Clorox Q4 2022 Earnings Call Transcript

Participants

Corporate Executives

• Lisah Burhan, Vice President of Investor Relations
• Linda Rendle, Chief Executive Officer
• Kevin Jacobsen, Executive Vice President and Chief Financial Officer

Analysts

• Peter Grom, UBS Group AG
• Andrea Teixeira, JPMorgan Chase & Co.
• Chris Carey, Wells Fargo & Company
• Kaumil Gajrawala, Credit Suisse Group AG
• Jason English, The Goldman Sachs Group, Inc.
• Dara Mohsenian, Morgan Stanley
• Kevin Grundy, Jefferies Financial Group Inc.
• Lauren Lieberman, Barclays Investment Bank
• Olivia Tong, Raymond James
• Steve Powers, Deutsche Bank Aktiengesellschaft

Presentation

[Operator]

Good day, ladies and gentlemen, and welcome to the Clorox Company's Fourth Quarter and Fiscal Year 2022 Earnings Release Conference Call. [Operator Instructions] 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.

[Lisah Burhan, Vice President of Investor Relations at Clorox]

Thanks, Paul. 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, may refer to certain non-GAAP financial measures. Please refer to the forward-looking statements section, which identified various factors that could affect any such forward-looking statements, which have been filed with the SEC. In addition, please refer to the non-GAAP financial information section in our earnings release and the supplemental financial schedules in the Investor Relations section of our website for a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures.

Now I'll turn it over to Linda.

[Linda Rendle, Chief Executive Officer at Clorox]

Hello, everyone, and thank you for joining us. Our fiscal 2022 results reflect a very challenging operating environment, including record high input cost inflation and ongoing pandemic-driven volatility. We navigated this by taking a broad set of actions within our control to rebuild margin while continuing to invest in innovation and our portfolio of trusted brands to position Clorox for long-term success. This allowed us to deliver results in line with our outlook, including another quarter of sequential gross margin improvement. While we look forward to a return to a more normalized environment, we are not there yet. We expect the environment to remain difficult in fiscal '23 as we lap COVID impacts on our business, demand continues to normalize, particularly on our cleaning and disinfecting portfolio and factors like input cost inflation and supply chain disruptions persist.

We'll keep addressing these challenges head on through actions that include revenue management, further pricing, ongoing cost management and supply chain optimization, our digital transformation and the streamlined operating model we announced today. At the same time, we're committed to maintaining our category leadership and delivering superior consumer value. I'm confident that our IGNITE strategy continues to position us well for the future. We remain committed to delivering on our 3% to 5% sales growth target over the long term and are on the right path to drive consistent, profitable growth over time and create shareholder value.

With that, Kevin and I will open the line for questions.

Questions and Answers

[Operator]

[Operator Instructions] And our first question comes from Peter Grom of UBS. Your line is open.

[Peter Grom, Analyst at UBS Group]

Hey. Good afternoon, everyone. So I guess I just kind of wanted to start with a pretty broad question. On the initial guidance, just kind of given where we land in versus expectations, I would be curious, Linda or Kevin, would you characterize this outlook as conservative? Is it prudent? Just trying to understand the comfort in the range at this point just given what we've seen over the past year?

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

Peter, thanks for the question. Yes, let me talk about our guidance and maybe a few thoughts. The first is we view this guidance as balanced, but certainly balanced in what we see today. As you saw in our outlook, we provided a wider range both on the top and bottom line. And I think, Peter, what that really indicates is we believe we continue to operate in an environment of heightened volatility. And I'll be the first to admit, I don't think we've done a particularly good job of estimating the cost environment. And so as we look forward, we're projecting about $400 million worth of cost inflation or supply chain. We think that's a balanced approach to take at this point, but I'll acknowledge there's a lot of variability there. We're going to watch that very closely and obviously update folks as we progress through the year. But we think to start the year, this is the right outlook. And again, the wider ranges speak to the heightened volatility we're dealing with.

[Peter Grom, Analyst at UBS Group]

Thanks. And then maybe just following up on just the organic sales outlook. But just trying to understand the confidence around the continued strength across the rest of the portfolio. You highlighted in the release and the prepared remarks that organic sales growth, excluding cleaning, I think it was up mid-single digits. So is that kind of the expectation moving forward? And if so, what kind of gives you confidence that you won't see moderation in some of these other categories looking ahead?

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

Yes, Peter, we feel very good about that, our portfolio overall. As you saw in our prepared remarks, if we set aside the health and wellness sector, and if you start with Q4, for the rest of our portfolio, our Household Essentials, our international business, we have about 5% organic growth. I feel very good about the strength of that portfolio. When you think about health and wellness, I would say pricing is playing out very much as we expected. Elasticities continue to be below historical levels. Well, we've got a couple of additional dynamics going on in that segment. As we mentioned, we had inventory reductions at our retailers. We saw in April and May, and that had a bit of a drag in the quarter as well as we continue to see demand moderation in cleaning and disinfecting behaviors with consumers, and we think that's going to continue.

And so if you look at what we saw in Q4 as we project forward to fiscal year '23, we continue to expect it to play out somewhat similar. As we look forward, we feel very good about Household Essentials and International. I think our pricing will continue to perform well. Now I think it's worth noting, we have assumed in our most recent price increase we took in July, we've assumed elasticities revert back to what we saw historically, which means more negative than what we've seen over the previous two price increases. And we just think that's a prudent assumption to make given the pressure consumers have been under, and we expect they will continue to be under going forward. But overall, I'd expect on the bulk of our portfolio, you'll see favorable price mix in the high single-digit range and volume down likely low single digits, similar to what we saw in Q4.

