieve that?

Sure. Jason, I would say we aspire to do both. I mean, you start by rebuilding gross profit then ultimately rebuild gross margin over time. For us, it'll be the same drivers we've talked about. We're going to continue to execute the pricing actions that we've taken. And as we've said, we don't have any additional plans to take further pricing this fiscal year based on our cost forecast. But we'll continue to drive pricing. We'll continue to drive cost savings and supply chain optimization. That's the way that we think puts us in a position to first recover gross profit and then ultimately keep going to recover gross margin. Typically, I'd say, in a normal environment, the work we do on cost savings is enough to offset a normalized level of inflation and allow us to build margins over time. And that allows us to continue to invest in our brands and continue to set the company. We have to deliver value over the long term. Obviously, we're dealing with a very unique environment right now with the unprecedented level of cost inflation. And so that's why we're leaning into pricing. I'd like to believe over time, as we get to a normalized environment as you described, we get back to more of our consistent model where we're really driving cost savings, and that's allowing us to offset inflation and build margin over time. But we're not in that environment right now. So we're leaning more aggressively into pricing. But I think ultimately, it's always both. We start by rebuilding gross profit and then we ultimately work to rebuild gross margin over time.

Our next question will come from Kevin Grundy with Jefferies.

Thank you. I have a question regarding investment spending. I'm trying to understand how this connects to your target of 10% of sales for the year, given that you're currently at about 9% for the first half. Kevin, you mentioned that this suggests an acceleration in the latter half of the year. Could you elaborate on where the investments are being directed? Also, why should we not expect a faster acceleration? If that's the case, why isn't there an immediate top-line payback, especially considering some of this spending is more long-term? I'd appreciate your insights on that. Lastly, after this call, there may be a perception that the gross margin guidance is conservative due to your strong performance in the first half of the fiscal year. What are your thoughts on potential reinvestment? Given that there’s still a path to achieving your desired gross margin, how confident are you about reinvestment this year? If you exceed your gross margin guidance, what are the chances that you would decide to reinvest, considering the promising trends you've observed in your top line?

Kevin, on the investment spending piece, incredibly important. We're seeing good consumer and category resilience. We're happy that we are maintaining share in an environment. We are aggressively going after rebuilding margin. And you all know that's exactly what we've targeted. We want to keep our top line momentum while rebuilding margins at the same time. And that's how we're approaching investments. We're making the right short-term investments to do that, but we're also not taking our eye off the long term and continuing to invest in those things that are going to make us a stronger company, like our digital transformation and like our op model. So that's what we're focused on. It just happens to be the shape of spending to have less in the front half of the year versus the back half given our plans, but that's just the shape of the investment, and we still are targeting 10% from an advertising and sales promotion perspective, still continuing to invest in innovation. That's been going well for us. And overall, going to continue to focus that investment on our brands. What I will say, though, is we're watching our categories incredibly closely right now. And the most important thing that we do is continue to deliver superior value to our consumers. And right now, we're really happy to say, among all that pricing that we took, strong double digits, we've maintained our record high superiority rating of 76%. We were in the 50% range a few years ago. And that combination gives us the confidence to continue to invest. But if we see a change in that, where consumers are reacting in a different way or if we don't see competition follow on price increases, we are ready with backup plans that we can activate very quickly to make adjustments to that. And if we need to make additional investments, we will to support the value spirit of our brands. But we feel we have that balance right now. That played out in Q2 behind the good balance we had in top line and bottom line. But that's how we're thinking about it overall, and we'll continue to take a proactive approach of adjusting if we need to.

I appreciate the information. I have a quick follow-up question. Are you receiving any feedback from retailers regarding the recent moderation in commodity prices? Are they expressing a desire for more promotions or trade deals? The scatter data from the last 12 weeks suggests there hasn't been much movement in this area, and we know that many of the categories you operate in have historically relied on heavy promotions. I want to evaluate this as a potential risk. Is there an indication that some of the price adjustments you're making might require you to return to promotional deals? I'll turn it over to you now.

Kevin, the latest data reflects that promotions are still below pre-pandemic levels, though higher than a year ago. Retailers are focused on maintaining the health of our categories rather than increasing promotions. The emphasis is on having the right distribution and innovating to enhance market value. Interest in promotions isn't strong as retailers recognize it's not typically the best way to support the category. We plan to use promotions strategically during peak times like back-to-school or cold and flu seasons to engage consumers and highlight innovations. Our discussions remain productive, centered on ensuring category health through the right approaches.

Our next question will come from Lauren Lieberman with Barclays Capital.

Great. First thing I wanted to ask about was the performance in household, because the volume growth was pretty striking. So just curious if you could tell us a little bit more about which of the businesses had volumes up and if there was any of the merchandising attached to that or kind of what was going on there. Because, again, to see volume up with pricing as strong as it is, is pretty notable.

