Clorox Q4 2023 Earnings Call Transcript

Participants

Corporate Executives

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

Analysts

• Peter Grom, UBS Group AG
• Anna Lizzul, Bank of America Securities
• Dara Mohsenian, Morgan Stanley
• Filippo Falorni, Smith Barney Citigroup
• Andrea Teixeira, JP Morgan Cazenove
• Christopher Carey, Wells Fargo & Company
• Javier Escalante, Evercore ISI
• Olivia Tong, Raymond James
• Lauren Lieberman, Barclays PLC
• Stephen Powers, Deutsche Bank Aktiengesellschaft
• Jason English, The Goldman Sachs Group, Inc.

Presentation

[Operator]

Good day, ladies and gentlemen, and welcome to The Clorox Company Fourth Quarter Fiscal Year 2023 Earnings Release Conference Call. [Operator Instructions]

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 at Clorox]

Thanks, Ross. 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 2024 outlook. These statements are based on management's current expectations, but may differ from actual results or outcomes. In addition, we may refer to certain non-GAAP financial measures. Please refer to the forward-looking statements section, which identifies various factors that could affect such forward-looking statements, which has been filed with the SEC. In addition, please refer to the non-GAAP financial information section of our earnings release and the supplemental financial 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 will turn it over to Linda.

[Linda Rendle, Chief Executive Officer at Clorox]

Hello, everyone, and thank you for joining us. We closed out fiscal year 2023 with strong results, underscoring the significant progress we've made against our strategic priorities. Over the course of the year, we've been relentlessly focused on driving topline growth and rebuilding margins in a challenging operating environment, while continuing to invest in the long-term health of our brands, categories and capabilities. Thanks to our team's strong execution across a comprehensive set of actions, we delivered on these commitments.

For fiscal year 2023, we generated net sales growth of 4%, within our long-term target; gross margin expansion of 360 basis points; and adjusted EPS growth of 24%. Our performance reflects our commitment to driving operational excellence and margin improvement, supported by the strength and resilience of our portfolio and the relevance our IGNITE Strategy. In addition to delivering results over the short-term, we made progress on our IGNITE strategy. The investments we're making to deliver consumer inspired innovation, strengthen the superior value of our brands, advance our digital transformation and streamline our operating model, are positioning us to drive long-term profitable growth.

As we look ahead to fiscal year 2024, we are clear on our priorities. While we expect the environment to remain difficult with macroeconomic uncertainty persisting, we are committed to building on our progress and have plans to enhance our value superiority at a time when it matters most to consumers. We believe these actions will enable us to continue to drive topline growth and rebuild margins back to pre-pandemic levels and put us in a position to grow share and household penetration over the long-term. I'm confident we're taking the appropriate actions to build a stronger, more resilient company positioned to win in the marketplace, deliver on our operational and financial goals and create long-term value for stakeholders.

With that, Kevin and I will take your questions.

Questions and Answers

[Operator]

Thank you, Ms. Rendle. [Operator Instructions]

And our first question comes from Peter Grom from UBS. Please go ahead, Peter.

[Peter Grom, Analyst at UBS Group]

Thanks, operator, and good afternoon, everyone. So, I wanted to ask two related questions on the topline. Maybe first, I know you called-out stronger shipments in cleaning and some early shipments for back-to-school, but the minus 2% volume performance was certainly stronger than what we can see in the tracked data. Was that largely due to the shipment timing that you mentioned or is there just strength elsewhere that's not being captured by the data?

And then just second on the organic sales guidance of 2% to 4%, you mentioned a mild U.S. recession in the back-half, you provided some color on savings, starting with mid-single-digit growth in 1Q. I just would be curious to get your perspective on the balance of pricing versus volume in that outlook, specifically as we move through the year? And do you expect volume growth at some point in the back-half? Thanks.

[Linda Rendle, Chief Executive Officer at Clorox]

Hi, Peter. I'll start with your first question, then I'll hand it over to Kevin. So, on Q4 over-delivery versus what we had expected, as we noted, we did see stronger consumption across the board across our categories in aggregate, and that's a result of two things mainly. The first being elasticity is continue to be better than they have been historically and that's an aggregate comment. And we see differences by category. But in aggregate, they are favorable. And trade promo has been normalizing at a slower pace than we'd expect. And we'll continue to see that normalize as we go through fiscal year '24. But for Q4, it wasn't to the degree that we thought it would be. So, that's the first bucket, stronger consumption.

The second is better operational performance by our team. And that's just a broad statement across the supply chain. We were able to make some supply that we didn't think we would have. Our shipments to retailers were stronger than we had expected. Just a lot of the things operationally came together with great execution and supported that growth. And then, finally in Kingsford, and we spoke about in Q3, we did not perform to our expectations in Q3. We made significant adjustments to the plan, including working with retailers on category growth plans, centered in having the right merchandising and those performed significantly better than we had expected, which was great to see. The consumer reacted very favorably and retailers executed with excellence. And those are really the big three main buckets between what we saw and what we expected.

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

And Peter, I can talk about the -- our plans for fiscal year '24 as it relates to sales. And as you saw, we're projecting 2% to 4% for the year. If you think about the front-half and the back-half, our expectations are sales to be closer to mid-single-digits in the front-half -- excuse me, and then low-single digits in the back-half. And that phasing from front-half to back-half, I'd call-out a few items. The first is, as you saw in our prepared remarks, we're projecting a mild recession in the back-half of our fiscal year, which would be the front-half of calendar year '24. So, I think that will put a little bit of pressure on consumers and our categories, and we've reflected that in our outlook.

The other item to be aware of is, we are now going to lap the four rounds of pricing we've taken when we get to the middle of the year. So, that fourth price increase we took last December, we will lap that when we get halfway through the year. So, the second-half of the year, we'll now have lapped all the pricing we've taken. So, as a result of that, what we expect to see is, you'll see improving volume trends as we move through the year, and you'll see the benefit of price mix larger in the front-half and then really start to tail-off in the back-half.