And then I think in the Health and Wellness segment, again, feel very good about our pricing actions. I feel very good about the health of that business. If you look at our home care portfolio, we continue to grow share. We grew share last year. If you look at particularly at our wipes business, I think we've grown share for the last six quarters. And so the business itself is very healthy. But we have to recognize we expect to continue to see some moderation and consumer behavior and that will play out in the category. So we expect that category to be down, but our business is quite healthy within this category.

[Peter Grom, Analyst at UBS Group]

Thanks so much. I'll pass it on.

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

Thanks, Peter.

[Operator]

Our next question comes from Andrea Teixeira from JPMorgan.

[Andrea Teixeira, Analyst at JPMorgan Chase & Co.]

Hi. Thank you. Thank you. Good afternoon. So I want to go back to the assumptions of the minus 3% to plus 3% organic growth? And I know I appreciate that you had to be -- to provide a wide range. So you just discussed now that the pricing that is embedded, and I'm assuming that is a fixed part, price mix would be about high single so it implies that you'd think at about of the range that you have minus 6-ish, if you will, like 5%, 6% in volumes. And then conversely, a more healthy environment on the top range. So just to kind of pause here and think what do you -- what are you embedding there? It's still mostly on the Health & Wellness, the Cleaning division that you expect that to be down? Or are you also embedding declines in the other components? And I have a follow-up on the cost side. The $400 million that you were expecting, is that based on spot or you're also using the curve as you normally do?

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

Andrea, thank you for the question. In regard to our sales outlook on organic sales growth of minus 3% to plus 3%, that assumes very similar to what Peter and I were talking about, good solid performance. On our household essentials and international portfolio that I expect positive sales growth there. I do expect our Health & Wellness segment to be down for the year. And that's primarily driven by the demand moderation, we expect, particularly including disinfecting. And folks, you have to remember, if you think about the lapse we have this year, last year in both Q1 and to a lesser extent Q3, we had both the Delta and Omicron variance spreading in the U.S., and we had very strong performance in the prior year.

So we have to lap that in addition to some moderating consumer behaviors. And as a result of that, we think the Health and Wellness segment will be down in sales for the year, but that's really driven by the category much less so based on the strength of our business. Just Andrea, as an example, if you think about Q1 last year, very strong performance for our cleaning and disinfecting business. And in fact, our wipes business on a unit basis, that business was up over 50% in Q1 of last year. So we have to lap that. And you may have seen in my prepared remarks, as a result of that, we think our cleaning and disinfecting business will be down double digits in Q1 and why we think overall sales for the company will be down high single digits. It's really driven by the lap of Q1 in the previous year. And then we expect to see stronger performance as we move forward.

[Andrea Teixeira, Analyst at JPMorgan Chase & Co.]

And on that sort -- sorry, go ahead.

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

I just say then on the $400 million worth of input costs we're projecting this year, we base that on what we expect, not just on spot rates, but looking forward where we expect commodities to migrate over the course of the year. And as we think about how that will phase into our results, we expect cost inflation to be the highest at the beginning of the year and then moderate as we move through the year.

[Andrea Teixeira, Analyst at JPMorgan Chase & Co.]

That's super helpful. And just a follow-up on that. Like, what is your visibility as you said, like we use forward curve, but you have some visibility into the first half, correct?

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

We do, yes.

[Andrea Teixeira, Analyst at JPMorgan Chase & Co.]

So the only thing that's really more forward is more in the second half?

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

Yes. I mean I'd be careful that we have visibility to forward curves for many of our commodities. But keep in mind, the level of volatility that we continue to see, while there's many outside resources that project commodity inflation and forward curves. I have found in this environment, they are difficult to use as certainty. We've seen quite a bit of variability on the services we use. And I think that's true for most folks. And so we have visibility to what we believe how commodities will play out over the course of the year. But I'm a bit cautious with suggesting that we have certainty in the first six months.

[Andrea Teixeira, Analyst at JPMorgan Chase & Co.]

Got it, Sir. Thank you. I'll pass it on.

[Operator]

Our next question comes from Chris Carey of Wells Fargo & Company. Your line is open.

[Chris Carey, Analyst at Wells Fargo & Company]

Hey, Everyone.

[Linda Rendle, Chief Executive Officer at Clorox]

Hey, Chris.

[Chris Carey, Analyst at Wells Fargo & Company]

Can I just confirm that just the commentary around sales that you expect the health and wellness business sales to be down for the year, but the rest of the business is to be up. So I just wanted to confirm these prior lines of questioning. And then just from a gross margin perspective, you've given some good detail around the makings of the bridge for fiscal '23. Kevin, I wonder if you could perhaps provide a bit more context on the contributing factors between pricing, volume deleverage? You noted $400 million of cost inflation, is that all commodities? Or are there other non-commodity cost buckets within that? Any promotional activity, transportational logistics? You see what I'm getting at. I wonder if you could just maybe contextualize some of these key buckets and where you see the most risk or not?