I'm happy to answer your question about households. We experienced 9% growth in this segment, with litter being a standout performer, showing double-digit growth. The category continues to thrive, largely driven by strong pet adoption during the pandemic. We are still witnessing robust performance in this area, and despite the price increases we've implemented, our volume is growing, effectively mitigating the impact of elasticity.

Okay. Great. And then also, just on the pricing. I'm not sure which of you had mentioned that pricing really had very little impact on the second quarter given the timing that went into the market and some of it is still showing up on shelves. So as we think about modeling forward, you spoke to seeing more volume pressure, but should we also see pricing accelerating versus what's already in the financials in the second quarter?

Yes, Lauren, I think you'll have two impacts. Now we're starting to lap the first round of pricing we took last year. So you're starting to see some of that first run of pricing drop off as we get into the back half of our fiscal year, and it's being replaced with this fourth round. So it's not as clean as another round of pricing being added. I think in aggregate, this fourth round was larger than our first round. So in aggregate, you'll see a little bit more benefit from pricing, and you'll see a little larger hit in terms of the impact to volume from elasticities.

That's great. I have one final question regarding the comments made about rebuilding household penetration. I understand that you don't typically anticipate significant revenue growth when adjusting pricing and that things are progressing as planned. I'm interested in which specific categories are being prioritized for focus on rebuilding household penetration and what you can share about your plans in this area.

Yes, Lauren, this is a fundamental thing we're really focused on. And one of the trade-offs you do when you take the level of pricing that we're taking in the categories is you trade off some household penetration in the short term in order to do that. And while we're still in 9 out of 10 households and have very strong household penetrations across our category and in most cases, are performing better than the category is in household penetration, this is one of the trade-offs that we're making. And I think it's the right trade-off given the fact that we need to both maintain top line momentum and rebuild margins. But that being said, household penetration is incredibly important to us and the health of our business over the long term, and we are committed to regrowing that over time. And typically, what we see in price increases, you see some volume loss initially as consumers adjust their behavior. You begin to rebuild that over time. So our first focus on household penetration will be rebuilding volumes over the mid- to long term. And we will do that by continuing to invest in innovation, having strong levels of investment in our brands as we're going to have 10% spending in A&SP this year, and continuing to make the right long-term digital investments to support brand building, et cetera. One note we were really proud of is we had our highest ROI marketing in this last period due to the personalization efforts that we've taken out. So we haven't talked a lot about that, but that's working, and it's allowing our money to work harder and will allow us to help us focus on growing household penetration over time. So what I would just again, to say it, this is a wide-eyed open trade-off that we are making in household penetration, but it's something that as we rebuild volumes, we would expect to rebound over time. And what's key to that is continuing to invest in our brands.

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

Great. I wanted to ask you about Glad and Burt's, where things stand there. Particularly with Glad, given the particularly strong performance in household, how much that contributed, if Glad continues to be an issue. And then with Burt's, where do we stand with respect to some of the supply chain challenges there?

Sure. Glad was a business we were up in sales this quarter. We actually grew share from a trash perspective. So we're really pleased with the performance of Glad through multiple rounds of pricing. We're seeing strong performance in the market, and that's really behind our innovation program that we've spent a lot of time talking about, whether it be the addition of colors and scents, our focus on value there. Our work on distribution across the retailer base is paying off, and we feel good about where that business is from a trash perspective. And then from a Burt's perspective, we did share that we had a supply disruption that happened and we believe we'll be able to work through it through Q3, and that continues to be the case. We made good progress on it in Q2 when we're able to support some strong holiday promotions and sales that led to growth in that business, but we still have some work to do, and we intend to be through that by the end of this quarter.

I understand you mentioned it's too early to make definitive conclusions about December pricing. Overall, are you noticing any differences in pack sizes or consumer preferences between branded and private label products among high-end and low-end consumers? As the year moves forward, do you think any caution in your outlook is influenced by these observations? It seems like consumers are still loyal, but I'm interested in whether you anticipate any potential reasons for concern as the year continues.