And so, as we get that low-single-digit growth. it'll be a combination of some price mix, because we're still doing a little bit of pricing internationally, improving volume trends, but recognizing we still think it's going to be a difficult economic environment for consumers.

[Peter Grom, Analyst at UBS Group]

Thank you, guys. I'll pass the line.

[Operator]

And our next question comes from Anna Lizzul from Bank of America. Please go ahead, Anna.

[Anna Lizzul, Analyst at Bank of America Securities]

Good afternoon, and thanks very much for the question. In your fiscal '24 guidance, you're are expecting flat to 2% net sales growth. This is a little bit below your long-term algorithm from your IGNITE strategy of that 3% to 5% annual sales growth. I was wondering if you can comment on when you expect to return to the 3% to 5% net sales growth on a more normalized basis? And in addition, what do you see as the drivers have really achieving that sales growth longer-term? Thank you.

[Linda Rendle, Chief Executive Officer at Clorox]

Yeah, 2% to 4% organic sales growth and 0% to 2% from reported is what we're expecting now, and that is slightly below what we want from a long-term perspective. But just to put that in perspective, of course, if you look at our four-year CAGR in our strategy period, we did deliver in the midpoint of that range at 4% and again 4% this year. This year coming up is kind of a tale of two halves, is the way I would talk about it and we expect stronger growth in the front-half as we continue to lap the two price increases that we have. And then in the back-half, we expect it to get tougher for consumers. And right now, our expectation is a mild recession.

So, when you put those things together, I think, in aggregate, we feel good about the topline that we've committed to. In addition to that includes about 1 point of a headwind from our Vitamins, Minerals and Supplements business. As we spoke about over the last couple of calls, we have reengineered that plan to focus more on profitability and we've done that at a trade-off from a topline perspective. So, that does include a 1 point headwind and over time, we would expect that, that wouldn't be the case, and that would help us return to getting in within that 3% to 5%.

The way I would think about this as we march through the year, we are expecting again lapping two price increases, we are expecting our elasticities to be more normalized as we go through the course of the year, we're expecting trade promotion to normalize as well, and then we're expecting a mild recession in the back-half. Those are all of our assumptions in forming that growth. And if those come true, we feel this plan is a very balanced plan. But we'll be watching really carefully as we move through the year if any one of those assumptions change and we need to adjust our plan that could impact both on the high-end and the lower ends of us delivering against what we put out there from an outlook perspective.

[Anna Lizzul, Analyst at Bank of America Securities]

Thank you. And just wanted to ask a follow-up. Just on marketing spend versus promotional levels, you've mentioned that advertising as a percent of sales, you intend to spend about 11% in fiscal '24 versus about 10% in fiscal '23. Do you feel this is the right level of investment, given the ramp in marketing spend versus some peers in this space? And also just in terms of the balance of advertising spend versus promotional levels in fiscal '24, it does sound like you're ramping back up on promotional levels and is this an intention to get back to pre-COVID levels of promotion as well? Thanks.

[Linda Rendle, Chief Executive Officer at Clorox]

Sure. So, on the marketing spend, as you rightly noted, we spent about 10% of sales on advertising and sales promotion over our history. And there's times we spent more than that. This year, we're targeting 11% and we think that's a prudent investment, given the pressure the consumer is going to be under from a macroeconomic perspective, the fact that we are coming off of four rounds of pricing, significant price increase, obviously, cost justified, but we want to continue to support the consumers as they transition through that. And so, we think 11% is the right number.

And two data points that give us confidence that 11% is the right number, during the pandemic, we took our advertising spending up, even in a time when we couldn't fully supply. That increase in advertising led to stronger superiority ratings for our brands and that gave us the confidence to take the four rounds of pricing that we took. So, we think, again, in a time where consumers are pressured and stressed, I'm investing that additional point of advertising makes a lot of sense. And then the second data point I would give you is that we've been on a journey to get to know 100 million consumers in the U.S. and that allows us to personalize to them. This was part of our IGNITE strategy. We've nearly met that goal and that has led to a return on investment and our advertising being the highest it ever was. We reached a high point this year. So, we feel really good about putting that extra point in, because we know what we're going to get from a returns perspective in addition to supporting the superiority of our brands.

And again, we'll continue to evaluate this moving forward, doesn't mean it will necessarily be 11% the year after. This is really a roll-up of what we think our general managers need to best support our brands during this time.

And then from a promotion perspective, promotions continue to be lower than they were pre-pandemic, but are ramping-up. Our expectation is throughout the course of the year, we'll return to more normalized promotions, so similar to what we were pre-pandemic. And we've assumed to be fair though, this year it would ramp-up faster and it hasn't. But based on what we're seeing in the data, we think that's a fair assumption. And again, we wouldn't be targeting going beyond what we were pre-pandemic, but just returning to those levels that we had. And for our categories, that still means the vast majority of our sales are done off-the-shelf with no price reduction, most of this is good quality merchandising, targeting the consumer around key pulse points etc.

So, we think those in combination are the right level of spend, given the consumer dynamics, given what we see from a return perspective and what we think is needed to grow categories and to grow share over the long-term.

[Anna Lizzul, Analyst at Bank of America Securities]

Great, Very helpful. Thank you very much.

[Operator]

And our next question comes from Dara Mohsenian from Morgan Stanley. Please go ahead, Dara.

[Dara Mohsenian, Analyst at Morgan Stanley]

Hey, guys, good afternoon. So, I just wanted to touch on the fiscal '24 guidance. You're assuming gross margins come in well below the fiscal Q4 level and the level in the back-half of the year. And then you've got $200 million of higher costs you mentioned in prepared remarks. First, can you just give us some more details specifically on that bucket and what's driving cost increases.

And then, b, just as you think about it conceptually, the lack of sequential progress versus the back-half of the year. Obviously, it's up year-over-year for the full-year. Just I'm wondering how that fits in with your goal to eventually move back towards those pre-COVID gross margin levels and why not more progress this year, again, specifically relative to that back-half? Thanks.