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

Chris. Yes, happy to provide some additional insights into the where we see the cost inflation occurring and then our plans to grow margin. On your sales question, though you are correct, our expectation is the Health & Wellness segment will decline this year, offset by growth over the rest of our portfolio. And again, as I mentioned, we feel very good about the overall health of our business, but recognize as both lapping the strong performance we had last year, plus the moderating demand by consumers and cleaning and disinfecting that, that will have a negative impact on the category for the year. In regard to the cost inflation, the $400 million I mentioned is cost inflation across the entire supply chain that includes commodities, transportation, wage inflation.

We are expecting broad-based inflation across the entire supply chain. And in regards to what we're doing to offset that is as you folks know and we've talked quite a bit about this, our commitment remains that we intend to get back to a pre-pandemic level of gross margin. We lost about 800 basis points last year, and our goal is to build that back over time. As we've said, I think, very clearly, we don't expect to do that in one year, but we expect to make progress this year, and then we'll continue to work at that. We are pulling every lever available to us. And so Chris, you think about the areas that we're pursuing that will drive that benefit this year.

For us, the biggest lever we're pulling is pricing. We have executed now three pricing actions. two went into effect last year. The third price increase just went into effect last month. That will have the biggest benefit we expect on our cost structure this year in the 500 to 600 basis point range. We expect to get a benefit this year. A little higher in the front half as that pricing builds. And then as we start to lap some of the actions we took last year, it will start to dissipate a bit. We're also driving our cost savings program, and we expect to have a very strong year this year. It's been more difficult over the past two years given the work we've been doing to try to keep up with demand as demand has moderated and we have been working on our supply chain. We have more opportunity to drive cost savings within our supply chain. So I expect to have a very strong year this year, 150 to 175 basis point range. And so those will be the two biggest drivers of helping us rebuild margins, and then that's going to be offset by ongoing cost inflation both in commodities, manufacturing and logistics.

And then you may have seen it, Chris, in our prepared remarks, but the other item I'd point out is, while we expect to improve gross margins, we're talking about 200 basis points this year, I think you'll see that build as we move through the year. We're going to be most challenged in Q1, given the decline in the top line, and that has an operating deleveraging impact on margins. And so we expect our gross margins to be about 35% in the first quarter, but they not expect to build as we move through the year with the expectation we're going to be approaching about 40 basis points by the time we get to the end of the year. And for perspective, we've lost about eight margin points last year. Our run rate as we get through the year, we think we'll put about half of that back on as we move into fiscal year '24. And again, we remain committed to continuing to pursue margin expansion beyond this year.

[Chris Carey, Analyst at Wells Fargo & Company]

Thank you so much for that, Kevin. This is -- this should be a quick one. But the health and wellness declines you're expecting. Can you just offer a quick comment on the professional business, clearly, quite challenged this year. Are you expecting that to continue? Or as we've normalized the sales base, you expect that business to get back to growth next year? Thanks for all that.

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

Sure, Chris. On our Professional Products division, I'd say overall, we expect modest growth. I think that will build as we move through the year as we get past some of the comps, and we get back to sort of a new level of performance. And particularly as you think about occupancies and professional environment starting to pick up, we think over time, we'll get back to growing that business and likely in the back half of this year and then growing overall for the year.

[Chris Carey, Analyst at Wells Fargo & Company]

Okay. Thank you very much.

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

Thanks, Chris.

[Operator]

Our next question comes from Kaumil Gajrawala of Credit Suisse. Your line is open.

[Kaumil Gajrawala, Analyst at Credit Suisse Group]

Hi. Thank you. Hey, everybody. Can you talk a bit more about the streamlining program? And maybe more specifically, what you'll be doing differently, how we should be thinking about what impact it may or may not have in the short run on top line? And when we think about you raising your long-term algorithm of 3% to 5% on the top line, in the context of what we're now seeing, is there something we should be just thinking about in terms of your ability to achieve that over the long run?

[Linda Rendle, Chief Executive Officer at Clorox]

Sure. Hi, Kaumil. I'll start with the streamlining. So this is our next step in one of our strategic choices connected to our IGNITE strategy, which is to reimagine work. And back when we released our strategy in 2019, we articulated that we wanted to be a faster and simpler company. And this is the next evolution in that. We're already a pretty efficient company, but we think we can be even more efficient. And these changes will help us meet that algorithm, that sales growth target of 3% to 5% and growing profitably over time as we return margins back to their pre-pandemic state. And what we're really trying to do through this model is get closer to the customer and closer to the consumer so that we can anticipate their needs better, move more quickly and have the entire organization focused on the business unit priorities and having end-to-end visibility.

We expect to implement this beginning in fiscal year '23 coming up here in the end of Q1. We expect to save $75 million to $100 million over the two years that we'll implement this. That will be an annual savings once we have it fully implemented. And we, over time, the combination of this with our digital transformation will really set us up for that goal of having an organization that moves much faster, much more simple and will support getting -- we're targeting about 13% as a percent of sales from an S&A perspective with those two initiatives combined over time.

[Kaumil Gajrawala, Analyst at Credit Suisse Group]

Got it. And this is subject to your typical productivity savings? I'm sorry about that, but...

[Linda Rendle, Chief Executive Officer at Clorox]

That's right.

[Kaumil Gajrawala, Analyst at Credit Suisse Group]

Right in your gross margin bridge, you often give the benefit of savings. This is separate and additional, correct?

