Earnings Call Transcript - CLX Q3 2021

Operator, Operator

Good day, ladies and gentlemen, and welcome to The Clorox Company Third Quarter Fiscal Year 2021 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Ms. Lisah Burhan, Vice President of Investor Relations for The Clorox Company. Ms. Burhan, you may begin your conference.

Lisah Burhan, Vice President, Investor Relations

Thanks, Christy. Welcome everyone and thank you for joining us. We hope you and your families are continuing to stay safe and well. I'll start by providing some context to this quarter to give you an understanding of the dynamic environment we're seeing as we begin to emerge from this pandemic. Then I'll have my usual topline commentary with highlights from each of our segments. Kevin will then address our total company results as well as our FY 2021 outlook. Finally, Linda will offer her perspective and we'll close with Q&A. A few reminders before we go into results. We're broadcasting this call over the Internet and a replay of the call will be available for seven days on our website at cloroxcompany.com. Today's discussion contains forward-looking statements, including statements related to the expected or potential impact of COVID-19. 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 and the non-GAAP financial information section which includes tables that reconcile non-GAAP financial measures to the most directly comparable GAAP measures, both of which are located at the end of today's earnings release which has also been posted on our website and filed with the SEC. To help cut through some of the complexities this quarter, I'd like to share what we see as three important key takeaways. First, we're on track for another strong year. Our FY 2021 outlook continues to project double-digit sales growth. On a two-year stack basis we're also positioned to deliver about 19% sales growth. Second, we continue to see opportunity to accelerate our long-term financial performance. For example, many consumer behaviors that have changed during the pandemic are expected to stick, including enhanced hygiene practices. We're leaning into these changes through new growth runways to help Clorox develop into a global disinfecting brand. And third, the pandemic has only reinforced the relevance of our IGNITE strategy priorities which center around people and innovation, leveraging technology as a critical enabler. Now, turning to our third quarter results. Our strategy has enabled us to deliver flat sales in Q3 on top of 15% growth in the year-ago quarter. Q3 sales reflected about one point of net benefit from a July 2020 acquisition that gave us a majority share in our joint venture in Saudi Arabia. On an organic basis, sales were down 1%. In our Health and Wellness segment, sales were down 8% reflecting declines in Cleaning and PPD. Sales in the Cleaning business declined this quarter from lower shipments in a number of our cleaning and disinfecting products. The lower shipments are a result of demand normalization in bleach and Pine-Sol relative to the year-ago period when consumers turned to these products given the persistent out-of-stocks in wipes and sprays at the onset of the pandemic. Segment results also reflect ongoing supply constraints in our wipes and sprays. Nonetheless, two-year stack growth remains very strong, reflecting a much higher level of consumer demand and household penetration than pre-pandemic, even as we begin to see a return to a new normal in the U.S. with a growing percentage of the population vaccinated. As we continue to increase supply in our wipes and sprays, product availability and assortment will improve, which in turn should lead to improvements in shares. We're also excited to be bringing back some of the innovation we've had to pause during the pandemic, including Clorox compostable wipes and Clorox Scentiva disinfecting sprays and wipes. Sales in our Professional Products business were down by double-digits this quarter, due to lower shipments of cleaning and disinfecting products as many businesses remain closed during the third quarter relative to the year-ago period. Similar to the trends in cleaning, demand for our consumer-preferred disinfectants, like wipes and sprays, remain elevated and consumption continues to be limited by our ability to supply. And as expected, consumption of bleach and other cleaning and disinfecting products has normalized. With continuing category tailwinds, progress in our out-of-home partnerships and a strong innovation pipeline, PPD fundamentals remain healthy. Importantly, we feel good about the prospects of this business. Lastly, within this segment, sales in our vitamins, minerals and supplements business were up in the third quarter, driven by higher shipments of our strategic brands and lower trade spending. Notably, we were lapping a double-digit decrease from the year-ago period, driven by a disruption in our supply chain related to COVID-19. As noted in today's press release, we recorded a $267 million net non-cash impairment charge related to this business, which Kevin will address in more detail shortly. Despite the setback, we're moving forward focused on implementing a refreshed portfolio strategy and incorporating what we've learned since acquiring these brands. There continue to be strong tailwinds in the VMS space. And we have clarity on the path of this business becoming a more meaningful contributor in the long term. Again, just some brief context before I get into the results in our other businesses. Similar to cleaning, inventory levels in the year-ago period impacted Q3 results, especially in Brita, where we remain supply constrained. With continued elevated demand and supply challenges, several of our businesses in these segments have gone back on allocation. In Household and Lifestyle, consumers continuing to stay at home as well as business closures impact our businesses differently, benefiting