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

Yeah. Happy to take those questions. Dara. And maybe let me start with cost inflation and what we're projecting for this year. And maybe if I step-back and just think a little longer-term in terms of what we've been dealing with, and you folks know, fiscal '22, a really difficult year, given the extreme levels of cost inflation, about $800 million. Last year, we experienced about $400 million of cost inflation. And this year, we're projecting about $200 million. So, sequentially, getting better, it's moderating, but we're still expecting to operate in a higher-cost environment. As we look at that $200 million of the supply chain, inflation, there's really two areas we're predominantly seeing those cost increases coming through. I would say about a third of that we're projecting will hit in commodities. There's a number of items we still seeing inflating, particularly chemicals, substrate, corrugate and linerboard, we're still looking at rising costs year-over-year. Resin, for us, we're looking as a fairly neutral cost, it came down last year and we're assuming it to be relatively flat this year. And then we are seeing some cost declines in some of our ag products and diesel. But overall, we think that bucket will be modestly inflationary.

And then the other item we're looking at really it's particularly manufacturing and warehousing, primarily driven by labor, that we continue to expect to be operating in inflationary environment. And so, those are the primary buckets where we expect to see the $200 million.

Now, on the the gross margin goals this year and the phasing of those, as you said, we're expecting to continue to make progress rebuilding gross margin. And you folks know, we've talked about this quite a bit, we're committed to getting back to those pre-pandemic levels of margin. I think we made good progress last year, we improved about 360 basis points. We expect to build on this, this year, expecting to get another 150 basis points to 175 basis points of improvement. And so, by the end of this year, assuming we deliver this plan, we'll have recovered a little over 500 basis points of that 800 we lost.

Now, in terms of phasing, I'd say Dara, typically, Clorox has some seasonality in terms of our margins. Typically, our fourth quarter is our highest-margin, and that's particularly because we deal in disproportionate amount of our Kingsford business in the fourth quarter. I think as you folks know, we sell about 50% of Kingsford in the fourth quarter and it's a very profitable business. So, that tends to generate our highest-margin. And then typically Q2 is our lowest margin point. One, because we do very little Kingsford as well as we do some -- a lot of gift packing on our Burt's business, which is a great activity to drive awareness and trial, but it comes at a lower-margin. So, you should normally think about our business, once we've gotten past the normalization and the pricing and all the disruptions, historically, Q2 is the low-point and then Q4 is our high. So, I think it's better to look on a year-over-year basis versus sequentially quarter-by-quarter.

Now, in Q1, I expect we'll make a good solid progress, now not to the same degree in Q4, 560 basis points, because we've now lapped that third round of pricing starting now. And so, you should expect it to step-down the benefit of pricing. But I expect to have a good solid Q1. And then what I expect to do is continue to advance margins on a year-over-year basis. And as we said, we're targeting to get to about 41% this year.

[Dara Mohsenian, Analyst at Morgan Stanley]

Okay. And are you assuming any incremental pricing next fiscal year? I'm assuming you're not. Is that more just a pause after all the pricing you've taken and maybe you can return later on?

And then, if I'm not overstaying my welcome, Linda, can you just comment on household penetration and your performance this fiscal year, particularly in light of the comments around the ROI on marketing being an all-time high, and the personalization reaching nearly 100 million consumers? Thanks.

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

Yeah, Dara, I can start with our pricing assumptions. In the outlook, we have not assumed any broad-based pricing in the U.S., similar to the first four rounds we've taken. Now, we will continue to price internationally because of the higher inflation rates we're experiencing there. And we also continue to focus on net revenue management activities. But in terms of broad-based pricing, we don't have anything assumed in the U.S. this year.

[Linda Rendle, Chief Executive Officer at Clorox]

And then your question on household penetration, when we've talked about this a bit over the last few quarters, household penetration, along with volume, were things what we knew were going to take a hit as we took the level of pricing we have over the last 18 months, and we've certainly seen that, and this is a category comment, not just the Clorox brand comment.

But what we tend to see is people having short-term reactions from a behavior perspective, and they adjust as they see the initial shock of pricing. And certainly they've seen four rounds, so they've had to adjust to. So, typically what we see is we see consumers looking to go to alternates. Maybe they use the inventory they have in their home. They delay a purchase cycle, they look -- they engage in value seeking behavior, they trade-up to larger sizes or smaller sizes. And in very extreme cases, they leave the category.

And then from a helpful penetration perspective, a number of those factors play in. We've seen some light users exit the category, which isn't a big surprise, it's typically what we've seen during price increases. And I think importantly to note, again, this is a category behavior, not a Clorox brand's behavior. And then, what we're focused on, of course, is over time, returning to that household penetration. And I think it's important to put in perspective, we're still in nine out of 10 U.S. households with our portfolio. But we want to be in a place where we're growing household penetration again. So, what I would what I would think about is all the investments that we spoke about a little earlier, increase in advertising and sales promotion as well as our focus on innovation and category growth plans, are all in service of returning to volume growth, returning to household penetration growth, and then, of course, our aim over the long-term to grow share. I mean, we would expect household penetration to begin to improve as we get through pricing and as we move through the course of the year and then through the course of our plan. But what I would say it's very in line with our expectation and we feel good about the plans we have in-place to continue to make progress on household penetration in fiscal year '24 and beyond.

[Dara Mohsenian, Analyst at Morgan Stanley]

Thanks.

[Operator]

And our next question comes from Filippo Falorni from Citi. Please go ahead, Filippo.

[Filippo Falorni, Analyst at Smith Barney Citigroup]

Hey, good afternoon, guys. Just wanted to ask a question on gross margin, again, following-up to Dara's question. What drove the outperformance relative to your plan in Q4? It seems like cost savings came in well ahead of expectation and it was a record year for you guys, particularly Q4. And how much was the incremental volume leverage from the better volume trends?

And then as you think about next year, how should we think about cost savings, is it, like, also another year above algorithm? Thank you.