[Linda Rendle, Chief Executive Officer at Clorox]

That's right, Kaumil. This is incremental to that.

[Kaumil Gajrawala, Analyst at Credit Suisse Group]

Okay. Great. Sorry. You were saying...

[Linda Rendle, Chief Executive Officer at Clorox]

I want to move to the question on long term on 3% to 5%. So on the 3% to 5%, we still remain committed to that, and we see line of sight to that, but it's not going to be linear to get there. And Kevin did a good job articulating what some of the factors are that we're dealing with in the short term, and it really has to do with demand normalization and lapping COVID impacts. Back a year ago, we thought that COVID was -- the worst of it was behind us before we entered fiscal year '22. We thought inflation was transitory and that has turned out to be a much longer headwind that we're facing. And if you look at what we experienced from COVID last year, as Kevin said, we had two of the biggest COVID waves, both Delta and Omicron impacting our business.

So we have to lap that and get to a more normalized state. We expect that to happen over the course of fiscal year '23. We have some other businesses that are doing some normalization. Kingsford is a good example. It was one of our fastest-growing businesses, and that's normalizing. But really, Health & Wellness is the biggest portion of that. And as Kevin articulated, we expect the broad portfolio to be growing, and we expect Health & Wellness to be down next year as a result of this normalization. But as we look at what we delivered, for example, in Q4, our businesses from an organic sales growth perspective ex the Health & Wellness in the segment grew 5%, so well within our algorithm. If you take a step back and look at the last three years, our business is in aggregate averaged 5% CAGR over that period of time from a growth. So we are in a period of normalization.

That's the biggest factor, but we remain confident in our ability to deliver those 3% to 5%, and are really happy with the strength of our brands right now. 75% of our portfolio deemed superior by consumers. Pricing is going as planned. And we anticipate that it will continue to go as planned in the early insights that we have as we've implemented our third round in July. And what we're just watching really closely is the consumer and watching this environment for them. And we will make adjustments to our plans as needed, but we're heading into the period with strong brands, rebuilding margins so that we can continue to invest. And we're just going to be as nimble as we can to react to a really volatile and changing environment.

[Kaumil Gajrawala, Analyst at Credit Suisse Group]

Okay, great. Thank you.

[Operator]

Our next question comes from Jason English of Goldman Sachs. Your line is open.

[Jason English, Analyst at The Goldman Sachs Group]

Hey folks. Thanks for taking me in.

[Linda Rendle, Chief Executive Officer at Clorox]

Hey, Jason.

[Jason English, Analyst at The Goldman Sachs Group]

Kevin, the $400 million of incremental cost pressure, I think you said is not just commodities, but it's supply chain as well. A, can you confirm that? And b, I think many of us, myself included, were expecting to see a very big offset come as you in-sourced a lot of the product. Does that $400 million include that offset? Or is that also captured somewhere else?

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

Jason, yes, thanks for the question. The $400 million does include supply chain inflation broadly across the entire supply chain, not just commodities. And so that will be -- we're looking at increased transportation costs, increased wage costs. We have built in these savings as we've exited these contract manufacturing agreements. We've now stepped out of all the agreements that we intend to step out of. It is contributing to our growing gross -- our plan to grow gross margins this year. And so our pricing actions, our cost savings, plus stepping out of these arrangements are all contributing to offsetting the cost inflation we're dealing with. Beyond the cost inflation, though, the other item impacting manufacturing and logistics is volume deleveraging. So as we're taking quite a bit of pricing, volume will be down for the year. That does have some negative impact on manufacturing logistics. But it's being offset to a certain degree by the exiting of those copack agreements. So that is all included in our bridge.

[Jason English, Analyst at The Goldman Sachs Group]

Understood. That's helpful. And gosh, I have a lot of questions, but I'm afraid I'm going to have to burn one on a simple modeling math question because I've loaded up my model here. I'm still having a hard time getting down to your EPS that you've guided to, despite seemingly getting like the gross margin, the other spend levels right. Interest expense is less variable. Like what are you assuming on interest expense? And do you have a sharp uptick coming with -- maybe with the higher rates?

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

We don't, Jason, we just recently refinanced debt maturities coming due over the next several years. And so this last quarter, we called $1.1 billion in debt, refinance that at a slightly lower interest rate, a modest savings in terms of interest expense. The other thing I might point to on a reported basis, if you look at other income and expense, typically, we have about $30 million to $40 million worth of charges related to intangible amortization. And then related to the operating model redesign we talked about today, we baked in about $35 million worth of restructuring charges that will show up in other income and expense as well. It's about $0.20 is our estimate. So that may be something else you'll look at in your model.

[Jason English, Analyst at The Goldman Sachs Group]

Understood. Thank you. I'll pass it on.

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

Thanks, Jason.

[Operator]

[Operator Instructions] And we have a question from Dara Mohsenian of Morgan Stanley. Your line is open.

[Dara Mohsenian, Analyst at Morgan Stanley]

Hey, good afternoon guys.

[Linda Rendle, Chief Executive Officer at Clorox]

Good afternoon.

[Dara Mohsenian, Analyst at Morgan Stanley]

Can you talk a little bit about pricing from here? Obviously, you've implemented some pricing this summer that hasn't been realized through the P&L yet. So that's to come. But as you look going forward, are there plans for any incremental pricing just given the gross margin compression over a three year period, even with the rebound expected in this upcoming fiscal year? And how do you think about that line item going forward in terms of price increases versus maybe mix pack size changes, etc?

