Clorox Q4 2021 Earnings Report

Clorox EPS Results

• Actual EPS: $0.95
• Consensus EPS: $1.29
• Beat/Miss: Missed by -$0.34
• One Year Ago EPS: $2.41

Clorox Revenue Results

• Actual Revenue: $1.80 billion
• Expected Revenue: $1.91 billion
• Beat/Miss: Missed by -$105.28 million
• YoY Revenue Growth: -9.10%

Clorox Announcement Details

• Quarter: Q4 2021
• Date: 8/3/2021
• Time: Before Market Opens
• Conference Call Date: Monday, August 2, 2021
• Conference Call Time: 8:00PM ET

Clorox (NYSE:CLX) is a leading manufacturer and marketer of consumer and professional products designed to help people care for their homes and live healthy, sustainable lives. Its portfolio spans cleaning and household products, food and beverages, water filtration systems and cat litter, serving both retail and institutional customers. The company’s flagship bleach and disinfecting products are well known in the United States and many international markets, where they help prevent the spread of germs in homes, hospitals, schools and businesses.

Clorox’s diverse brand lineup includes liquid bleach and surface cleaners, eco-friendly cleaning tools, food preservation and preparation items, charcoal grills and briquettes, specialty foods and beverages, pet care products and personal care lines. Through continuous investment in research and development, the company seeks to innovate across its core categories—formulating concentrated cleaning solutions, sustainable packaging, and smart filtration technologies that meet evolving consumer preferences for health, sustainability and convenience.

Founded in 1913 as the Electro-Alkaline Company, Clorox introduced its signature bleach product in 1914 and later adopted the Clorox name in 1928. Headquartered in Oakland, California, the company has expanded its footprint to include manufacturing plants, regional offices and distribution centers in North America, Latin America, Europe, Asia and Oceania. Today, Clorox products are sold in more than 100 countries, with a network of partnerships spanning retail chains, wholesale distributors and e-commerce platforms.

Since January 2019, Clorox has been led by President and Chief Executive Officer Linda Rendle, who oversees the company’s global operations, innovation pipeline and sustainability initiatives. Under her leadership, Clorox continues to focus on advancing its environmental goals—reducing waste, curbing greenhouse gas emissions and promoting safer ingredients—while driving long-term growth through brand building and digital engagement with consumers worldwide.

Clorox Q4 2021 Earnings Call Transcript

Key Takeaways

• Clorox delivered 9% fiscal 2021 sales growth on both a reported and organic basis (a 17% two-year stack) despite rapid pandemic-driven demand swings.
• Gross margin fell 200 basis points in FY21 (Q4 down 970bps to 37.1%) due to elevated commodity and transportation costs and lower fixed-cost absorption, and is guided down another 300–400bps in FY22 with sequential improvement expected into Q4.
• FY21 adjusted EPS decreased 2% to $7.25 (Q4: $0.95), and FY22 EPS is forecast at $5.40–$5.70 as Clorox laps elevated pandemic demand and absorbs ongoing cost headwinds.
• The company surpassed its cost-savings target with over $120 million saved in FY21, has implemented price increases on roughly 50% of its portfolio to offset about two-thirds of FY22’s ~$300 million commodity and freight cost rise, and plans further pricing actions.
• Clorox is committing $500 million over five years to digital transformation and productivity improvements (including an ERP replacement), has nearly doubled e-commerce to 13% of sales, and gained market share in 7 of 9 major businesses.

Presentation

[Operator]

Good day, ladies and gentlemen. Welcome to The Clorox Company fourth quarter and fiscal year 2021 earnings release conference call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question and answer session. If you would like to ask a question, you may press star one on your touch tone pad at any time. If anyone should require operator assistance during the call, please press star zero. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Ms. Lisah Burhan, Vice President of Investor Relations for The Clorox Company. Ms. Burhan, you may begin.

[Lisah Burhan, VP of Investor Relations at The Clorox Company]

Thanks, Christy. Welcome, everyone, thank you for joining us. We hope you and your families are continuing to stay safe and well. Before we get started, I want to let you know that we're making some changes to how we present our results. Today, Linda will start by providing some overall key takeaways for the year. Next, I'll follow up with some highlights from each of our segments. Kevin will then address our financial results, as well as our outlook for fiscal year 2022. Finally, Linda will return to offer her perspective, and we'll close with Q&A. Now, a few reminders before we go into results. We're broadcasting this call over the Internet, and a replay of the call will be available for seven days at our website, thecloroxcompany.com. Today's discussion contains forward-looking statements, including statements related to the expected or potential impact of COVID-19.