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

Yeah, thanks, Filippo, for the question. As it relates to Q4, and you're right, the over-delivery on gross margin versus our expectation. We went into the quarter targeting 40% to 41% gross margin. And as you saw, we delivered just under 43%. I would say, for the most part, as you look at the various drivers within gross margin, they are generally in line with our expectation. That was certainly true for cost savings, pricing and commodities. The biggest variance was our topline performance and particularly on volume. And so, volume declined 2% for the quarter. We had projected a larger volume decline in the quarter. And as a result of that, we've had improved operating leverage, that really flow through the entire P&L. It certainly benefited gross margin, but it also was the primary driver of our very strong earnings performance for the quarter.

And then as we go forward, and on your question on cost savings, look, our team did some just terrific work this year. We target 175 basis points of EBIT margin expansion each year through cost savings. In fiscal year '23, we delivered well north of 200 basis points. And that's really a credit to the team and the work they're doing to drive costs out of the system. And I fully expect to have a very strong year this year as well. So, I would expect this year will have another strong year, that's probably north of 200 basis points. And that's incredibly important, because as we said, we continue to operate in an inflationary environment. And for us to continue to grow margin, it's really based on the good work our team is doing both on driving cost savings and driving the supply chain optimization work we're doing, and that's allowing us to absorb that increased inflation and continue on our progress rebuilding margins. So, really good work by the team and exceeded our goals both last year and expect to do it again this year.

[Filippo Falorni, Analyst at Smith Barney Citigroup]

Great. That's super helpful. And then a high-level question, Linda, just in your guidance on topline, you mentioned you expect a sequential improvement in volume throughout the year. Just what gives you guys the confidence of the volume coming back other than, obviously, the comparisons? But like at a high-level, is it about incremental advertising investment or any other specific point that you can point to give us some confidence on the volume improvement? Thank you.

[Linda Rendle, Chief Executive Officer at Clorox]

Yeah, you want volume -- maybe just to take a step-back, I think, it would be helpful and talk a little bit more -- similar to my comments on household penetration of what impacts volume and then what we believe will see over time as we return to more volume-based growth from more pricing-driven growth. So, the big-picture on this, we knew we were going to make a volume trade-off with the level of pricing that we took. And certainly that pricing was cost justified. And I think that's the right trade-off, given the fact that we were able to deliver the topline and margin progress that we committed to. And it's only one lever that we look at it, understanding brand and category health.

So, if we look at volume, again, what impacts it. Consumers are adjusting to pricing right now. And we still have two price increases that will lap here in Q1 and Q2. And so, they are still adjusting to what the pricing is. And they're adjusting to pricing well beyond our categories. I think it's also important to note, there is an element of cross elasticity here. Everything in their world has changed from a wallet perspective. And they also just came through a pandemic and they want to have experiences. So, we're watching that consumers settle out. And what we're seeing in our data is volumes are beginning to improve. You saw that, if you looked 52 weeks, our volumes were down more than they were in the latest 13 weeks for example. So, we are making improvement. We still have to lap those two price increases.

But from a consumer behavior standpoint, what you'll see is consumers will return to their old routines, because those routines were the most efficient and effective for them, in particularly, in essential categories. They don't want to have to work harder to do the stuff. So, perhaps they run through the inventory they have in their house, maybe they tried an alternative and it doesn't work as well, and we tend to see those people start to come back. We also saw those light users at the category loss tend to come back again, because we reintroduced our products to them through innovation. We use our advertising spend to talk to them about the benefits of the product, we remind them that, and they pick us up again, as they send their child back-to-school or if their family experiences a run of cold and flu in the house. So, those moments, we tend to bring those light users over and volume tends to grow again. And we've seen that every time we've taken the pricing and that's consistent in categories.

I think what's unique for this time is, the amount of inflation our industry and Clorox experienced specifically is unprecedented. We certainly not taken this level of pricing. So, it really will be about the pace that this happens at, but we're happy with the progress we've made so far. We think we have the right plans in-place, we're making the right investments. Our brands are still a superior value versus what they were pre-pandemic, so they are very strong. And we believe over time and again, we will make progress on volumes and return to more volume-based growth moving forward.

[Filippo Falorni, Analyst at Smith Barney Citigroup]

Great. Thank you, guys.

[Operator]

And our next question comes from Andrea Teixeira from JP Morgan. Please go ahead, Andrea.

[Andrea Teixeira, Analyst at JP Morgan Cazenove]

Thank you. Good afternoon. Hello, everyone. My question is on the shipments and consumption, trade-off, if there is any tradeoff. You mentioned volumes came in better-than-anticipated, Linda, and was driven by -- was it driven by consumption or do you think retailers were also rebuilding inventory given that consumption was better than feared? As you exit the quarter, do you feel inventory levels are where they should be?

And then related to that, I also have a clarification on the assumption for the mild recession for the second-half. And in your comments about like volumes coming in slightly better-than-anticipated. So -- but on top of that you said category behavior has been changing. Is that some more price elasticities that you saw towards the back-end of the quarter or are you exit rate on the quarter or are you just assuming prudently that at some point, you're going to see the historical price elasticities one-to-one kick in?

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

Hey, Andrea, let me maybe start with your shipment consumption question. And then, Linda can dress price elasticities. As it relates to the fourth quarter, I think, there's a few things we are seeing and I'll talk both versus our expectations and on a year-over-year basis. Versus our expectations, as you know, we had anticipated about 3% to 6% organic sales growth and we delivered much stronger growth in the quarter, that was primarily driven by consumption coming in stronger than we anticipated. So, the consumer is still quite resilient and we haven't seen any drop-off in consumption as we look Q4 to Q3 and we expect that we might see some drop-off in consumption and that didn't materialize.

And then the other driver of our performance was Kingsford. And as you know, we talked quite a bit about that last quarter. We were disappointed with the results in the third quarter. We made some changes to our plans. And I would tell you we are a bit cautious on what exactly we'd be able to accomplish in the fourth quarter. But a credit to our team, we had very strong execution. That business grew both volume and double-digit in sales, so had a very strong performance. And that was the primary drivers to the over-delivery.