some and challenging others. Nonetheless, our two-year stack growth across our segments remain very strong and well above our long-term sales growth targets. Turning to the Household segment. Quarterly sales were up 6% with growth recorded in all three businesses for a fourth consecutive quarter. Grilling sales were up by double-digits in what was a record-setting quarter of shipments for the business. Through strategic collaborations with our retail partners, we've been able to continue to grow household penetration and share. In the past year, we've introduced Kingsford products to more than one million new households. And they've invested in their backyard, including buying new charcoal and pellet products, which will create a lasting tailwind for this business. Our pricing strategy has also led to a less promotional environment, which will reduce pantry loading going forward. And we've improved our product lineup and distribution, making it easier for consumers to find our Kingsford pellet innovation and new flavors of our Kingsford product lineup at even more locations nationwide. All this is helping us build healthy momentum for this business, which is especially important as we head into the peak of the grilling season and tough comparable periods. Cat Litter sales increased this quarter, despite lapping consumer stockpiling in the year-ago period. The driving forces behind the business' strong performance have been its success in the e-commerce channel and innovation. Fresh Step with Gain continues to do well and build distribution with more innovation planned for Q4. Additionally, the record number of pet adoptions that has occurred during the past year will resonate for years to come as cat parents continue to purchase necessities like litter long after the pandemic has ended. Glad sales increased in Q3, mainly behind lower trade promotion. As a reminder, while we began to see elevated demand at the tail end of the year-ago quarter, heavy consumption didn't occur until late in FY 2020. So Q4 will be a more challenging comparison than Q3. In recent months, we've also seen significant resin price inflation. To manage those rising costs, we have announced a pricing action on this brand effective in July. As we've mentioned, we'll manage inflationary pressures holistically using all the tools in our toolbox. This approach will allow us to continue introducing innovation that resonates with consumers, which has driven profitable growth for the category for a long time. For example, over the past decade, we've started using higher-quality resin that has allowed us to reduce overall use by 20%, resulting in a stronger bag with a reduced environmental footprint, all while improving our cost structure over time. Our latest innovation Glad ForceFlex with Clorox trash bags has been performing well since its fall 2020 launch. In the Lifestyle segment, Q3 sales were flat. The Food business had a double-digit sales increase for a fourth straight quarter behind continued consumption growth of our Hidden Valley Ranch bottle dressings and dry seasonings. This growth was on top of high single-digit growth in the year-ago period. The ongoing trend of at-home meals has driven household penetration to another record high. Our optimism for this business is further fueled by the success of our latest innovation Hidden Valley Secret Sauces and Hidden Valley plant-based ranch dressing, both of which have been performing well. Brita sales in Q3 were down by double-digits, as the category consumption decelerated from its COVID-related buying spikes in the year-ago period. Despite these results, consumption levels have remained much higher than pre-pandemic, partly fueled by strong filter replacement. As with wipes and sprays, our supply chains have not caught up with demand in Brita, particularly for filters, impacting our shares and sales. On a positive note, we're continuing to make progress in addressing these supply issues, which has already helped us begin to recover share. Burt’s Bees sales also decreased by double digits, due to the changes in shopping and usage behavior that have occurred during the pandemic. The business was also lapping the effect of pantry loading in the year-ago period. Mask wearing and decreased mobility have created headwinds in both the lip care and face care segments. Still, the brand has not only maintained, but fortified its position as the number one lip balm. As we prepare this business for improving consumer mobility and consumers returning to cosmetics and colors, we'll be launching towelette innovation in value sizes and the new watermelon scent. These bright spots, combined with the continued growth in online channels, contribute to our confidence in the long-term growth prospects of this business. Lastly, International has its own unique dynamics that set it apart from our other segments. Unlike the U.S., most international markets where we operate don't yet have high vaccination rates. As a result, demand for cleaning and disinfecting products remain elevated. The two-year stack growth rate for this business is about 22%. In our International segment, Q3 sales grew 9%. These results reflect the combined impact of about seven points of benefit from the Saudi JV acquisition and about two points from foreign currency headwinds and are on top of 11% growth in the year-ago period. Excluding the impact of the Saudi acquisition, half of all sales growth was driven by the introduction of a new line of Clorox disinfecting wipes, mainly flat packs innovation sourced from our dedicated international supply chain and launched in more than 30 countries this fiscal year. With strong innovation like this and differentiation of our brands in their respective categories, we feel good about the growth runway of this business. Now, I'll turn it over to Kevin, who will discuss our Q3 performance, as well as our updated outlook for FY 2021.