Sure. As we've said, it really is too early to judge December's price increase at this point. But maybe I'll speak, Olivia, to the broader sets of price increases and just what we're seeing on average and what we continue to expect to happen as December gets fully reflected in the marketplace. We are seeing consumers and our categories remain resilient. And you can see that just in the strong consumption that you see in MULO right now. Consumers are reacting favorably. And I think this is really due to the fact that we're in essential categories. These brands play a role in consumers' everyday routines, and we're continuing to see them favor value. That's what we've always focused on with our brands. They're looking for superior value, not necessarily the lowest price. And with our superiority rating I mentioned earlier of 76%, consumers continue to feel that our brands are the best value and they're voting for them in-store. And with that, we are seeing value-seeking behavior that's within our own brands. So people want to stay with the Clorox Company-branded product. And so they're trading within our portfolio, and we've seen that over the last number of price increases. Some consumers are choosing to buy opening price points because perhaps that day, their wallet, they have a limited amount of money they can spend in the category, or they're looking for the very, very best value on a price per use basis, and so they're trading up to larger sizes, or maybe they're trading within our cleaning portfolio between a dilutable and a spray cleaner in order to get the value equation right for them. And the good news is we have offerings to meet their needs there. And that's what we're really focused on with retailers, ensuring we have the right distribution to meet those needs as consumers continue to look for the best value within our portfolio. And I think we're going to continue to see that happen. As it relates to private label, we're not seeing any meaningful trade down in our categories to private label. And again, we maintain share amid four price increases, so that is playing out. But I'll tell you, we're watching it really closely. It looks like it's going to continue to get tougher for the consumer in aggregate. And so we're looking particularly at that fourth round as it is implemented and particularly in categories where we have higher private label penetration to ensure that we have that right value. And I also mentioned earlier, we haven't seen some competitors reflecting additional price increase as we did in December. And so we're watching our gaps really closely in those categories as well to ensure that we are continuing to offer superior value. And we will make adjustments. We are ready to if we need to, to protect the value of those brands. But at the moment, category and consumer is resilient. Our brands are very resilient maintaining share, and we're going to continue to activate our plans on innovation and investment to keep them healthy.

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

Hello, can you hear me? Sorry for that. I wanted to double-click on the timing factors and the household volume growth of 3%. If you look at the scatter data, it shows a double-digit decline. So if you can help us understand how much stronger these pet food, pet litter business was in the quarter and whether there was a channel shift there. And then I have a question more philosophically to Linda when it comes to the Health and Wellness business.

Javier, let me see if I answer your question on shifting. So as we mentioned, in Q2, we had some benefit of shifting of some merch activity. And as I said, that's pretty typical that you'll see some merch events shift between quarters out of Q3 into Q2, and that was across a number of businesses. And then more specifically, we're seeing the benefit of an early start to cold and flu season in Q2 as it relates to our Health and Wellness portfolio. But maybe say a little bit more on what your question is. I'm not sure that gets to the question you're asking.

No. It's a follow-up on Lauren's question regarding the job in household and the categories you've mentioned. The shift was in Health and Wellness, which was down 19%, while the significant growth was in household, and we don't observe that in retail. If you could provide some insight and help us understand the disconnect between what we see in retail and what was just reported.

Yes. This is a category that certainly has had the biggest swings as consumers change their behavior as we went through the height of the pandemic, and we're still lapping. We're still normalizing, given Omicron happened last Q3, and we're in the process of lapping that right now. What I would say is, if you look at this last Q2 versus pre-pandemic, our volumes are still higher. So in aggregate, people are still cleaning more. And certainly, we're still normalizing consumer behavior. And then we had a very abnormal cold and flu season this year. It happened earlier, it happened in December from a peak perspective. It usually happens in January and February. So there are a lot of dynamics in play here around normalization. But what we see is still a business that has great opportunity to grow and be an outsized contributor to the company given people, they care about cleaning and disinfecting as part of keeping them well. But we're going to be normalizing as we get through this and consumers continue to adjust their behavior. And hopefully, we'll get into a more normalized cycle where cold and flu normalizes, and we're seeing a more normalized impact from COVID, but we're not quite there yet. And as we look at the volume loss, that's really due to that factor around normalization, but also the pricing that we have, and it's in line with our expectations. So as we look at that, that just gives us conviction because it's about what we expected it to be. And then as we move forward, we'll continue to adjust as consumers adjust. But it's the same thing we're focusing on innovation in those categories where we can make the job easier for them. We're continuing to invest to help people to understand different ways to keep themselves well, whether that be in a professional setting or at home. But we feel really good about the Health and Wellness business overall. It's just going to be bumpy until we get back to a normalized environment.

And our next question will come from Anna Lizzul with BofA Global Research.

I just wanted to follow up on the cost side. You're still seeing cost inflation, but you noted in your prepared remarks that cost inflation has moderated slightly on a sequential basis even though it's still higher year-over-year. I was wondering if you can give some more color on which inputs are moderating and how quickly those are coming down versus the ones that are still headwinds. And then could you also remind us how quickly you expect some of your raw materials come down in your P&L relative to when you see spot prices for those raw materials decline.