The other element to think about though as it relates to inventory, we think retailers generally have the right inventory levels. But one of the reasons we had very strong growth on a year-over-year basis is, if you think about last year, retailers were reducing inventory levels. And at the time, as we were all getting more comfortable with the resiliency of the supply chain, everyone was starting to take-down their safety stocks. And we saw that last year with retailers reducing inventory. And if you think about what's really happening when they do that, what that means is, retailers continue to sell to their customers, but they don't reorder from the manufacturers, so they're still selling product and not not reordering from us. And so, last year our shipments lagged consumption. This year, as you fast-forward, we saw our shipments much closer to consumption, because retailers are not adjusting inventory levels. So, on a year-over-year basis, that drove much stronger performance. That was particularly true in our homecare business, where we saw inventory reductions a year-ago. We saw -- and particularly in wipes, we saw very strong wipes shipments this Q4, which was really now we're shipping in line with consumption, which was not the case a year ago. And that really contributed to very strong year-over-year performance in that 14% growth.

And then, Linda, I know she can speak to the elasticities.

[Linda Rendle, Chief Executive Officer at Clorox]

So, on elasticity, what we saw in Q4 specifically was continued in aggregate lower elasticities than pre-pandemic and lower than we had expected. Again, this is nuanced by categories or some categories that are less favorable, etc. But in aggregate, our elasticities were more favorable than we expected. What we expect to happen in fiscal year '24 is over time, those elasticities return to more normalized levels, and it's not anything related to particularly our categories, but just the broader pressure the consumer is under. So, if you look at what's going on, certainly, balance sheets for them are returning to pre-pandemic levels, particularly savings rates, where the consumer had a lot of excess savings over the last few years.

Right now, we are anticipating a mild recession in the back-half. We think that's the most prudent plan based on what we're seeing for our economic predictions in the U.S., that will put up additional pressure on the consumer as well. And we think those factors in combination will lead to more normalized price elasticities and that's what we have assumed in the plan.

[Andrea Teixeira, Analyst at JP Morgan Cazenove]

That's helpful. And on the -- just a clarification, the impact of the inventory write-down -- not write-down, but inventory rationalization last year, was it like a low-single-digit headwind, that then disappear this year or normalized?

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

Yeah. Andrea, you're exactly right. Last year, we anticipated there was a couple of point headwind as a result of the inventory reductions at retailers. And so, we didn't have that impact this year. So, year-over-year, that's a source of benefit and part of the 14% organic sales growth we delivered this year. Part of that was driven by lapping that inventory reduction in the prior period.

[Andrea Teixeira, Analyst at JP Morgan Cazenove]

Super helpful. Thank you. I'll pass it on.

[Operator]

And our next question comes from Chris Carey from Wells Fargo. Please go ahead, Chris.

[Christopher Carey, Analyst at Wells Fargo & Company]

Hey, everyone.

[Linda Rendle, Chief Executive Officer at Clorox]

Hi, Chris.

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

Hi, Chris.

[Christopher Carey, Analyst at Wells Fargo & Company]

Just one quick follow-up on the gross margin assumption. Kevin, you said in the prepared remarks that commodities would still be a bit inflationary. What are those commodities? I know there's always a lag, but I'd just be curious, where you're seeing that, just given the favorability that we can see on this side. Then I have a quick follow-up.

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

Sure. Chris, as it relates to commodities and within that $200 million, we said about a third of that we see is coming from commodity inflation. So, that would be roughly $60 million or so. I would say there's a few areas. We're seeing substrate, some chemicals and some corrugated linerboard inflating year-over-year. Now that's partially being offset in a number of areas where we are expecting some deflation, particularly in ag products, soybean oil. We also expect diesel down year-over-year. And resin, we've got about flat on a year-over-year basis. So, it's not necessarily contributing or helping. But that's really what we're seeing in terms of our commodity basket and it's modestly inflationary. Certainly, an improvement from where we were last year, but still modestly inflationary is what we're projecting.

[Christopher Carey, Analyst at Wells Fargo & Company]

Okay. And then just on the organic sale over-delivery, non-track charcoal comping, some under shipment in the base and then stronger consumption, just to make sure I have those. Anything else is coming up a lot this evening? Okay. All right. Thanks. And then just the...

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

Those are the few primary drivers.

[Christopher Carey, Analyst at Wells Fargo & Company]

Okay. Great. Just like a strategic question, Linda, it's interesting how far this whole spectrum on investment has come that this evening, it's almost like are you spending enough, and you're talking about higher advertising spending, really strong S&A and I guess maybe the helpful, because you're getting through earnings season now, what's your take on why we're seeing this really significant step-up in investment levels and it's not just in Clorox, it's from all of your peers, marketing spending, SG&A, are just going to the levels that have not been seen in a very long time. Is this just a lot of manufacturer thing, we need to get volumes going? Or are you feeling a lot more push from the retailers to get volumes going? Just what are your thoughts on maybe why this investment cycle is coming together and some of the key drivers and where it's going. Just -- I know it's a big question, but thanks for any thoughts.

[Linda Rendle, Chief Executive Officer at Clorox]

Sure, Chris. Yeah, I won't speak on behalf of the industry. I'll certainly let everyone speak on their own behalf. But I can just give you the insights into how we're thinking about it. And I think it's a pretty clear understanding. We -- headed into COVID, we had learned a lot about volatility and the impact that had on our business. And so, we began investing more a number of years ago to ensure that we have the right digital foundation, that we have the right organization suited to a more volatile environment, that we have the right capabilities to ensure that we continue to lead from a consumer insights perspective and that the data we have flows as fast as we possibly can get it, so that we can make quick decisions. So, that was certainly an area for us where we needed to invest within our digital transformation and our operating model to ensure we could react as fast as consumers could be. We want to be more consumer obsessed faster and leaner.