Kevin Jacobsen, Chief Financial Officer

Thank you, Lisah, and thank you everyone for joining us today. We hope you and your families are well. Before I review our third quarter results, let me first address the non-cash impairment charge we reported today. The Better Health, Vitamins, Minerals and Supplements business represents about 4% of total company sales, comprising several small brands we acquired in two separate transactions. Performance on this business has not delivered on our expectations. The impairment was a result of our updated valuation, which assumes lower sales and profit projections versus our initial expectations at the time of the acquisition, primarily driven by an increased level of competitive activity and the need for more investments to scale these small brands. As a result of our updated valuation, we recorded a pretax non-cash impairment charge of $329 million to lower the carrying values of goodwill, trademarks and other assets of the Vitamin, Mineral and Supplement business unit. Net of a deferred tax benefit of $62 million associated with this impairment, we recorded a $267 million charge to net income or $2.11 per share. This represents about 27% of its initial purchase price. Going forward, we are implementing our refreshed portfolio strategy. We continue to believe in the attractiveness of the VMS space, driven by strong consumer tailwinds and the strategic fit, given our focus on health and wellness. Importantly, we fully expect that our VMS business will be a meaningful contributor to our company results over time. To ensure clarity around the underlying operating performance of our overall business, my comments on the third quarter results will exclude the impact of this non-cash impairment. In addition, my comments will exclude the impact of a one-time non-cash gain related to our Saudi joint venture acquisition. It's important to note that while the Saudi joint venture is expected to contribute $0.45 to $0.50 to our reported EPS, it includes a $0.60 non-cash gain that we're excluding from our adjusted EPS outlook. Moving forward, in our fiscal year adjusted EPS 2021 outlook, we are continuing to include a $0.10 to $0.15 charge, primarily from an ongoing intangible amortization related to the acquisition. Before I review our third quarter results, I'll comment briefly on our fiscal year outlook. As you saw in our press release, we've confirmed our fiscal year sales outlook and provided an adjusted EPS outlook, which excludes a non-cash impact from the VMS impairment in the third quarter, as well as a one-time non-cash gain from the Saudi joint venture acquisition in the first quarter. For perspective, excluding these items helps provide clarity around our underlying operational performance, which is unchanged from our previous outlook. Importantly, I'm pleased we're on track to deliver another strong year for our shareholders, targeting a two-year stack of about 19% sales growth, well above our historical financial performance. Now, turning to our third quarter results. Third quarter sales were flat in comparison to 15% growth in the year-ago quarter when we saw the initial spike from COVID-19. Our sales results reflect a 5-point decline in organic volume, offset by 4 points of favorable price/mix and 1 point benefit from our Saudi joint venture acquisition. On an organic basis, third quarter sales declined 1%. Our sales results came in largely as expected, although there's certainly variability across our portfolio, which reflects a very dynamic environment we continue to navigate. Importantly, we grew sales in six out of our ten businesses. Gross margin for the quarter decreased 320 basis points to 43.5%, compared to 46.7% for the year-ago quarter. Gross margin results reflect a pronounced inflationary environment, resulting in 360 basis points of higher manufacturing and logistics costs, including temporary COVID-19 spending, as well as 170 basis points of higher commodity costs, primarily related to the rising cost of resin, partially impacted by the extreme weather events we experienced in the Southern U.S. earlier this quarter. Gross margin also reflects 100 basis points of negative impact from lower volume in the quarter. These factors are partially offset by 140 basis points of favorable trade promotion and 110 basis points of cost savings. Selling and administrative expenses, as a percentage of sales, came in at 13.3%, compared to 15.1% in the year-ago quarter reflecting lower incentive compensation expenses, primarily related to the non-cash impairment on the VMS business. Advertising and sales promotion investment levels, as a percentage of sales, came in at 11%, reflecting continued strong investments across our portfolio, with U.S. spending at about 12% of sales, to support a robust innovation program in the back half of the fiscal year. Our third quarter effective tax rate was negative 1.4%, driven by the impairment charge we took on our VMS business. Excluding the impairment charge, our third quarter tax rate was 23%, compared to 19% in the year-ago quarter, as we lap excess tax benefits on stock-based compensation. Net of all these factors, adjusted earnings per share for the third quarter came in at $1.62 versus $1.89 in the year-ago quarter, a decline of 14%. As you also saw in our press release, year-to-date net cash provided by operations was $893 million versus $806 million in the year-ago period, an increase of 11%. Our strong cash flow was due to profitable sales growth, partially offset by higher tax payments and higher employee incentive compensation payments. Turning to our updated fiscal year outlook. We continue to anticipate fiscal year sales to grow between 10% to 13%, reflecting the strength of our first half results and our ongoing assumptions for moderating demand over the balance of the fiscal year as we move beyond the peak of the pandemic in the U.S. and lap exceptional prior year comparisons. Our assumptions for one point of contribution from our Saudi joint venture offset by one point of foreign exchange headwinds remain the same. On an organic sales basis, our outlook continues to assume 10% to 13% growth. We now expect fiscal year gross margin to be down due to more pronounced headwinds from elevated commodity and transportation costs. We now expect fiscal year selling and administrative expenses to come in below 14% of sales reflecting lower incentive compensation costs primarily due to our third quarter non-cash impairment on our VMS business. Additionally, we continue to anticipate fiscal year advertising spending to be about 11% of sales, reflecting our ongoing assumption to spend about 12% in the back half to support our innovation program. For perspective, this fiscal year, we're planning to spend about $125 million more versus a year ago to ensure we're leaning into engaging consumers to build lifetime loyalty to our brands. We continue to expect our fiscal year tax rate on a reported and adjusted basis to be between 21% and 22%. Net of these factors, we anticipate fiscal year adjusted EPS to be between $7.45 and $7.65 or 1% to 4% growth, reflecting the continued assumptions I mentioned last quarter, including strong top-line performance partially offset by an increasingly elevated cost environment. In closing, I'd like to note that as we transition from the peak of the pandemic in the U.S., we're navigating a highly dynamic operating environment with the following factors that can influence our results in the near to medium term. First, category dynamics and consumption trends. As more people get vaccinated and become increasingly mobile in the U.S., although we recognize different markets are in varying stages of the pandemic, we're keeping an eye on short-term changes in these trends as they could cause variability in our top line. That said, longer term, we believe our portfolio will continue to play a meaningful role in addressing consumer megatrends that have accelerated over the last 12 months, which will contribute to higher demand for our products relative to demand levels prior to the pandemic. Second, more pronounced cost headwinds, which we'll plan to navigate with all the tools in our toolkit including opportunities for pricing in key areas of our portfolio. And third, increased production capacity to support ongoing elevated demand. This remains a key priority for us as our teams continue to look for every opportunity to expand our production capacity, while recognizing the ongoing volatility this creates on our extended supply chain. And finally, I'll reinforce that we're on track to deliver another strong year for our shareholders, while keeping our sights set on the long term. As you saw in February, we raised our long-term annual sales target to 3% to 5%. Based on the early success of our IGNITE strategy and our continued plans to lean in even further with strong investments behind our brands, people, technology, production capacity and of course, our new growth opportunities where we believe we have a right to win. These efforts are all in service of our broader ambition to accelerate profitable growth, to create long-term value for our shareholders. And with that I'll turn it over to Linda.