[Lisah Burhan, VP of Investor Relations at The Clorox Company]

These statements are based on management's current expectations but may differ from actual results or outcomes. In addition, we may refer to certain non-GAAP financial measures. Please refer to the Forward-Looking Statements section, which identifies various factors that could affect such forward-looking statements, and the Non-GAAP Financial Information section, including the tables that reconcile non-GAAP financial measures to the most directly comparable GAAP measures, both of which are located at the end of today's earnings release, which has also been posted on our website and filed with the SEC. Now, I'll turn it over to Linda.

[Linda Rendle, CEO at The Clorox Company]

Thank you, Lisah. Hello, everyone. Thank you for joining us. Fiscal 2021 was an extraordinary year for Clorox, with the pandemic putting us through the ultimate test of volatility, including rapid changes in consumer demand and significant cost inflation, which was reflected in our Q4 results. Despite the complexities we faced, we delivered 9% sales growth for the fiscal year on a reported and organic basis, reflecting growth in all four reportable segments. This was on top of the reported 8% increase we delivered in fiscal 2020. On a two-year stack basis, we delivered 17% sales growth. With rising cost pressures, we experienced declines in gross margin, particularly in Q4, resulting in a decrease of 200 basis points for the fiscal year, which we will discuss in more detail. Fiscal year 2021 adjusted EPS decreased 2% to $7.25.

[Linda Rendle, CEO at The Clorox Company]

Recognizing the immediate priorities before us, I'd like to reinforce what matters most, long-term profitable growth. With a business that's significantly larger than before the pandemic and a portfolio of trusted brands exposed to more tailwinds, we have clarity in our strategic imperatives, and I have every confidence in our ability to continue delivering long-term value creation for our shareholders. When I look at fiscal 2021, our performance has shown the strengths of our people, brands, and products, as well as the resilience of our categories, as we work tirelessly to supply consumers with products across our portfolio. As a result, we experienced significant growth in demand and strengthened our position amongst global consumers, with strong household penetration supported by higher repeat rates across new and existing users.

[Linda Rendle, CEO at The Clorox Company]

The last 12 months have also demonstrated the need to accelerate our IGNITE strategy to address near-term headwinds and capitalize on long-term opportunities. The industry environment remains dynamic, with significant inflationary pressure and continuing uncertainty. In the face of these conditions, our top priority is strong execution to mitigate the impact of elevated cost headwinds and continue to improve market share. The pandemic has also highlighted areas where additional investments can help us be as agile as possible in the future. We are clear on the opportunities ahead of us to differentiate Clorox and build a stronger, more resilient, and more profitable company. This includes driving our growth runways and making investments to enhance our digital capabilities and drive productivity improvements, which I will discuss shortly.

[Linda Rendle, CEO at The Clorox Company]

We are confident that strong execution of our IGNITE strategy will enable us to achieve our 3%-5% long-term sales target and deliver long-term shareholder value. Before I discuss Q4 and our progress against our strategy, I'd like to thank our Clorox teammates around the world for everything they've accomplished over the past year, as well as their commitment and dedication to serving people and communities around the world. For Q4, faster-than-expected moderating demand for Cleaning and disinfecting products had a pronounced impact on sales growth as we moved through the peak of the pandemic and lapped the unprecedented demand we experienced last year. The magnitude of this quarter's gross margin contraction was a result of faster-than-expected sales moderation, acceleration of inflationary headwinds, and improvements in supply, which led to broader product assortment, including the reintroduction of value packs.

[Linda Rendle, CEO at The Clorox Company]

I'll discuss shortly the actions we're taking to address these headwinds. Let me share a few highlights of our progress on our IGNITE strategy. First, with fuel growth being a critical focus to help address elevated cost pressures and ensure the long-term health of our brands, I'm pleased we delivered over $120 million in cost savings in this fiscal year, surpassing our annual target. Second, we made strong progress on our 2025 goal to know 100 million people, crossing the halfway mark to our goal this fiscal year. Our higher investment in personalization has led to significantly improved ROI. It has been one of the contributors to increasingly strong payouts, driving our confidence in continued investments in our brands.

[Linda Rendle, CEO at The Clorox Company]

Third, with innovation at the heart of our strategy, we doubled our innovation investments in fiscal 2021, and new products were a bigger contributor to our top line, which we expect to continue in fiscal 2022. Next, as consumers have increased their digital usage during the pandemic, we leaned into digital marketing and commerce, resulting in our e-commerce business nearly doubling in the last two years, which today represents about 13% of total company sales. Finally, we continue to make progress on our ESG goals. For example, we advanced our commitment to climate action and submitted our proposal on science-based targets for our operations and scope three emissions to the Science Based Targets initiative in June. As a people-centered company, we continue to focus on the well-being of our teammates and our values-based, inclusive culture.