[Linda Rendle, Chief Executive Officer at Clorox]

Sure. Just a reminder for everyone, we just implemented our third significant round of pricing in July, and that is flowing through now to your point, and is on track to our expectations. And that was our largest price increase of the three that we have taken over the last 12 months, and it's on track. We do anticipate taking additional pricing as part of our plan, and that will come in different forms, whether that be truckload increases or price pack architecture, which will start to begin in more earnest in fiscal year '23, as we've discussed before. And what we're watching right now is the reaction to July, it's too early to tell. That is just hitting the market now, and we want to get through a purchase cycle with the consumer to see how they're reacting. And as Kevin highlighted, we had seen our historical price elasticities not play out over this last year.

They were slightly better than that historical elasticity that we had experienced, but we're expecting that to return in fiscal year '23. So elasticity is slightly worse and better in line with what we saw pre-COVID given the level of pricing and given what's going on with the consumer. So we'd anticipate that they will continue to be on track. Our categories remain healthy, but we're going to watch that very closely, and we will adjust any plans that we have as needed to adjust that. But largely we expect to continue to use pricing as a lever to grow gross margin not only through July but across the year.

[Dara Mohsenian, Analyst at Morgan Stanley]

Okay. Thanks. And then just a detailed question. The streamlined operating model, how much savings do you have embedded in guidance in fiscal '23? Is that savings more likely to play out in fiscal '24? Or is there a decent chunk of it in fiscal '23?

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

Dara, as you may have seen, we are projecting $75 million to $100 million of savings over the next 18 to 24 months. We are expecting about $25 million worth of savings this year as we begin the program, and then that will continue into fiscal year '24.. And in terms of as you're modeling both the onetime restructuring charge, typically, those charges come first. So I'd expect more restructuring charges in the front half of the year and then the savings start to occur in the back half of the year and then continue into next year.

[Dara Mohsenian, Analyst at Morgan Stanley]

Thanks.

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

Yup. Thanks, Dara.

[Operator]

We have a question from Kevin Grundy of Jefferies. Your line is open.

[Kevin Grundy, Analyst at Jefferies Financial Group]

Great. Thanks. Good afternoon, everyone. I wanted to pick up on trade down risk. Linda, I think you mentioned a handful of times about how the consumer is behaving and we see that, right? And increasingly, I think, across the categories. As we look at the syndicated data for Clorox, we're seeing private label pickup share across all of your key categories: trash bags, bleach, wipes, [Indecipherable] dressing, charcoal, etc. I think a notable nuance with this has also been the price gaps have narrowed given some of the timing in terms of when you have moved versus private label as well. So we've seen some of this share loss or share gains for private label, while price gaps have narrowed for Clorox versus private label, which is a bit perverse.

And I think, Kevin, you also made the comment that you expect with some of this pricing that the price gaps will return to more normal levels. So that is to suggest that the price gaps will widen, which then, in theory, for more price-conscious consumer could perpetuate some of the share issues that you've seen in your portfolio. So that's all sort of a big wind up, Linda, I guess, for how worried, I guess, how did you contemplate what you're seeing with the consumer and some of these dynamics as you pull together the outlook. Maybe just comment updated thoughts on trade down risk, where you are with price gaps, where you think you're going to land, etc? Thank you.

[Linda Rendle, Chief Executive Officer at Clorox]

Sure, Kevin. Thanks for the question. So maybe we start with your private label share question and talk a little bit about what we're seeing there, and we can get into the broader piece around what does that mean and what are we seeing more broadly in trade down. So as we've spoken about before, the dynamics as you look at any time period in scanner data right now, it's difficult to parse out because you have many factors depending on the category: normalization; the timing of pricing which you already hit on, which is exactly right; supply normalization, etc. So I would caution that looking at any small portion of time to get to a conclusion one way or the other, you have to get to a bit of the nuances.

As it relates to private label in our categories, a good portion of that is the timing gap in pricing. So we've seen private label go a little faster in some of our categories. You called that out, and it's true in trash and bleach in particular. In wipes, it is more about normalization. And so wipes in that time period for Q4, private label grew five share points, we grew six. So it's not coming from us. And if you look at Charcoal, another example where there's a different nuance, we grew share all outlets as consumers move to some channels and bought some larger sizes even then we were down slightly in LouLou. So I think, again, it just speaks to the dynamic nature of what we're experiencing right now.

And you're right, as we return our price gaps to more normalized levels, which we continue to expect, and as we implement our July price increase that is in market now, and again, as a reminder, it's our largest price increase, we do expect to be back to more normalized price gaps. And you'll start to see that flow through in share. Right now, we have very strong volume shares, for example, and we expect that to translate to dollar share as that flows through. And then your larger question on trade down. We are not seeing any significant trade down as it relates to trading into private label, given the dynamics I just covered, I think that's clear that there's some other things going on there.