Linda Rendle, Chief Executive Officer

Thanks, Kevin. Hello, everyone and thank you for being with us today. I hope you are all well. A year ago around this time when the pandemic spiked in the U.S., we knew we were facing uncharted territory. And as I look back at how we've managed our business to support our consumers, retail partners and communities over the last 12 months, what makes me proud is that we stayed true to three things. We embraced our role as a health and wellness company, which helped us prioritize our actions, including ensuring the safety of our people and emphasizing our support for health care workers. We put people at the center, taking care of our teammates around the world and staying the course in doing everything we could to serve public health and consumer needs. We were led by our values, with our commitment to do the right thing guiding our strategic choices and actions. Out of all of this, our purpose became clearer. We champion people to be well and thrive every single day. With this in mind, here's what's important for you to take away from today's call. First, our business is well positioned for the future. I'm grateful our consumers have rewarded our team's dedication to serving people and communities around the world. Our business is significantly larger than it was before the pandemic. People have turned to our trusted brands for support during an incredibly tough year, and Clorox has the most trusted brands in many categories. We see this play out in strong household penetration across our portfolio, with our brands in 90% of U.S. households. We continue to see strong repeat rates across our brands among core and new users versus last year. And as Lisah mentioned, we continue to focus on retaining this larger base of loyal consumers. And of course, this is showing up in our results, including flat sales in comparison to a very strong base in the year-ago quarter. For perspective, it's worth noting that we delivered a two-year stack of 15% total company sales growth in the third quarter. And as Kevin mentioned, we're on track to hit a two-year stack of about 19% sales growth for the fiscal year. My second message is that we have strategic plans in place to address near-term priorities as we continue to navigate in a very dynamic environment. First, there's more work to be done on improving supply, especially after weather-related disruptions in the third quarter and higher-than-anticipated demand in certain parts of our portfolio. We're pulling every lever available to us to improve supply, including working with third-party supply sources as we continue to run flat out. I'm encouraged by our progress, but our overall supply chain remains a top priority focus for us. Next, we fully acknowledge that market shares for key brands are not where we want them to be. That said, share declines are primarily driven by recent supply challenges. And as we continue to improve supply capacity, we expect to recover market share. We feel good about seeing continued strong consumption and demand across our portfolio relative to pre-pandemic levels. And as Kevin discussed, we're facing stronger cost pressures from critical input costs and a tightening transportation market. One of the four key choices in our IGNITE strategy is to generate fuel to support growth and mitigate inflation. We're taking a holistic approach to address these cost pressures by leveraging a number of tools to support our margins, including margin accretive innovation, net revenue management, pricing through trade reduction and, as always, a relentless focus on cost savings. My last message is this. With conviction in our purpose and guided by a strategy that makes the most of our strengths, we continue to have our sights set on our ambition to accelerate long-term profitable growth. In the past year, we learned that by putting people at the center, our IGNITE strategy has helped us to do what we do best: serve people who count on our brands. And we continue to have an opportunity to serve even more people around the world. And as we think about our future, our strategy is proving to be particularly relevant as it leverages significant consumer megatrends that have accelerated because of the pandemic. The latest research still tells us that consumer routines and behaviors formed during the pandemic are expected to persist, including prioritizing health and hygiene, drinking more water, taking vitamins and supplements and spending more time online. What's more, the role of home has changed. With many companies pursuing hybrid models for their workforce, we expect more cleaning, more meal occasions and more trash to be generated at home. Our portfolio continues to be in a unique position to play a meaningful role in people's lives and we have every intention of accelerating new growth opportunities to support these trends. Moving forward, we're leaning into our IGNITE strategy with innovation remaining core to our key areas of strength. That means innovating in our products, especially larger, stickier innovation platforms that deliver superior consumer value and multiyear growth for our business; innovating in consumer and shopper engagement; personalizing experiences for consumers so that we get to know 100 million people by the year 2025; and partnering with our retailers on category vision and leadership to support healthy and profitable categories. The turnaround of our Kingsford business is a great example of how our focus on innovation is contributing significantly to strong category and brand growth. Innovating how we work across the organization through technology that makes us smarter, work faster and, in the case of our supply chain, enables us to respond more quickly to future demand spikes. And finally, innovating through an ESG lens because we believe in the strategic link between our societal impact and long-term value creation. Here are some highlights in the last quarter. We're 21% of the way toward our goal to reduce virgin plastic and fiber packaging by 50% by 2030. We've achieved 76% of our 100% goal for recyclable, reusable or compostable packaging by 2025. We're introducing a company-wide learning and development program focused on sustainability because ESG integration in our business not only means embedding it in every brand, but also rallying every person behind our efforts. And with ESG embedded into our operations, our brands are not only contributing to our corporate ESG goals, but they're also pursuing meaningful goals that matter to their consumers. As an example, by 2030 Brita has a goal to provide clean water access to 0.5 million people in the U.S. facing poor-quality tap water. This speaks to the heart of Brita's brand purpose. Before I open it up for questions, I'd like to echo the important takeaways Lisah mentioned at the beginning of the call. First, we're on track for another strong year. Second, we'll seize the opportunity before us to accelerate long-term profitable growth. Third, our IGNITE strategy has proven its relevance in the face of the pandemic by putting people at the center, emphasizing innovation and leveraging technology to lay the groundwork for the future. Operator, you may now open the line for questions.