And then if you look at the bucket on promotional spending. I look at that as more of a return to the norm. And for us, that spending is on good faith. We spend mostly on quality merchandising. We do that to introduce consumers to innovation, we do that to remind them in key pulse points of the year, like back-to-school, back-to-college, remind them the great products that we have, introduce them to new benefits etc. And so, seeing that return to more pre-pandemic levels, I think, makes good sense, given the industry can fully supply now, we can certainly supply now. And so, we get back into that good cadence of giving the right information to shoppers.

And then on A&SP, which we have decided to take-up, as you know, from 10 to 11, and we addressed earlier. I think this is another case where -- the number one thing that we can do right now is ensure that we have superior value for our consumers. And we have that from a ratings perspective. Over the last couple of years, we reached the highest brand superiority overall from a portfolio perspective we've ever had. We continue to have more of our portfolio superior than we did pre-pandemic. And we think given the stress the consumer is going to be under, it would make absolute sense given the improvement we've made on margin to invest a bit more in advertising and sales promotion to secure that with consumers. And that's how we're thinking about it. We have great brands, great innovation, great products and we want them at this time when they're making those choices in their total basket of spending to remind them in our household essential categories, no one delivers a better value than Clorox. And that's exactly what we're focused on.

So, to me, I think it is exactly what we do, we focus on the long-term, we focus on building brands and the spending is right in line with doing that.

[Christopher Carey, Analyst at Wells Fargo & Company]

Thank you, both.

[Linda Rendle, Chief Executive Officer at Clorox]

Thanks, Chris.

[Operator]

And our next question comes from Javier Escalante from Evercore ISI. Please go ahead, Javier.

[Javier Escalante, Analyst at Evercore ISI]

Hi, good afternoon, everyone. I have another permutation of the same. Observed retail sales in tracked channels versus their overdeliver in the quarter, but hopefully, it's from a different angle. So, if you can talk about all channel retail sales growth, if you give us a sense of what were Clorox's Q4 retail sales including online on Home Depot and things like that, so we can better understand your guidance going into fiscal '24. So, if we can start with that and I have a follow-up.

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

Javier, let me see if this helps. If you look at our Q4 performance and I think your question is sales across many different channels as you saw very strong growth. If you look at tracked channels, that's true. But what I'd also tell you is some of the areas that are not showing up in tracked channels, we had very strong performance. Our PPD business grew both volume and sales in the quarter. In international, we held volumes and grew sales 14% organically and then our non-tracked sales were even stronger than tracked. So, we're seeing broad performance not only in tracked channels, but we're seeing it in all the areas where we're selling products and that contributed the overall performance -- the business. And that's why you will probably see even strong result of what you're seeing if you're just looking at tracked channel performance.

[Javier Escalante, Analyst at Evercore ISI]

Well, the reason why I'm asking that is because I think Linda mentioned that consumption was stronger, right, and this is part of the over-deliver in the quarter, but we don't see that in tracked channels. We see retail sales growth at 6%, both in the March and the June quarter and then there is this very big difference in organic sales, particularly on the volume side. So, wondering if you could at least -- let me tackle differently. What is -- what percentage of your sales is in non-tracked channels, specifically in this quarter, given the seasonality of Kingsford? That would be helpful.

[Linda Rendle, Chief Executive Officer at Clorox]

Javier, maybe it would be good just to back up again and go through -- make sure we go through all the drivers of what drove tracked consumption versus organic sales. And Kevin just covered part of it. But we do have a fair amount of our sales in non-tracked channels. It's a little complicated because non-tracked does not include international PPD, which is why Kevin broke it out the way he did.

So, just to break it down, we had Q4 organic sales growth of 14% and we've had tracked channel [Phonetic] consumption of about 7%. So, the delta would be what Kevin highlighted, international and PPD are a portion of that. PPD grew volume international held volume. Remember that we're lapping wipes inventory that Kevin spoke about that's a portion of it. And then we saw stronger non-tracked performance in a number of retailers on a number of businesses. And that's across e-commerce and brick-and-mortar, etc. And then in addition to that, we haven't spoken a lot about this yet, but we do always ship some of our Q1 events in Q4 and that contributed to that delta as well.

But we do have a strong tracked channel presence. And so, yes, that absolutely can move the number. And this is pretty normal for us to have a quarter that is a bit disconnected from tracked channel sales. In addition to that, you have the fact that we have very strong merchandising in Q1 as we normally do and we typically ship some of that in Q4. But those are really the -- if you look at those four buckets, those are the four buckets of the difference between the 14% and the 7%.

[Javier Escalante, Analyst at Evercore ISI]

Well, thank you. And if I can squeeze in something when it comes to pricing for next year. How much is the carryover impact for fiscal -- fiscal '24?

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

Javier, at this point, it's pretty minimal. What we have left to lap is the fourth round of pricing we took for half a year. So, if you look this year, we had in total about 670 basis points of total benefit for the year. You should expect a much smaller benefit in fiscal '24, because now we're looking at just half a year on one of our pricing actions and the fourth round was not as large as the third round.

[Javier Escalante, Analyst at Evercore ISI]

Okay. Thank you so much. Very helpful.

[Operator]

And our next question comes from Olivia Tong from Raymond James. Please go ahead, Olivia.

[Olivia Tong, Analyst at Raymond James]

Great. Thanks. I was just wondering if is it gross margin, because the pace of gross margin expansion in fiscal '24 versus the year you just reported, obviously, a fair bit of deceleration. But I'm trying to understand, I mean, fiscal '23 recovery in gross margin was so meaningfully ahead of your expectations. Why is the pace of expansion is slowing so much in fiscal '24? Because cost inflation while maybe not down, is certainly less of a pressure versus last year. Pricing is by and large working, the topline is growing. And gross margin is still quite a bit below pre-COVID levels. So, would love a little bit more color on that. Thanks.

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

Sure, Olivia. As it relates to gross margin, as you said, we continue to expect to make progress this year. So, our commitment is to rebuild gross margin back to pre-pandemic levels. This year, we're looking at about 150 basis points to 175 basis points of progress. Is that slowing from what we delivered last year, and is primarily driven by pricing. So, we took four rounds of pricing over 18 months and that had a significant benefit last year. It contributed over 650 bps to gross margin.