[Linda Rendle, CEO at The Clorox Company]

I'm particularly proud that during this trying year, we achieved our best safety score in recorded history with a recordable incident rate of 0.26, significantly lower than the 3.3 industry average. I'm also pleased that in fiscal 2021, we continued to have high employee engagement of 87%, putting us at the top quartile of Fortune 500 companies. Let me turn to fiscal 2022. We expect inflationary pressure to persist, along with continued moderating demand as we lap COVID-19 related demand surges in the first half of fiscal 2021. While this is reflected in our fiscal 2022 outlook, which Kevin will discuss, by the second half of the year, we expect to be within the lower end of the range of our long-term sales targets.

[Linda Rendle, CEO at The Clorox Company]

Like others in our industry and beyond, we are experiencing significant increases in input and transportation costs across all categories in our portfolio, which have accelerated since Q3, and we're holistically and dynamically managing this with a laser focus on rebuilding margin. We implemented pricing on Glad and announced actions on our food, cleaning, and international businesses. This represents about 50% of our portfolio. We're also pursuing pricing in additional parts of our portfolio, which we'll communicate at the right time. Based on the constructive conversations we're having with our retail partners, and importantly, the strength of our brands, we feel confident about our ability to execute our pricing plans. In addition, we will continue to drive our hallmark cost savings program. We expect sequential growth margin improvements as we progress through fiscal 2022, with our assumption for growth margin expansion by Q4.

[Linda Rendle, CEO at The Clorox Company]

In terms of market share, as we've discussed previously, we have experienced some declines due to supply challenges, but have made notable progress. With strong investments in internal and external production capacity, including additional manufacturing lines and a significant expansion of our production team, in June, we achieved our highest case fill rate since the start of the pandemic. I'm pleased to see that in the latest 13-week data ending July 17th, we saw market share gains in seven out of nine businesses. Certainly, we recognize there's more work to do in parts of the portfolio, such as Glad trash, and we have adjusted our plans to drive market share improvements over time. Despite these near-term headwinds, we remain focused on our long-term priorities, rooted in our IGNITE strategy to deliver our long-term growth aspirations.

[Linda Rendle, CEO at The Clorox Company]

While some pandemic-related behaviors may revert over the next 12 months, we continue to believe there's been a shift in behaviors that will advantage Clorox longer term, including a focus on health, wellness, and hygiene, more time at home, as well as increased adoption of e-commerce and digital platforms. The pandemic also revealed the urgency to upgrade our digital infrastructure and capabilities. Last year, I brought in Chief Information and Enterprise Analytics Officer, Chau Banks, who has extensive experience in business-driven digital transformation, to conduct a fresh assessment of our own program that was already underway before the pandemic. With that assessment now complete, we are accelerating our transformation through planned investments of about $500 million over the next five years to enhance our digital capabilities and drive productivity improvements, including replacing our ERP.

[Linda Rendle, CEO at The Clorox Company]

This will enhance our supply chain to better position Clorox to meet customer needs, yield efficiencies, and support our digital commerce, innovation, and brand-building efforts. Prior to the pandemic, we were already adapting our business to differentiate Clorox from a digital perspective. We'll continue to invest in e-commerce and digital marketing across our portfolio, leveraging data-driven insights to engage with consumers in more relevant ways. Moving to innovation. Innovation continues to be a key focus area for me and our new Chief Growth Officer, Tony Matta, who joined last October. Tony has more than 20 years of brand-building experience with leading consumer companies. Ensuring we have stickier innovation delivering multi-year value, we're driving lasting new product platforms, such as Fresh Step Clean Paws and Scentiva, which continue to grow. In addition, we're extending innovation by leveraging external partners to create new revenue streams.

[Linda Rendle, CEO at The Clorox Company]

We're continuing to support our brands, especially margin-accretive innovation, with disciplined, high ROI advertising and sales promotion investments to build and strengthen consumer loyalty. We also remain very focused on driving our growth runways to build Clorox into a global cleaning and disinfecting brand. We are still in the early stages of a multi-year journey, but continue to believe they can become a meaningful contributor to growth longer term. As we execute on all these initiatives, we will continue to drive the strategic link between our societal impact and long-term value creation as we live our purpose and keep our ESG commitments front and center in our decision-making every day. With that, I'll turn the call over to Lisah to review our business unit performance.

[Lisah Burhan, VP of Investor Relations at The Clorox Company]

Thank you, Linda. Now turning to our segment results. In Health and Wellness, Q4 sales decreased 17% for the quarter, while full-year sales were up 8%, with growth across all businesses. On a two-year stack basis, Q4 sales grew 16%, and full-year sales grew 22%. In Cleaning, sales were down by double digits compared to double-digit growth in the year-ago quarter, primarily due to the deceleration of demand across various cleaning and disinfecting products. On a full-year basis, Cleaning sales grew behind a strong front-half performance. While demand fell faster than anticipated, it remains higher than it was pre-pandemic, with strong repeat rates among new buyers. Importantly, our supply and product assortment are almost fully restored, which is reflected in our market share improvements, especially in wipes and sprays.