Operator, Operator

Thank you. Your first question comes from Dara Mohsenian of Morgan Stanley.

Dara Mohsenian, Analyst, Morgan Stanley

Hi, guys. Two things for me. First, can you clarify the 3% to 5% long-term top-line growth range you talked about at CAGNY — can you clarify specifically what time period that is over? Is that a post fiscal 2022 range? Does it include fiscal 2021-2022? Just trying to understand that. And then second, there are a lot of puts and takes as we think about the next few quarters from a top-line standpoint. In theory more difficult comparisons, COVID cases are dropping off, vaccine counts are going up. Those are some headwinds, but you mentioned some of the supply chain challenges that you're working on, and you've talked about the greater opportunity in professional and international longer-term, which drove that higher long-term top-line growth guidance down at CAGNY. So I was just hoping you could give us a bit of context as you look out here over the next few quarters in terms of some of those headwinds versus tailwinds. Could the business potentially decelerate with the comparisons you're facing, or do some of those positive areas more than offset it as you think about the business over the next few quarters here? I know you're not going to give a specific number, but just trying to think how you guys think through that, particularly with some of those longer-term positive top-line tailwinds you're thinking of. Does that play out in the near term, or how long does that take to play out? Thanks.

Kevin Jacobsen, Chief Financial Officer

Sure, Dara. Let me start with your first question. We raised our long-term sales goal of 3% to 5% back in February as part of our IGNITE strategy, which runs through 2025. How I see that playing out, as we talked about in February and we have the same point of view, is we expect our sales to be roughly flat in the back half of the year. That's consistent with Q3. As we get into fiscal year 2022, our expectation is by the back half of the year we'll be back to our long-term raised sales outlook at 3% to 5%. So we've got some tough comps here for the next three quarters, but as we get through those comps by January, we should be at this new elevated level. As we work through the next phase of this pandemic, as we see higher vaccination rates and more mobility, we fully expect that we'll see a slowdown in demand for products — that's expected. When we get to that new normalized level, we think we're back at this 3% to 5% rate going forward.

Dara Mohsenian, Analyst, Morgan Stanley

Great. That's helpful. And then any context around some of those headwinds and tailwinds and particularly supply chain challenges? Any progress on that front, how much impact could that have from a top-line perspective as you think over the next few quarters here?

Linda Rendle, Chief Executive Officer

Sure. I'll take that one. I'll start with the big picture on what we're seeing as tailwinds for us. We're definitely seeing consumer behavior trends stick over the mid to long term. We're seeing hygiene continue to be a cornerstone of health for folks. Even as people are getting vaccinated and mobility is starting to increase, we're seeing people embrace those new cleaning behaviors as new routines, both inside and outside the home. On the business side, we're still seeing the need for higher disinfection as businesses welcome people back. The issue has been depending on the market you're in — in the U.S. mobility has not really increased to the point where businesses are fully at capacity yet or even open in many cases. So that was a short-term impact to Q3, and we're watching how mobility will improve in future quarters. Other things persisting include people taking care of their health and wellness. We have a new installed base, for example, with Brita from purchases of pitchers during the pandemic and we're seeing continued filter sales. Digital continues to persist and we think that will be a tailwind for our business as we've invested more in digital marketing than the average in our industry. Our strong position in e-commerce has built over many years and continues to accelerate — it's up to 14% of our business year-to-date. The role of home continues to be a tailwind; people are eating more at home and continuing to work from home, which benefits businesses like Kingsford and Hidden Valley and trash bags. So I think those will be tailwinds in the coming months and in the long term. From a headwind perspective, supply chain has continued to be a challenge. We've grown a lot since pre-pandemic and the complexity of our supply chain has increased with more nodes and more third parties. What didn't help this quarter were the weather disruptions that caused several force majeures. Although we managed through it and delivered our overall commitments in Q3, it's something we're watching closely for volatility. The expanded supply chain remains something to watch and could help or hinder as we look forward.

Dara Mohsenian, Analyst, Morgan Stanley

Great. That's helpful. And if I can just sneak one more in, on the pricing front, obviously you mentioned the Glad increases, potentially opportunities in other areas. Can you talk a bit about whether you have pricing plans in place across the rest of the portfolio? Is it still being decided? Is it just a matter of when you communicate it? How do you think about pricing in the rest of the portfolio beyond Glad? Thanks.

Linda Rendle, Chief Executive Officer

Absolutely. As Kevin and Lisah highlighted, we are seeing inflationary pressure across the industry. We have our sights set on how to meet our long-term EBIT margin goals, and the approach is holistic. We're looking across a robust toolbox to address this, including margin-accretive innovation, net revenue management, pricing that includes both list price increases and trade reductions, and relentless cost savings. We're employing that entire toolbox across our businesses. We're coming from a position of strength with strong brands and higher consumer value measures, so we're confident in our ability to take price. We'll be surgical and targeted — category by category — weighing the broader environment. We're evaluating our ability to take price across all businesses, and while we will consider pricing, we'll be measured. Regarding promotions, we're trying to get back to a more normalized state of promotion. Promotions are still well below pre-pandemic levels. As we lap the growth, there's little incentive to put deep discounting in the system. We're working on growth plans with retailers, and in some cases that will mean a lower promotional environment. It will depend on the category, but the overall approach is to keep promotion rational and use it to drive trial.