But we are seeing some trade down within our own portfolio, for example, and we would have anticipated and expected this, and we're working this as part of our sales plan. So for example, we're seeing consumers move to some opening price points. They still want the branded player, but they are -- don't have a lot of out-of-pocket and so they are buying a smaller size. We're also seeing consumers trade up to larger sizes to get the very best price per ounce. And we're working with retailers to ensure our assortment is right to capture that. We've seen that in other times of inflation and recession. And so we've been proactive about addressing that with our retailer partners to ensure that we have the right distribution. And of course, as you know, we are widely distributed across all channels who are ready as consumers move and ensure that they have the right level of value. So at this moment, what I would say is we are seeing some change in consumer behavior.

It's largely what we would anticipate we are not seeing a big change into private label at this moment. But again, we're focusing on the things that we can control here, ensuring our innovation program continues to activate in the market. We continue to spend on our brands. We'll spend 10% of sales on advertising and sales promotion next year, and we're proactively working with our retailers on tailored shopper plans to ensure that we're offering the right value for the moment depending on where the consumer is. And it's something, again, we'll watch very closely and we'll adjust our plans as needed if it starts to go in a different direction.

[Kevin Grundy, Analyst at Jefferies Financial Group]

Okay. Very good. Thanks, Linda.

[Linda Rendle, Chief Executive Officer at Clorox]

Thanks, Kevin.

[Operator]

Our next question comes from Lauren Lieberman from Barclays Investment Bank. Your line is open.

[Lauren Lieberman, Analyst at Barclays Investment Bank]

Great. Thank you so much. Thank you. I had two sets of questions. The first thing is just on the SG&A and as you're talking about targeting lower ratio over time and this kind of restructuring program that you're initiating. I just -- it strikes me that if anything, it has felt like perhaps Clorox has been more on the side of underinvested, not overinvested. The company has been had a hallmark of kind of running lean, go lean with a program, and that's been an approach. And so if anything, and maybe I'm off base on this, it felt like part of the problem has been being too lean that hasn't afforded you the visibility you've needed, the flexibility you've needed and yet part of this plan going forward is to get more lean on SG&A. So I would just be curious on reactions to that? And then I have a question on cash flow. Thanks.

[Linda Rendle, Chief Executive Officer at Clorox]

Sure, Lauren. So as we think about just our investment and how this fits into the overall picture that we're trying to drive with IGNITE, we were really clear in IGNITE that we needed to be simpler and faster, that was a key choice that we made under the headline of Reimagine Work. And we also said we needed to invest strongly in our business. And we took that another step further when we announced the technology transformation that we're undergoing, and the $500 million investment we're making in that program over the next several years. In addition, we've continued to invest strongly in our brands. We have invested in innovation, and innovation is a larger contributor than it was in the prior strategy period.

So I feel like we're making all of the right investments to ensure that we have strong brands with our consumers, and that is playing out in our consumer value measure, and we expect to play out over the mid- to long term in share. Certainly, this quarter wasn't the share performance we wanted to deliver. But we feel like we're headed in the right direction. But when it comes to this piece and what we want to do with the operating model, we want to make sure that we are always operating as efficiently as we can and putting the dollars where they matter in our business to ensure that we can grow our brands. And we believe very strongly that we can be more simple and fast and that will help support that 3% to 5% growth rate that we have and restoring margins.

We want to cut down on decision time. We want to ensure that the technology we put in place through our digital transformation is supported by a structure that enables it and uses it as fast as we possibly can to ensure that we're closer to the customer and closer to the consumer. So I think when you step back and take a balanced view, we are making investments in the right spots where we think they have the highest ROI, and we're ensuring that we take all of the necessary actions to reduce costs where we think that ROI is lower, and we can operate more efficiently. And I just want to be really clear, I think on your point on Go Lean. Go Lean was not a company initiative. That was an international initiative, and that was very effective for international to ensure that we reestablish the cost base of International to get to the appropriate level to grow off of.

And you can look at our international performance was very strong this year. And that was supported by getting that right structure underneath the business in order for it to grow. So again, as I step back, Lauren, I think we have investments in the right place. And we're doing everything that we can to restore margins in places where we have a low return on investment.

[Lauren Lieberman, Analyst at Barclays Investment Bank]

Okay. Great. Thank you. That's excellent color. My next question was just on cash flow. So I was curious if there's any, Kevin, cash flow metrics you could articulate that you're targeting for '23? And just in terms of inventory, right, because inventory days are still quite high. And I'm just curious, as you think through, obviously, a lot of this is going to be tied to cleaning. A lot of this is tied to exiting those -- the external supply contracts. But how should we be thinking about inventory days? And what's the right level? Are you still in the kind of low 60s and that's significantly higher than where you were pre-COVID, so just how that flows into the gross margin recovery story in '23 or beyond? Thanks.

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

Yes. Thanks, Lauren, for the question. Maybe I'll start with inventory, and then I'll get back to cash flow and our expectations this year. As it relates to inventory, I feel good about the progress we are making. If you look at the fourth quarter, we were able to reduce inventory sequentially, about $50 million from where we landed in Q3. Now part of that was what we talked about earlier as we exited these third-party manufacturing agreements, and in many cases, we maintain raw materials or finished goods at these facilities. We're able to consolidate those manufacturing nodes and reduce our overall inventory levels. And so we made good progress there. I expect this year we'll continue to make progress on inventory. Now that assumes that we see more normalization in supply chain.