[Lisah Burhan, VP of Investor Relations at The Clorox Company]

As consumer demand migrated to more preferred forms and value packs, we also saw a negative impact to price mix, which we expect to continue over the next few quarters. Going forward, we'll be focused on strengthening our merchandising activities, especially for the back-to-school period. Sales in professional products were down by double digits versus year-ago period, when we experienced double-digit growth. For the full year, professional product sales were up by double digits, fueled by an exceptional front-half performance. Demand started moderating in Q3 and continued into Q4 as customers worked through high inventory levels, especially of Clorox T360 electrostatic sprayers. In the short term, we expect results will continue to be volatile as we lap periods with unprecedented demand. Longer term, this business continues to be a strategic growth area for the company.

[Lisah Burhan, VP of Investor Relations at The Clorox Company]

As part of our initiative to expand into new channels, we continue to add to our roster of out-of-home partnerships, including Live Nation, the world's leading live events company. Lastly, within the Health and Wellness segment, our vitamins, minerals, and supplements business increased by double digits this quarter after lapping a double-digit decrease caused by a supply disruption related to COVID-19. For the full year, sales were up as well. Sales growth for the quarter was driven by a strong performance in the food, drug, and mass channel and e-commerce. Turning to the Household segment, Q4 sales were down 8%. Full-year sales grew 10%, with growth across all three businesses. On a two-year stack basis, Q4 sales grew 8%, and full-year sales grew 12%. Glad sales decreased by double digits in Q4, lapping strong double-digit growth in the year-ago quarter, which was impacted by initial stockpiling.

[Lisah Burhan, VP of Investor Relations at The Clorox Company]

For the full year, sales were up. Our efforts going forward are focused on managing the strong inflationary headwinds we're facing. As Linda mentioned, we still have more work to do in this business to restore market share. Grilling sales decreased by double digits in Q4 as demand started moderating after four consecutive quarters of strong double-digit growth. For the full year, sales grew by double digits, fueled by very strong consumption overall. Our focus on expanding distribution of our latest innovation, Kingsford Pellets, continued with a nationwide launch, building on the product's initial success, while we're also introducing signature flavors made with 100% real spices that will be available in select retailers before Labor Day, as we gear up for the 2022 grilling season. This innovation is intended to help our business continue building consumption among multicultural millennials and other heavy grillers.

[Lisah Burhan, VP of Investor Relations at The Clorox Company]

Cat litter sales grew by double digits in Q4, driven by continued strong consumption. For the full year, litter sales also grew. The result reflected strength in e-commerce, with Fresh Step becoming the number one brand online for the first time, and positive overall category trends boosted by record pet adoptions during the pandemic. Going forward, we're excited about our latest innovation, Fresh Step Outstretch litter, which lasts 50% longer than regular litter, thanks to patent-pending technology. In our lifestyle segment, sales were down 3%, and full-year sales grew 6%. On a two-year stack basis, Q4 sales grew 13%, and full-year sales grew 16%. Brita sales were down as demand continued to moderate from an extended period of elevated consumption. Full-year sales grew on top of double-digit growth in the prior year. Despite the deceleration in Q4, business fundamentals are strong, especially now that our supply is mostly restored.

[Lisah Burhan, VP of Investor Relations at The Clorox Company]

We're excited about the strong merchandising program we've put in place this year, including the largest back-to-college event ever for the brand. The food business was down primarily due to lower shipments of Hidden Valley Ranch bottle dressings, with consumption moderating as consumer mobility improved. Full-year sales were up by double digits on top of double-digit growth in the prior year. The consumer fundamentals for this business are strong, with the brand growing market share and household penetration.

[Lisah Burhan, VP of Investor Relations at The Clorox Company]

Burt's Bees sales increased by double digits this quarter as overall category consumption began to recover. Full-year sales were down as category consumption was negatively impacted by store closures, mask mandates, and stay-at-home measures. We expect this business to continue to recover as people begin returning to their pre-pandemic shopping patterns and consumer mobility keeps improving. We'll build on that momentum with our new Lips to Love campaign, supported by strong innovation pipeline.

[Lisah Burhan, VP of Investor Relations at The Clorox Company]

Lastly, turning to international. Q4 sales grew 5%, reflecting the combined impact of the Saudi JV acquisition and benefit of price increases, partially offset by lower shipments due to the moderating demand after a period of elevated consumption. Extended lockdowns in Canada also contributed to the decrease in shipments. The results are on top of 12% growth in the year-ago period, when we saw elevated consumption across our portfolio during the early stages of the pandemic. Importantly, we continue to expand our global disinfecting wipes business, building on the dedicated international supply chain that was developed in five months, and are making progress launching our Clorox Expert disinfecting wipes in existing countries as well as new markets. For the full year, sales increased 14%, reflecting very strong growth for the majority of the year before moderating in Q4.