Dara Mohsenian, Analyst, Morgan Stanley

Thank you.

Operator, Operator

Thank you. Your next question is from Chris Carey of Wells Fargo Securities.

Chris Carey, Analyst, Wells Fargo Securities

Hi everyone. So I just want to follow up on pricing. On Glad pricing, last time that happened it caused volatility on shelf. Now you have competitors moving ahead of you. Can you talk to confidence that won't happen again this time? Related to pricing you mentioned lower promotions are part of how you're getting some net pricing. Promos are already at a pretty low level, so do you anticipate promotional levels going below peers? Did I hear that right that promo can be a source of pricing, implying maybe you're not looking at list prices in the rest of the portfolio just yet until well into fiscal '22? And then I have a second question. Thanks.

Linda Rendle, Chief Executive Officer

Thanks Chris. We have confidence in our brands and the investments we've made, which supports our ability to take pricing, including Glad. This time, the inflationary environment is broader and pretty systemic across the industry, and competitors are also moving. For Glad in particular, we have announced a price increase effective in July. Given ongoing resin volatility, we're considering whether additional pricing actions are necessary. For other brands, we're evaluating price increases as part of our category-specific approach. We'll use a holistic mix of cost savings, margin-accretive innovation and pricing where appropriate and be surgical in how we apply it. Regarding promotions, we're trying to normalize promotion levels. They're still well below pre-pandemic levels, and given the strong growth we have to lap, there's little incentive to do deep discounting. We'll keep promotions rational and use them to drive trial and curiosity.

Chris Carey, Analyst, Wells Fargo Securities

Thank you for that. One more: last time there was a commodity cycle pricing accounted for several hundred basis points to gross margin. Is that a realistic framework going forward? And second, professional was weaker than expected this quarter. You’ve discussed partnerships. Also International came in a bit light versus other staples. Can you give puts and takes that give you confidence those businesses can be contributors to your 3% to 5% longer-term growth outlook?

Kevin Jacobsen, Chief Financial Officer

Hey Chris, on the impact of pricing, it's too early to provide definitive perspective. We're building our plans for fiscal year 2022 now. Pricing will be one lever among many to offset transportation and commodity cost increases. We'll update you as we finalize plans in August. On International, we feel good about progress in cleaning and disinfecting work. As Lisah mentioned, we've introduced wipes into many countries. In Q3, one challenge was Canada, which is in its third lockdown. In Canada, many retail aisles deemed non-essential are blocked off, so while our cleaning and disinfecting business grew there, other parts of our business declined — Brita was down over 30% and Burt’s Bees was down similarly because consumers couldn't shop those aisles. That lockdown impacts Q4 as well, though we expect those businesses to rebound as lockdowns ease. Broadly, we feel very good about cleaning and disinfecting internationally. I'll turn it over to Linda on professional.

Linda Rendle, Chief Executive Officer

Professional is tied heavily to mobility. Last year in Q3 many businesses hadn't shut down yet, so we had a strong comparison period to lap. This quarter, many professional customers remain closed. Remember, our professional business is well-established: roughly 7% of the company pre-pandemic and had been growing mid- to high single-digits over many years, so the comparison is tough. That said, the two-year stack on this business is up 17%, so long-term trends remain strong. Our out-of-home partners continue to see benefits of offering branded clean, disinfected spaces, and we continue to expand partnerships. We have a terrific suite of innovation coming in Q4, including expanding our electrostatic sprayer business with new forms and chemistries. So while there's short-term noise, our long-term outlook for professional is unchanged and positive.

Chris Carey, Analyst, Wells Fargo Securities

Okay. Thanks both.

Operator, Operator

Thank you. Your next question is from Nik Modi of RBC Capital Markets.

Nik Modi, Analyst, RBC Capital Markets

Hi. Linda, two vectors on disinfecting wipes. Vaccinated consumer data suggests vaccinated consumers' buy rate for disinfecting wipes is dropping faster than unvaccinated consumers. Any thoughts on that? And on market share, since this has been supply-related, what's the case to retailers to get back space when supply is restored? Is it marketing support, brand loyalty, basket size? Any thoughts would be helpful.

Linda Rendle, Chief Executive Officer

We continue to see strong behavior changes in cleaning, and we anticipated some change as people became vaccinated. We did see that curve move up slightly and vaccines happened earlier than anticipated, so that's normal. The key takeaway is that versus pre-pandemic levels, cleaning behaviors are still significantly elevated and we continue to expect that going forward. On market share, we're not happy — we want to grow share. The share declines have been primarily driven by supply constraints. We had weather disruptions and the expanded supply chain introduces additional risks. We're optimistic on supply: we've made good progress and anticipate substantial improvement in the next four months. We plan to be in stock on most cleaning businesses, including wipes, by the end of Q1, and fully in stock across our Cleaning business by the end of Q2, including sprays and other items that are still constrained. Supply will help recover share, but innovation will also be critical. We have a strong Q4 innovation suite that retailers are excited about, including reintroducing Scentiva and compostable wipes, expanding disinfecting floor mopping, paper towel wipes, a new Clorox non-bleach all-purpose cleaner, and expanding our electrostatic business with new forms and chemistries. We expect these innovations and improved supply to help regain share.

Nik Modi, Analyst, RBC Capital Markets

Thanks. And one quick on vitamins: what specifically do you plan to do to turn that business around? The category backdrop is favorable given consumer focus on health. Any specifics around strategy would be helpful.