As we look at fiscal year '24, as I was just mentioning Javier, we have fairly limited pricing the plan, we're going to get a little bit of carryover on that fourth price increase. So, we'll have a smaller impact on gross margin. And then we're really able to grow margin-based on all the very good work our team is doing on cost savings and supply chain optimization. So, in-spite of still dealing with about $200 million worth of cost inflation, we believe we can more than offset that through the good work we're doing within the supply chain and continue to grow gross margins.

And so, while we're making good progress, I'd expect that continue as we move into fiscal year '25, I expect that progress to continue. The one thing we have to look at over time is we bought these commodities for decades. They are cyclical. At some point, they'll turn deflationary. That's not our expectation this year. But certainly when that occurs, that will certainly accelerate the pace of recovery. It's just hard in this environment to predict exactly when that's going to occur. But we feel very good about our ability to rebuild margins back to those pre-pandemic levels and we know that's going to take some time to get there. But I have to tell you, I feel very good about the progress we're going to continue to make this year in-spite of ongoing inflation we're dealing with.

[Linda Rendle, Chief Executive Officer at Clorox]

Olivia, I had just one point to that. Kevin underscored the $200 million, which is significantly better than what we had a $500 million in fiscal year '23. But I just want to underscore, that still three times the level of average we had before we got into this inflationary cycle on an average year of inflation. So, I think the point that Kevin is making is really important to understand, this is still a very challenging environment with significant cost inflation, although certainly better than we experienced over the last two years.

[Olivia Tong, Analyst at Raymond James]

Got it. And then on the topline, as you look towards rebuilding volume as the year progresses, can you talk a little bit about innovation and what role that plays? And in your view, what kind of impact is innovation have on this year versus last?

[Linda Rendle, Chief Executive Officer at Clorox]

Sure. Innovation continues to be the lifeblood of how we grow our brands over time and we set-out to deliver a bigger stickier innovation platforms as part of our IGNITE strategy and we've talked about the fact that we've been able to have more net contribution from innovation in our strategy period than we did and the prior strategy period, and we're going to continue to focus on accelerating that this year. We have innovation across our portfolio, just as we did this year. So, all of our major brands launched innovation in fiscal year '23, we would expect expect something similar in fiscal year '24. We're really focused on value and value superiority in that innovation. So, we're looking at a combination of product improvements and new innovations as well as good claims support. And of course, we'll support that innovation with 11% of sales from an advertising and sales promotion perspective.

But we think as we lap these price increases, as a consumer comes under more pressure, innovation will be as important as it ever has been. And certainly our retailers are looking for innovation to help them grow their categories to ensure that we're getting shoppers down the aisles, etc. So what I would say is, it's a continuation of what we've done. Of course, we want to we want to have additional progress as we can and we think we have the right investments to ensure that, that continues in fiscal year '24.

[Olivia Tong, Analyst at Raymond James]

Thank you.

[Operator]

And our next question comes from Lauren Lieberman from Barclays. Please go ahead, Lauren.

[Lauren Lieberman, Analyst at Barclays]

Great. Thanks so much. So, just taking a look [Indecipherable] model looking at kind of the dreaded multi-year stacks, so. And -- but looking at the two-year stacks on volume and on price mix for this quarter in particular, like all your comments make frankly more and more sense on the things you were lapping, the contribution, for example, for charcoal, to price mix, the inverse, probably, I guess for wipes in health and wellness. I was curious as we look forward, any other periods, because the stacks are messy, that you think should be called-out, where there is the dynamic of retailers having reduced inventory in the prior years that we should be particularly keen for differences in shipments versus what we're seeing in tracked channels, knowing there's always untracked that we won't see?

[Linda Rendle, Chief Executive Officer at Clorox]

Lauren, it has certainly been, as we said bumpy, this is -- now this is everyone understands, I think, the definition of bumpy. And then we have lots of laps etc. I would say we had a pretty good period of normalization now, where I don't see anything that we look ahead and say, there was a significant inventory build-up or something that we have to lap, that's very notable. We've gone through the COVID waves lapping. Pricing would be the one thing I call, we're still lapping pricing. And Kevin, I think, and I've been clear on that. But I think you can predict that based off of what we put out there.

And of course, that comment is barring any other changes that we see any other shocks in the environment. I want to knock-on a little bit of wood saying that. But I don't see anything material that we would be looking ahead and saying, there's a big lap ahead of us that we have to consider, pricing being the one exception.

[Lauren Lieberman, Analyst at Barclays]

Okay. Great. And then just in follow-up, I was curious if you could comment on kind of where you stand I guess in terms of shelf-space or distribution and knowing that, and we've talked about several times in the past, pre-COVID, there was some -- you kind of lost shelf-space and now you've had -- you pointed out in the release really strong innovation agenda. So, I guess, where do you stand on kind of shelf-space, how are you thinking? Do you think there's opportunities to be growing of shelf-space with innovation in '24? Is that part of the outlook, or not so much?

[Linda Rendle, Chief Executive Officer at Clorox]

Yeah. We made good progress as we return to full supply and getting our total distributions point up. So, we made good progress over the last, call it, 18 to 24 months across a number of our businesses. And you all remember that in many cases where the current -- often our competitors couldn't fully supply or a lot of third-tier brands that have entered in, for the most part that is cleaned up and we've been able to gain distribution points as a result of that in aggregate.

What we're focused on. For fiscal year '24 is exactly what you said. We want to gain distribution on our innovation, we want to make sure that we have the right SKUs on the shelf as we think about the right pack for the consumer, given their value seeking. We think we've done most of that work. But we want to continue to make progress and particularly, ensure that we get our innovations on shelf as fast as we possibly can on both the physical and digital shelf, and that's what the team will be focused on, and that will contribute to '24. We expect the category growth plans and the plans we have with retailers and our execution of those plans to contribute. But we feel good about what we're walking into and what we have for both the front-half and the back-half.