[Lisah Burhan, VP of Investor Relations at The Clorox Company]

On a two-year stack basis, Q4 sales grew 17% and full-year sales grew 19%. Now I'll turn it over to Kevin, who will discuss Q4 and full-year financial results for FY 2021, as well as our outlook for FY 2022.

[Kevin Jacobsen, CFO at The Clorox Company]

Thank you, Lisah. Thank you everyone for joining us today. As Linda mentioned, for fiscal year 2021, we delivered 9% sales growth on top of 8% sales growth in fiscal year 2020. While this is lower than we anticipated in our outlook, we feel good about delivering another strong sales year. Of course, we continue to manage through an extremely challenging cost environment, which impacted our fiscal year margins and earnings. Importantly, we delivered another year of strong cash flow, which came in at $1.3 billion, compared to a record $1.5 billion for fiscal year 2020. I'm pleased our strong cash flow allowed us to return almost $1.5 billion to our shareholders through our dividend and share repurchase program, representing an increase of about 90% in cash returned to shareholders versus fiscal year 2020.

[Kevin Jacobsen, CFO at The Clorox Company]

Before I review our Q4 results, I wanted to highlight a $28 million non-cash charge we booked in Q4 related to a third-party supplier for our professional products business. As we have shared previously, during the height of the pandemic, we worked with a number of third-party suppliers to support us in addressing unprecedented demand in the consumer and professional spaces. We are reducing our reliance on one of these suppliers. As a result, we took a charge in the fourth quarter. Important to note, this non-cash charge is included in our reported EPS and excluded from our Q4 adjusted EPS, as it represents a non-reoccurring item. Turning to our fourth quarter results. Fourth quarter sales decreased 9% in comparison to a 22% increase in the year-ago quarter, delivering a two-year stack of 13% sales growth.

[Kevin Jacobsen, CFO at The Clorox Company]

Our sales results reflect an 8% decline in organic volume and two points of unfavorable price mix, primarily in our Health and Wellness segment, as supply improvements result in a broader product assortment, including the reintroduction of value packs. On an organic basis, fourth quarter sales declined 10%. Fourth quarter sales were lower than expected, primarily in our Health and Wellness segment, as demand for cleaning and disinfecting products moderated more rapidly than we had previously anticipated. The cleaning and disinfecting category continues to moderate, we're pleased to see improving share as we've increased our ability to supply. Gross margin for the quarter decreased 970 basis points to 37.1%, compared to 46.8% in the year-ago quarter. Gross margin results were lower than anticipated, largely driven by higher input costs and lower sales.

[Kevin Jacobsen, CFO at The Clorox Company]

The year-over-year change in Q4 gross margin was primarily driven by lower sales, resulting in lower manufacturing fixed cost absorption, as well as a significant cost headwinds, driving about 290 basis points of higher commodity costs, 180 basis points of increased transportation costs, as well as 130 basis points of unfavorable mix. Our fourth quarter gross margin also includes about 70 basis points of negative impact from the non-cash charge I just mentioned. These margin headwinds were partially offset by about 90 basis points of cost savings and 50 basis points of benefit from our pricing actions in our International division. Selling administrative expenses as a percentage of sales came in at 14.4%, compared to 14.1% in the year-ago quarter. Advertising and sales promotion investment levels as a percentage of sales came in at about 12%, with U.S. spending at about 14% of sales.

[Kevin Jacobsen, CFO at The Clorox Company]

Strong investments in Q4 supported our back half innovation program and reflected our continued focus on building loyalty among new consumers. Our fourth quarter effective tax rate was 0%, primarily driven by a tax benefit from exiting of a small foreign subsidiary, which was mostly offset by the charge we took to pre-tax book income associated with this decision, as well as favorable return to provision adjustments. On a full-year basis, our effective tax rate was 20%. Net of all these factors, adjusted earnings per share for the fourth quarter came in at $0.95 versus $2.41 in the year-ago quarter, a decline of 61%. Before I review the details of our outlook, let me provide perspective on the strategic investment Linda discussed. We are planning to invest about $500 million over the next five years to enhance our digital capabilities and drive productivity improvements, including the replacement of our ERP.

[Kevin Jacobsen, CFO at The Clorox Company]

In fiscal year 2022, we plan to invest about $90 million in operating and capital expenditures, with about $55 million impacting our P&L, and the remainder reflected on our balance sheet. Beginning in Q1 and going forward, our adjusted EPS will exclude the portion of the $500 million investment that flows through our P&L to provide better insights into our underlying operating performance of our business. Turning to our fiscal year 2022 outlook. We anticipate fiscal year sales to be down 2%-6%, reflecting ongoing demand moderation, primarily in our cleaning and disinfecting products in the front half of the fiscal year, in addition to the unfavorable mix and higher trade spending as we move to a more normalized supply and promotional environment. We assume these factors will be partially offset by the pricing actions we are taking broadly across our portfolio.