Linda Rendle, Chief Executive Officer

I'll give some background and high-level actions. We acquired several small brands three to five years ago that were strong in the fast-growing natural channel. Performance underperformed expectations due to channel headwinds — natural went from plus 8% when we bought it to negative 5% due to retail consolidation during the pandemic — and because these brands are heavily weighted in probiotics, a fragmented category that has seen increased competition and new product forms. Given the size of the brands, scaling them requires more investment and time than we initially thought. Our strategy going forward starts with building the right category knowledge: we've hired industry talent with experience in this space and refreshed our portfolio strategy for how to win with these small brands. We'll have more to share later, but we fully expect the category is attractive, and we expect these brands to become company-accretive over the long term, although the ramp will be slower than initially planned.

Nik Modi, Analyst, RBC Capital Markets

Excellent. Thank you, Linda.

Operator, Operator

Thank you. Your next question is from Andrea Teixeira of JPMorgan.

Andrea Teixeira, Analyst, JPMorgan

Linda, on the Glad bag pricing comment, when should we see this flow through? I'm assuming that's a fiscal 2022 consideration at this point. Also, it’s been about six months since your large competitor took pricing. Is this strategy intended to recover some of that share? Any idea when you'll consider taking pricing in other categories impacted by transportation and commodity pressures? Also, you talked about supply being normalized for cleaning products by the end of calendar second quarter — should we expect professional and international to normalize on the same timeline, or is there more work to recover share and capacity in other segments?

Linda Rendle, Chief Executive Officer

We announced the Glad price increase to the trade in March, effective in July, and it will pass through to shelf as retailers change prices. Given continued resin inflation, we are considering whether additional action on Glad is necessary, but we have no further timing to share. Broader pricing is category-specific based on seasonality, promotion and innovation plans; we will evaluate across the portfolio and be targeted in our actions. We are focused on cost savings, and we're on track to deliver our cost savings targets for the year while evaluating where we can do more. Regarding supply, professional shares some supply chain with U.S. retail cleaning while international has a dedicated supply chain for wipes and many international businesses are less constrained because of that dedicated supply chain. So in many international markets, we're not as constrained. Professional and international have some differences, but overall we expect recovery on similar timelines to retail for many items, with some exceptions depending on the product and supply chain node.

Andrea Teixeira, Analyst, JPMorgan

Any acceleration in introducing products into more countries? You mentioned over 30 countries with wipes — are you planning to expand sprays and other products to accelerate international growth?

Linda Rendle, Chief Executive Officer

Yes. As part of our plan to reach the 3% to 5% long-term sales target, we expect stronger growth from international by building a global Clorox cleaning brand. Wipes are an important part of that, but we're also looking across the full set of cleaning products — sprays, disinfectants and other innovations — to strengthen presence in markets and leverage innovation to expand our reach behind the Clorox brand.

Andrea Teixeira, Analyst, JPMorgan

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

Operator, Operator

Thank you. Your next question is from Kaumil Gajrawala with Credit Suisse.

Kaumil Gajrawala, Analyst, Credit Suisse

Hi. On elasticity, with inflation and pricing coming through, to what degree are you worried about breaking the trend of structural increased use of products in the home? Do you have to be careful about taking too much pricing? How are you thinking about elasticity and the risk of losing behavior changes?

Linda Rendle, Chief Executive Officer

When we evaluate our ability to take price, we focus on consumer value, which is a combination of brand strength, product experience versus competitors and price. We look at that triangle to determine the right approach by category. Consumer value is at its highest since we've been measuring it, indicating strong brand strength and the ability to take price. As we strengthen innovation and invest behind our brands, we expect to maintain that consumer value. Regardless of pricing, we believe the core consumer behaviors — prioritizing health and hygiene, cleaning more, drinking more water, taking supplements, and cooking at home — are here to stay. Consumers have shown a willingness to pay during this period to keep themselves and their families safe, so we feel confident we can balance pricing and maintaining demand.

Kaumil Gajrawala, Analyst, Credit Suisse

Okay. Great. Thank you.

Operator, Operator

Thank you. Your next question is from Steve Powers with Deutsche Bank.

Steve Powers, Analyst, Deutsche Bank

Hey guys. A couple of questions. First, on the Health and Wellness segment: factoring in the new normal consumption level and improved supply, what do you think the average run rate of sales in that segment is likely to be as the new base? You've been running $800 million-plus for several quarters, and this quarter came down below $700 million. Is this the new normal, or does it bounce back to somewhere in the middle?

Linda Rendle, Chief Executive Officer

If you step back, our retail cleaning business was a place of strength pre-pandemic — growing mid-single digits in both top line and bottom line for a number of years. We grew mid-single digits on a five-year CAGR pre-pandemic. We expect the category to remain above the company average given the consumer tailwinds, and we see innovation playing a big role as consumer needs have changed. We've also invested more in the Clorox brand to capture this demand. So we expect Health and Wellness to be solid as we move to a new normal, supported by these trends and investments.

Steve Powers, Analyst, Deutsche Bank

Okay. On gross margin, your guidance implies a significant contraction in Q4. Can you comment on the size and timing — will it peak in H1 fiscal '22 and then soften? Also, how urgent is margin recovery — are you satisfied with a more elongated path or eager to claw back quickly? And specifically, how should we think about the Glad July price action — how impactful is that? Finally, on adjusted EPS disclosure, should we expect continued use of adjusted going forward and how to treat amortization items for fiscal 2022?