Sure. Regarding the cost environment, we are observing moderating cost increases. Although we expect inflation to persist throughout the year, the year-over-year increase will ease as the year progresses. For specific commodities, we anticipated that resin would provide a cost advantage, resulting in lower year-over-year costs for resin, which has been confirmed as we see favorable resin prices compared to last year. However, this is being countered by cost increases in most of our other purchases outside of resin, including soybean oil, linerboard, chemicals, solvents, and substrate. Most of our key buying costs are rising on a year-over-year basis, and we anticipate this trend will continue throughout the year. When considering the moderation of costs, you can observe it in our first half results. In Q1, commodities affected gross margin by 330 basis points, while in Q2, this impact was reduced to 240 basis points. While it remains a headwind, the impact is lessening each quarter. I expect this trend to continue, resulting in a decreasing effect from commodity costs as we advance through the year. Overall, we're looking at around $400 million in total inflation, with favorable resin costs but continued unfavorable trends for most of our other purchases year-over-year.

And just, could you remind us how quickly you would expect the cost to come down in your P&L just relative to when we see those spot prices coming down?

Yes, I’m sorry that you would ask that question. Well, it really varies by commodities. In some cases, we hedge, and so in those cases, you may have 9 to 18 months before we see the impact of a changing commodity environment play through our cost structure. In other cases, we have contractual relationships with our suppliers that delays those changes. So it's really hard to give you an enterprise answer how quickly that plays through. It is a commodity-by-commodity discussion based on how we set up those relationships with our suppliers.

And our next question will come from Steve Powers with Deutsche Bank.

Regarding household penetration, how much recovery is expected for the remainder of your fiscal '23 outlook? Do you anticipate some sequential progress in the next few months and quarters, or is that more of a goal for fiscal '24 and beyond?

Yes, Steve, on household penetration, that is definitely a more mid- to long-term goal for us to get back to household penetration, given the fact that the December price increase is just starting to take hold now. We would expect to have to go through an entire cycle of that and we haven't even lapped the July price increase, which was our big one coming up here. So that will be something that we're focused on now to ensure that we are investing and that we're keeping as many consumers in as we possibly can. But that work will be rebuilding over 24 and beyond.

Is there an expectation that you might experience a decline as we enter 2023 before moving forward again, or is it more about maintaining the current level?

Yes. I think that's very possible, Steve, based on the fact that we just took that pricing, we could see a bit more of a reduction in household penetration. And again, we think that is the right trade-off to make to get that balance right between top line and bottom line. But yes, it's possible as we go through, we could see some additional household penetration erosion.

Okay. Okay. And then you talked about promotional intensity in the category. And right now, it seems pretty rational, benign, constructive. I guess, is there, at all, in the base plan, an element of increased promotion as you go through the next couple of quarters? Or is that also more steady state as a base case?

The base case is more steady state, Steve. As we talk about promotions being a more strategic part of our portfolio than something that we just do to drive volume on a quarterly basis. That's the approach that we're taking for the back half of the year. We have good innovation plans. We want to make sure that we hit consumers on key pulse periods to remind them about the category and the value that we drive. So that's our approach. Again, being what it is, we will look to ensure that we have the right value and that we are competitive. And so if there were to be a change in what we're seeing in the category today, which is slightly higher promotion than last year, but still less than in pandemic, we could potentially adjust our plans and we're ready to do that. but we would expect just a more normalized promo environment. That's how we're treating it for the back half, and that's what we've seen so far in Q2.

There is indeed a positive narrative regarding the pricing momentum you’ve achieved and the growing gap between price and cost trends alongside the recovery in gross margins. However, you've brought up several times the price discrepancies you're monitoring, whether they pertain to private label or branded products, as well as consumer resilience following this recent pricing wave. Could you provide more clarity on the key indicators you are focused on? Is it primarily the widening price gaps you’re concerned about? Are there specific timeframes in which you prefer these gaps not to remain too broad? Are you looking at value share, volume share, or household penetration metrics? I understand it’s likely a combination of various factors, but it would be helpful to know if there are any particular indicators that hold more significance for you.

Yes, you got it right on mosaic, Steve. That's exactly it, which is we're taking a combination of all of those factors as we're deciding if we need to adjust our plans or not. And really primarily, what we're looking at is consumer reaction to our brands, and we're looking very closely at any changes that would be outside of what we expect given the elasticities that we have in market. And then we would make corresponding plans. And we're looking at competitors to see are they doing something different, are they promoting more heavily, or are they looking at a certain pack size that would make us adjust our plans. Those are the two primary factors we're looking at in the very, very short term. And then, of course, as we look over months and quarters, we're looking at share, and we're really happy that we maintained share this quarter given the fourth round of pricing. But that's the other thing we're watching. Is there too much of a slide in share? Is that trade-off not worth it, et cetera? So we're looking at all of it. But to start, we're looking at that gap, we're looking at consumer behavior by category to say, is it different than our expectations and then adjusting from there.

And this concludes the question-and-answer session. Ms. Rendle, I'd like to now turn the conference back to you.

Thank you, everyone. We'll see you at CAGNY later this month and look forward to updating you on our progress in May. Please stay well.

And this concludes today's conference call. Thank you for attending.