Lauren, as you know, we talked in the past, we've had to hold higher inventory levels to prepare for the ongoing disruptions we're dealing with. Our expectation is supply chain will still be challenged, but certainly not to the degree we've experienced over the last 12 to 18 months. So as a result, we're going to be able to pull down our inventory levels broadly across the enterprise. And so I'd expect us to continue to make progress. I like the progress I saw in Q4. I expect that to continue in fiscal year '23, which should contribute to reducing our overall working capital. And then I think more broadly about cash. Lauren, I think this year, very similar to last year. I think in terms of cash provided by operations, we'll be in that $700 million to $900 million range. Now before our margins were under pressure, we were generating about $1 billion. So I do expect it to be lower than our historical levels because of the reduced profitability we're expecting this year. And as it relates to capex, as you know, we target 3% to 4% per year.

Now we've been a little above that in previous years that we've been making some investments to increase our production capacity. For the most part, we're through those investments, we have one last plant we're working on. We're -- as you may know, we're preparing to open up a second litter facility which we'll bring online this year. So we've got a little bit more capital spending there. But I expect we'll be in that 3% to 4% this year and probably about the midpoint of that range. And so what that means is if you think about our free cash flow goal, we target 11% to 13%. I expect this year will be below that goal, probably high single digits as we've got some reduced profitability. And then over time, I expect that to build that back as we improve profitability.

[Lauren Lieberman, Analyst at Barclays Investment Bank]

Okay. Great. Thanks so much for all the detail.

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

Thanks, Lauren.

[Operator]

We have a question from Olivia Tong of Raymond James. Your line is open.

[Olivia Tong, Analyst at Raymond James]

Great. Thanks. Good afternoon, Linda, Kevin. You have mentioned earlier that price elasticities have continued to come in better than you expected, but your outlook assumes that, that doesn't continue that they go back to the circle level. So to the extent that you do have some favorability there versus expectations, how do you think about what you do with that? Does it flow through to the P&L?

Or is there -- are there projects that you want to do to drive some return -- free up some funds to return to spending? And then just on the gross margin overall, 200 basis points expected for next year, so quarter of the way back, it sounds like you were expecting another quarter in fiscal '24. So is that the way that we should be thinking about the mechanics to get back to where you were before, just sort of like ratably fourth or fourth or fourth or fourth?

[Linda Rendle, Chief Executive Officer at Clorox]

Sure. I'll start with your question on price elasticity. So if we were to experience better than what we expect, which again is more normalized price elasticities to historical pre-COVID then that would be something that we would first look to flow through. And of course, that's because we've made all the investments that we feel we need to make at this time in the year. We're investing in advertising. We have the right promotional spending from what we can see. And of course, if there was anything that were to change that we needed to address, then we would consider that, but we would leverage that in a way to flow through. And I just want to make sure I'm really clear on that. But we'll, of course, have to see given the environment is so volatile if there was anything else to come up, we would consider it but that would be the first thing we would look to do.

[Kevin Jacobsen, Executive Vice President and Chief Financial Officer at Clorox]

And then, Olivia, on your question on gross margin and the pace of the margin recovery. As you mentioned, our expectation is we're going to improve gross margin by 200 basis points. I think important, though, is we expect that to build as we move through the year. And as I said earlier, our expectation is we're going to be close to a 40% gross margin when we end the year. So on a run rate basis, I expect to make fairly good progress this year and be in a position we've recovered a good portion of that margin decline. And then I expect that obviously to continue into '24 where the actions we'll take. Now part of the timing of our pace of margin recovery will be dictated by inflation. I would tell you, we are not waiting for cost deflation is our path to margin recovery. We're pulling every lever available to us between pricing, cost savings, the operating model changes we talked about today.

And we'll continue to do that going forward. But obviously, what the direction inflation goes could either accelerate or decelerate that margin recovery. In this environment, it's hard to look beyond this year with a strong perspective on where costs will be next year. And so that's something we'll probably have to see how it plays out a bit this year to make that call. So I think we're making solid progress this year on our commitment to rebuild margins. We're pulling every lever available to us. And I think it's a bit difficult to pick the exact time period. We'll build it back. I think some of that will be influenced by the external cost environment. As we move through the year, we'll certainly update you as we're thinking about the pace of that change.

[Olivia Tong, Analyst at Raymond James]

Got it. Thanks. And then my follow-up is on your thoughts around your trajectory on market share. Perhaps could you talk a little bit about what private label capacity looks like? And specifically in the Health and Wellness businesses. Obviously, a lot of pretty aggressive pricing and consequently a fair degree of volume degradation associated with that. So to the extent that consumers can first and foremost, stomach this much in terms of pricing, just kind of curious how you how private label capacity and their ability to step in looks as you consider these pricing and maneuvers that you're taking? Thanks.

[Linda Rendle, Chief Executive Officer at Clorox]

Olivia, I can't speak to capacity outside of our own network. But I would just say I don't think there's a capacity limiter in our categories. That's not as we have spoken about in terms of what capacity exists there. It's just timing and money. And we create differentiation, of course, on the unique products, and etc. that we offer. But what I would really return to is what we're seeing in terms of the performance of the Health and Wellness segment and our cleaning business in particular. Pricing is going out of plans. And we are seeing more than historical elasticities to this moment. Again, we are expecting that to be in a more normalized elasticity as we move into fiscal year '23.