Kevin Jacobsen, Chief Financial Officer

Steve, we don't provide quarter-by-quarter guidance, but for the full year we expect gross margin to be down, likely about 100 basis points on a full-year basis. Since February, the biggest change is the resin impact driven by the ice storm in February. Previously, I had anticipated about 150 basis points of commodity headwind in the back half; that now looks closer to 200 basis points. You saw about 170 basis points in Q3 and I expect it will be higher in Q4, likely peaking in the front half of fiscal year 2022 and then softening. Regarding margin recovery, we remain committed to our long-term goal of expanding EBIT margins 25 to 50 basis points. We'll aggressively work toward that via pricing, cost savings and other levers. To give perspective, comparing fiscal 2019 to where we're likely this year on a two-year stack, that's about a 100 basis point increase in gross margin over that period. We want to move through the current challenges quickly and put actions in place to reach our long-term goals by the back half of fiscal 2022. On Glad pricing, the July action is low to mid-single digits; we'll evaluate whether further action is necessary. On adjusted EPS, we introduced it to provide clarity given the large non-cash items this year — the Saudi JV gain and the VMS impairment. We'll continue to provide both reported GAAP and adjusted estimates going forward so investors can understand operational performance excluding one-time items.

Steve Powers, Analyst, Deutsche Bank

Appreciate it. Thank you.

Operator, Operator

Thank you. Our next question is from Lauren Lieberman of Barclays.

Lauren Lieberman, Analyst, Barclays

Hi. Kevin, on GAAP versus adjusted, being a GAAP reporter has been a point of pride for the company and something that supported valuation. I understand the impairment is large and one-off, but you introduced adjusted now when we'd be looking at fiscal 2022 growth rates. I'm struggling with the ask to switch to adjusted. Can you offer further perspective on that decision?

Kevin Jacobsen, Chief Financial Officer

Lauren, I wouldn't characterize it as playing games. We'll continue to provide both reported GAAP estimates and adjusted estimates. We introduced adjusted because we had two large non-cash items this year — a sizable gain in Q1 and a sizable charge in Q3. We think providing adjusted numbers helps investors see our underlying operational performance more clearly by setting those two items aside. The intent is transparency and clarity, and we'll continue to use both metrics going forward, including into fiscal 2022, so investors can evaluate performance on both a reported and an adjusted basis.

Lauren Lieberman, Analyst, Barclays

Thanks. I also wanted to follow up on market shares. Nielsen suggests share in sprays and wipes has been down, and pre-pandemic your shares in sprays were down considerably. Is there any channel prioritization dynamic or in hindsight any sense that you could have invested more in cleaning historically? It feels like there's a hole to dig out of that's not just supply-related.

Linda Rendle, Chief Executive Officer

Lauren, thanks. A step back may help. Our retail cleaning business was a strength pre-pandemic — growing mid-single digits TTM and we had a two-point share gain in home care from fiscal 2013 through 2019. We were investing in the Clorox brand and innovations like Scentiva prior to the pandemic. Diving into subsegments, there are ups and downs, and sprays is a fragmented category. While we were winning in many segments, in others there was more work to do. We entered the pandemic from a position of strength overall. We're not satisfied with current shares, but the majority of the issue has been supply constraints. We have strong upcoming innovation — Scentiva, compostable wipes, disinfecting floor mops, paper towel wipes, new Clorox non-bleach sprays, and expansions to our electrostatic business — and we are investing in advertising. We're seeing strong consumer metrics: household penetration gains, improved retention and repeat rates, and strong ROI on advertising. We're laser-focused on regaining share through supply improvements, innovation, consumer value and investment in the Clorox brand.

Lauren Lieberman, Analyst, Barclays

Okay. Thanks, Linda.

Operator, Operator

Thank you. Our next question is from Kevin Grundy of Jefferies.

Kevin Grundy, Analyst, Jefferies

On advertising and marketing you referenced 11% of sales this year with about 12% in the back half. That's a historical high. Was there any thought about pulling back given commodity cost increases? How confident are you in the ROI behind the spend given volatility in consumption? And longer term, is 11% the right number or do you expect it to come back toward previous levels like 9%?

Linda Rendle, Chief Executive Officer

Kevin, we were deliberate in increasing ad spend this year. We wanted to welcome new consumers into our brands, build loyalty and support innovation launches during a year when consumer behaviors were shifting. We're on track to spend the 11% and have a strong spend planned in Q4 tied to new innovations. On ROI, we're tracking in real time and the ROI remains very strong, which supports continued spending. We see positive consumer metrics: higher household penetration, increased repeat and retention, larger purchase quantities and frequency. As we move forward, we don't have a fixed long-term ad percentage yet; we'll optimize advertising by category, market share and innovation plans. But the message is we'll continue to invest behind our brands and will communicate the exact level of spending for 2022 and beyond when we provide our outlook.

Kevin Grundy, Analyst, Jefferies

Very good. Thanks and good luck.

Operator, Operator

And your final question comes from Jason English of Goldman Sachs. It appears his line disconnected.

Linda Rendle, Chief Executive Officer

Jason? One more time? His line disconnected. Okay. That's the final question. Thanks again, everyone. We look forward to speaking to you again on our next call in August. Until then, please stay well.

Operator, Operator

Thank you. This does conclude today's conference call. You may now disconnect.