[Lauren Lieberman, Analyst at Barclays]

Okay. Thanks so much.

[Linda Rendle, Chief Executive Officer at Clorox]

Thanks, Lauren.

[Operator]

And our next question comes from Stephen Powers from Deutsche Bank. Please go ahead, Stephen. Stephen, is your line muted?

[Stephen Powers, Analyst at Deutsche Bank Aktiengesellschaft]

Sorry, can you hear me?

[Operator]

Yeah. We can hear you now.

[Linda Rendle, Chief Executive Officer at Clorox]

Hi, Steve.

[Stephen Powers, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. Great. Sorry about that. So, following-up on that conversation you were just having with Lauren actually. So, it sounds like things are relatively normalized from a supply and inventory standpoint. So, the guidance implies shipping to consumption. I guess, I'm curious, if it also you've guided to what you expect category growth rates to be both from a value perspective and a volume perspective? Or if you're embedding any bias of share gain, or even some share sacrifice as you still continue to rebuild the margins? Just how do how do we think about your guide relative to category growth expectations?

[Linda Rendle, Chief Executive Officer at Clorox]

So, we've certainly taken into account of the foundation of any year that we plan. We look at what we expect the categories to contribute, and, our assumptions in both as we lap pricing and as we head into what we predict is a mild recession in the back half of our fiscal, assume category rates commensurate with that.

And then by category, we're looking at our plans comparing it to that and adjusting based off of if we see headwinds or tailwinds. We want to make progress over the long term on share. We've built that into these plans. We've built in the fact that we're spending additional advertising and sales promotion, that we have good innovation plans. And that lands us at the total outlook that we've provided. But they're very much grounded in the realities of the categories and what we expect.

[Stephen Powers, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. So, just to summarize that, on a net basis, it doesn't sound like you're -- it sounds like the topline call you're making is essentially in line with category growth. If things go well, maybe top end will market share gain, if not, you're kind of in the zone. Is that fair?

[Linda Rendle, Chief Executive Officer at Clorox]

That's fair.

[Stephen Powers, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. Thank you.

[Linda Rendle, Chief Executive Officer at Clorox]

Thanks, Steve.

[Operator]

And our next question comes from Jason English from Goldman Sachs. Please go ahead, Jason.

[Jason English, Analyst at The Goldman Sachs Group]

Hey, folks. Good evening. Thank you for slotting me in, and congratulations on a strong finish to the year. I'm going to totally date myself, by going back in time to a time where you guys used to give us a log of all your price increases and decreases. And the point there was, there was decreases back in, I think, 2009 and 2010, you had some decreases on Glad, on Litter, more recently in 2018, I think you rolled back the prices of Glad. Obviously, all that was accompanied by pretty substantial downdraft in commodities.

So, my question is, if we get to your point, Kevin, another downdraft in commodities, because these commodities, to your point, are cyclical, would we expect or should we expect you to roll back some of these price increases that you put through one of the four in the last year or two? Or, in light of the investment you're making, like, are you trying to manage the business differently? So, instead of give back that relief in the form of pricing, you spend it back into the ability of the P&L through lines like A&P and marketing?

[Linda Rendle, Chief Executive Officer at Clorox]

Hey, Jason. Thank you for your comment. And then on your question on price rollback, just to be completely clear, so we're all on the same page, we've rolled back one price increase in a category we no longer own from a truckload perspective after taking an increase. And the other ones that you're referring to, I think, rightfully on Glad, is we've always used trade as a way to evaluate given resin is such volatile commodity. And so, as we've taken pricing, we've used trade in the past in order to make up a difference if we've seen favorability in resin that we needed to deal with or we saw something change in the category. But the pricing that we've taken has stuck in the marketplace.

And given what we're facing right now, obviously, we have not fully recovered margins, made great progress through the pricing action we've taken, but we have additional work to do given the fact that we continue to see an inflationary environment, also we talked about three times the average year, certainly better than last year, but still a big headwind. We are planning to -- and anticipate the pricing increases will stick, and that will bring back volume and household penetration through innovation and through investment in advertising and sales promotion. But we don't see any structural reason why these price increases wouldn't stick like they have in the past.

And again, we're really focused on ensuring we grow categories the right way through those other levers. And if we need to make an adjustment, I think Kingsford is a good example. We did not roll back pricing. So we took pricing. Competition did not follow. We made an adjustment to our plan by putting incremental merchant place. We did not rollback. Our truckload pricing, we continue to hold that, is a good example of how we're approaching it, that if we see a dynamic in a category we need to react to, we will try to do that in a short-term manner, and maintain the truckload pricing we've taken.

[Jason English, Analyst at The Goldman Sachs Group]

Okay. So, that actually sounds like you do intend to manage pricing differently than you did a decade ago or so. Last time we came through a commodity super cycle, where you didn't just adjust by trade, you actually announced those price increases, you published those price increases, you gave us a log for the list price decreases on the back end of it. And I'm hearing you say now that's even if clients do come in, that's not the intent. The intent is to manage it differently with trade, flexing trade if we find ourselves in that scenario, and I totally appreciate that you don't see that scenario. That's not what you're calling for in 2024, given the commodity the overall inflation environment.

[Linda Rendle, Chief Executive Officer at Clorox]

Yeah. I see it as a continuation of what we've done in the past, Jason, seems like we have a little bit of different data. But, yes, I think we're getting to the same conclusion, which is we intend for these and price increases to stick. We think we have the right tools in place to do that. And we're focused on all the other levers we can pull to continue on the strong category performance we've had from a topline perspective as I noted on spending and innovation.

But we're -- you're landing on the same conclusion, which is we believe these price increases will stick and have a good structural reason to do that.

[Jason English, Analyst at The Goldman Sachs Group]

Understood. Thank you.

[Linda Rendle, Chief Executive Officer at Clorox]

Thanks, Jason.

[Operator]

This now 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]

Great. Thank you, everyone. We look forward to speaking with you again on our next call. And until then, please stay well.

[Operator]

[Operator Closing Remarks]