But what we're seeing in private label is more about pricing timing than anything else. If you look at volumes, their volume shares are actually down and we are growing volume share in that last quarter. And we expect that to translate to dollar share as pricing flows through beginning this month -- or excuse me, last month, into this month and the remainder of the quarter. So shares aren't what we want them to be at this moment. And I always want to talk about the fact that share is something that we hold ourselves to and we knew quarter-to-quarter, that's going to vary, but we think we're making the right progress. The evidence of that would be our Q4 absolute share is higher than our Q3 share was. So we made progress on the absolute share number, although it was down slightly versus a year ago. We made sequential improvement from Q3 to Q4.

And again, I highlighted a few of those areas that were due to pricing timing and then some other factors where we grew very strongly, for example, in wipes and private label did as well we were up six points, they were up five points from a share perspective. So I don't see any health issue at this point in our home care categories or our cleaning categories. Elasticities, again, are playing out as we defined. And I think really, as we look to this, we will expect demand normalization to be the biggest contributing factor and that elasticities will largely play out as we expect. Again, we'll watch that very closely. But this is more about demand normalization than it is about any trade down to private label at this point.

[Olivia Tong, Analyst at Raymond James]

Got it. Thank you.

[Operator]

And we have a question from Steve Powers of Deutsche Bank. Your line is open.

[Steve Powers, Analyst at Deutsche Bank Aktiengesellschaft]

Hey, great. Thank you. And good afternoon. I guess, picking up on that thread of demand normalization, Linda. I guess I'm curious as to how you actually go about or have gone about defining what renormalized demand looks like in categories like wipes or cleaning and disinfecting more broadly and maybe how that compares to prepandemic levels? And as you talk about that, maybe you could, if possible, elaborate a bit more on the expected pacing to get there embedded in the outlook? I get the base year comparisons are going to create a lot of year-over-year volatility. But is the normalization process that you're envisioning, is that something that happens all the way through '23? Does it happen faster such that the headwinds are skewed heavily to the first half and the back half is more normal? Just how should we think about that?

[Linda Rendle, Chief Executive Officer at Clorox]

Yes, Steve. On demand normalization, we certainly are lapping impacts from COVID. But we're seeing changes in more normal behavior coming from consumers, and we're trying to understand when are we at a new normal. And it's more about lapse versus we're at that new normalization state. We saw, as Kevin and I said a couple of times, we're lapping delta right now where wipes were up from a unit base is 50% in our last Q1 and we did see a bump in Q3 as well. And so both of those will be laps that we'll have to get through. So we're talking through fiscal year '23, we would expect that normalization. We are still seeing consumer behaviors, if you look at buy rate, etc, enhanced, and we're still seeing people care about cleaning and disinfecting elevated, but definitely lower than it was at the height of the pandemic, but higher than it was pre-COVID.

So what we're trying to gauge is when does that new consumption pattern align to that desire from consumers who have a heightened state of awareness of cleaning and disinfecting and get into a more normalized routine. The other thing we're going to see how this plays out is cold and flu. Consumers have not experienced a normal cold and flu season since COVID started. So how will that reinforce consumer behaviors, and we'll experience that at the end of Q2 and through Q3. So we'll be watching that very closely. And then, of course, we're in a COVID wave right now. And so we're watching that dynamic as we lap last year's Delta wave. So I would say we are watching this throughout the year, and we'll give indicators of when we start to see that more normalized demand, but we're looking something between where we were pre-COVID, which we continue to be above that.

And what it looks like in a more normalized state when people are more aware and have a heightened concern but yet are getting into a new set of habits and routines. And we'll keep you updated as we see that and when we anticipate being in a more normalized state. But as you can imagine, given what's going on with COVID, etc, it is difficult to pinpoint exactly when that will occur.

[Steve Powers, Analyst at Deutsche Bank Aktiengesellschaft]

Yes. Okay. That's all fair. Just one other question, if I could. Going back to the new operating model. I guess I was just curious for a little history on when the initiatives that you've -- you're rolling out here in '23 and into '24, when those were -- when those began to be contemplated? Just a little bit of history on how these decisions were made? And has this been planned for a while? Is this something that is more of a recent initiative? Just a little color there would be helpful. Thank you.

[Linda Rendle, Chief Executive Officer at Clorox]

Sure, Steve. This really relates back to the strategic choice we made in IGNITE to Reimagine Work, and we wanted to be simpler and faster. And we always contemplated ways, as you would expect, you expect us to operate efficiently and be removing costs wherever we can. They were always looking at the choices across the ecosystem to say, are we getting the best return on our investment? Are there ways to do things more effectively and efficiently? We did that as we unveiled our digital transformation program. which we really needed to accelerate given the increase in digital behavior behind the pandemics, we moved that up.

And as we evaluated the environment that we see now, we want to accelerate the progress we wanted to make on Reimagine Work by making a more structural change. So that I would say it's at this moment that we think it's the right time to do that. We've got to a bit more of a steady state when it comes to supply chain, still very challenged. We're still having force majeures, etc, but it's more manageable. And we think this is the right time to take it on, but it's really a continuation of that vision we laid out in 2019 to be faster and bolder.

[Steve Powers, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. Thank you very much.

[Linda Rendle, Chief Executive Officer at Clorox]

Thanks, Steve.

[Operator]

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

[Linda Rendle, Chief Executive Officer at Clorox]

Thanks again, everyone, for joining us. I look forward to speaking with you again on our next call in November. Until then, please stay well.

[Operator]

[Operator Closing Remarks]