[Kevin Jacobsen, CFO at The Clorox Company]

Organic sales are expected to be down 2%-6% as well. We expect front half sales to decline high single to low double digits as we lap 27% growth in the front half of fiscal year 2021 during the height of the pandemic. Additionally, we expect Q1 sales to decline low double digits. As we move to the back half of the year, we expect to return to the lower end of our long-term sales growth target. Of course, we continue to operate in a dynamic and uncertain environment, which could impact our outlook. We anticipate fiscal year gross margin to be down 300-400 basis points due to our assumption for significant ongoing headwinds from elevated commodity and transportation costs, which represent nearly $300 million in year-over-year cost increases.

[Kevin Jacobsen, CFO at The Clorox Company]

We expect these headwinds to be more pronounced in the front half of the year, particularly in Q1, as we expect key commodity cost increases to reduce gross margin by about 500 basis points, driving our assumption for Q1 gross margin to decline 1,100 basis points-1,300 basis points. For perspective, in Q1, we are lapping a modern gross margin record of 48%, reflecting over 400 basis points of favorable operating leverage on 27% sales growth in the year-ago quarter. As we mentioned in our press release, we expect sequential improvement for gross margin over the course of fiscal year 2022, with the assumption for gross margin expansion in Q4. This is based on our assumption that cost inflation will begin to moderate, and then we'll see the benefits from the mitigating actions flow more fully through our P&L.

[Kevin Jacobsen, CFO at The Clorox Company]

We expect fiscal year selling administrative expenses to be about 15% of sales, which includes about one point of impact related to our investment to enhance our digital capabilities. We anticipate fiscal year advertising spending to be about 10% of sales, reflecting our ongoing commitment to invest behind our brands and build market share. We expect our fiscal year tax rate to be about 22%-23%. The year-over-year increase primarily reflects lapping several one-time benefits in the prior fiscal year. Net of these factors, we anticipate fiscal year adjusted EPS to be between $5.40-$5.70. As we start fiscal year 2022, I'd like to emphasize our priority to address elevated cost pressures from both commodities and transportation throughout the fiscal year. We are focused on executing the pricing actions we discussed today.

[Kevin Jacobsen, CFO at The Clorox Company]

We've implemented our announced price increase on our Bags and Wraps and are taking pricing on our Food, Cleaning, and International businesses. This represents about 50% of our portfolio. We're also pursuing pricing in additional parts of our portfolio, which we'll announce at a later date. While it's still early, we are confident in our ability to price given the strength of our brand and the constructive conversations we're having with retailers. Consistent with our IGNITE strategy, we're addressing short-term headwinds head-on with an eye on the long-term health of our business. We will continue to invest in our brands, including meaningful innovation to drive differentiation, which will help us continue to drive superior consumer value. We are leaning into our cost savings program and productivity initiatives to help address ongoing cost pressures.

[Kevin Jacobsen, CFO at The Clorox Company]

We're accelerating investments in our digital transformation to drive increased capabilities, lower costs across our supply chain, and improve innovation efforts and our brand engagement activities. Finally, as Linda mentioned, our business is significantly larger than before the pandemic, and we're well-positioned for the future. Our global portfolio of trusted brands is more relevant than ever, and we're positioning ourselves to make the most of the changing consumer trends we see. We have confidence in our strategic plans and our ability to execute to enable us to continue to create long-term value for our shareholders. With that, I'll turn it back over to Linda.

[Linda Rendle, CEO at The Clorox Company]

Thank you, Kevin. Before we open the line for questions, I wanted to take a moment to reiterate our commitment to and confidence in Clorox's long-term growth and value creation potential, which is fueled by our IGNITE strategy. We're focused on strong execution in the face of dynamic conditions, including addressing significant cost headwinds and improving market share. In addition, we have clarity on the strategic imperatives and executional mandate to differentiate Clorox and build a stronger, more resilient, and more profitable company. As we accelerate and execute our IGNITE strategy, we're confident that we'll drive improved performance. Christy, you may now open the line for questions.

[Operator]

Thank you, Ms. Rendle. Your first question is from Dara Mohsenian of Morgan Stanley.

[Dara Mohsenian, Analyst at Morgan Stanley]

Hey, guys. Two questions. First on the $500 million investment program on digital and productivity, can you just give us a better sense for why the program is necessary now? We've heard the IGNITE strategy's been working the last couple of years. We've heard historically that you're ahead of the curve in competition on the e-commerce side from you guys and happy with innovation progress. Sounds like there was a review when you took over Linda, and obviously Chau Banks's appointment, but I'm sure you were focused on these areas before also. Was this a surprise? How did it develop, particularly given it's such a large amount? As we think about the payback, is this what's necessary to get back to long-term goals at some point? In theory, sometimes a big spending program can yield payback above and beyond prior goals.

[Dara Mohsenian, Analyst at Morgan Stanley]

I'm assuming at this point it's more to help return to prior long-term goals. I also have a second question on gross margins if I can come back. Thanks.

[Linda Rendle, CEO at The Clorox Company]

Sure, Dara. Thank you. Why don't we start with your first question, why necessary now? What's clear is the pandemic has absolutely accelerated consumer digital behaviors in a way that we never contemplated during our IGNITE strategy. Certainly we saw that as a key consumer tailwind for us as we penned that strategy. We've seen such a rapid movement online by consumers, both in the e-commerce space, and certainly in the marketing consumption space, that we really knew we needed to take a step back and look at the program that we had in place and ensure that it was sufficient for us to deliver as we move forward. What we looked was across the entire operation.

[Linda Rendle, CEO at The Clorox Company]

I think the other thing that I would note is our challenges in fiscal year 2021, managing the type of volatility that we haven't been exposed to in the past underscored the urgency to upgrade that digital infrastructure and capabilities. What I want to make clear is this is really not about today. This is about maintaining momentum as we come out of our IGNITE strategy period. You'll see the bulk of the value of this comes after our IGNITE strategy period, so 2025 and beyond. This will allow us to have really real-time access to data and information that will help our entire operation move more efficiently, and better serve consumer and customer needs. We're making first investment in our ERP, which is the foundation and infrastructure of all of these changes, and that's needed and accelerated to build these digital capabilities.

[Linda Rendle, CEO at The Clorox Company]

We'll have better supply chain visibility across all parts of the supply chain with real-time data, which will improve things like procurement and supply planning. It will further enhance the work that you already referenced, that we've done on digital and e-commerce, and further enhance our ability to do personalization, and get more out of that goal, and will help us on innovation. Really what this was about was a change in circumstances and the environment, a rapid change in consumer behavior that couldn't have been predicted before the pandemic, and we're leaning in. This is really about building a stronger company with momentum coming out of the strategy period.

[Dara Mohsenian, Analyst at Morgan Stanley]

Okay. Then can you just talk a little bit about the yield from this, how we should think about that in terms of timing and magnitude over time? Then second, Kevin, on gross margins. When you include the guidance for fiscal 2022, you're obviously experiencing a lot of gross margin compression over a two-year period, probably a record amount of compression. I'm just trying to understand your focus on pricing. It seems like the magnitude and timing of the pricing is less than what we've seen in the past versus these unprecedented cost pressures. I just want to understand why we're not seeing a greater offset through pricing. Is pricing more difficult in this environment from a retailer or competitive perspective? Is it more some of the pressure was unexpected? Are there other pressure points on gross margin?

[Dara Mohsenian, Analyst at Morgan Stanley]

How do you sort of think about and help us understand why we're not seeing more of an offset to those outsized cost pressures like we're seeing at some of your peers?

[Kevin Jacobsen, CFO at The Clorox Company]

Yeah, Dara, thanks for the question. Let me share a perspective on gross margin. If I think about where we were before the pandemic, our gross margin was just below 44%, about 43.9%. As we've moved through the pandemic over the last couple of years, we ended this year about 43.6%, so just a little below where we were before the pandemic began. As we go forward, as both Linda and I talked about in our prepared remarks, we are facing what we're describing as unprecedented cost environment in terms of inflation. Dara, for perspective, as I mentioned before, we're going to experience, we think about $300 million of cost increases this year between both commodities and transportation. That's about a 400 basis point hit to gross margin this year.

[Kevin Jacobsen, CFO at The Clorox Company]

From the pricing actions we're taking, we think we can offset about two-thirds of those this year, with the pricing actions we've announced, plus some more we'll announce at a later date. We expect to fully offset the cost increase going forward, but that'll extend beyond fiscal year 2022, just based on the phasing of these actions we're taking. I feel confident we'll recover these, but that'll take a little longer beyond 2022. The other items, Dara, I'd point out you'd be aware of as you think about our margin in fiscal year 2022, there's two other items. We had a temporary benefit during the pandemic as it relates to mix as well as trade spending. As I think you know, for many of our categories, there's very limited promotional activity because of lack of supply.

[Kevin Jacobsen, CFO at The Clorox Company]

We expected that as temporary and expect that to reverse out as we get back to a more normalized promotional environment. Using about fiscal year 2022, I expect about 50 basis points of headwind from higher trade spending. On mix, when the pandemic hit and we rationalized our production to try to get as much product out as possible, we ran 35-count canisters, an example on wipes because we could run the most of those. As we introduce larger sizes, as we introduce multi-packs, which is very good for consumption and trial, that'll come in as a lower margin as well. You'll see that positive mix turn negative as we get back into a more normal level of SKU offerings. That's about another 100 basis point hit we're going to see in 2022.

[Kevin Jacobsen, CFO at The Clorox Company]

Both of those are temporary benefits as a result of the pandemic that we expect to unwind, and they'll unwind this year and get back to a more normalized level. I think what's important as we go through the year, and you think about the phasing of our margins, the biggest challenge we're going to face is in the front half. When you think about the cost environment I highlighted, we expect to take about 75% of those cost increases in the front half of the year, you'll see sequential improvements as we move through the year and turn back to margin expansion.

[Kevin Jacobsen, CFO at The Clorox Company]

I expect, Dara, as we get to Q4 and we start recovering some of these costs, that you should see our gross margins back in the low 40s, and we're committed to rebuilding it back to where we were before the pandemic began. Let me stop there. I'm happy to take any follow-ups.

[Dara Mohsenian, Analyst at Morgan Stanley]

Just on the timing of pricing, it does seem like it's taking longer than it has previously. Obviously, a lot of compression year-over-year in Q4, almost 1,000 basis points, and we're not expecting positive gross margins until you get to Q4 of next year. I'd be curious for your thoughts specifically around the pricing offset. I understand there are issues like mix and some of the other issues you mentioned, it does seem like it's taking a long period of time to get pricing in relative to history. Just trying to understand that.

[Linda Rendle, CEO at The Clorox Company]

Yeah. Timing is related to the commitment that we made at the beginning of the pandemic, and we continue to hold fast to, which is our absolute number one priority, was to supply as much of the demand as we possibly could. That continued to be our priority as we headed through Q4. We made the immediate call to price on Glad given what we were seeing in resin, and that will go in market shortly. We were doing the work behind the scenes to ready pricing across the rest of the portfolio as needed. Clearly, we're going to need to pull that lever, and we are, with about 50% announced to date and plan to take additional pricing that we'll communicate more details around coming up in the future. It really was about that continued priority of meeting as much demand as we possibly could.

[Dara Mohsenian, Analyst at Morgan Stanley]

Great. Thanks, guys.

[Operator]

Thank you. Your next question is from Peter Grom of UBS.

[Peter Grom, Analyst at UBS]

Hey. Hey, good afternoon, everyone. My question is just more on the conservatism and the guidance at this point. I know there are a lot of moving parts here, but I think a lot of investors are kind of asking, is the company being prudent, conservative, lowering the bar, whatever term you really want to use, to where you've embedded enough flex that even if trends deteriorate from here, is this guidance range still achievable? I know the operating environment is very different, and I'm not sure I would necessarily call this a rebase versus what we've seen in the past, but it would be helpful to get your view on how much flex there is in this guidance should inflation rise or consumer demand fall more from here. Thanks.

[Kevin Jacobsen, CFO at The Clorox Company]

Hey, Peter. This is Kevin. Yeah, thank you for the question. On our outlook, what I'd say is, I don't view this as conservative. I view this as balanced. I think you folks all know we are operating in an environment of unprecedented volatility, as you think about the changing consumer demand, the macroeconomy as well as how the virus is going to play out. We recognize, we've been operating in this environment for the better part of the last 18 months, and we expect that to continue. I would say that's certainly true in the front half of 2022. Our hope is we'll start to see it level out a bit in the back half and get to a more normalized environment. You should expect ongoing volatility in the front half.

[Kevin Jacobsen, CFO at The Clorox Company]

The way, Peter, we try to account for that is we provide a bit of a wider range in our outlook than what we would normally provide at this time of year, and we just think that's prudent to recognize the level of variability we have. I would describe this as a balanced forecast based on everything we're seeing to date.

[Peter Grom, Analyst at UBS]

Okay, super helpful. Quickly, maybe a point of clarification on Dara's question or your response to Dara's question. Returning to 40% in Q4, does that mean that you don't expect to be above 40% gross margins until Q4? I just want to make sure I'm thinking about that in the model correctly.

[Kevin Jacobsen, CFO at The Clorox Company]

Sure. Peter, the way we're envisioning this playing out over the course of the year is, as I mentioned in my prepared remarks, we expect Q1 to be down about 1,100 basis points-1,300 basis points, primarily driven by the cost environment. I'll talk more about that in a moment. We expect sequential improvements as we move through the year, and by the fourth quarter, we'll turn to margin growth. What we expect is by the fourth quarter, we've got margins back in the low 40s with our expectation going forward into 2023. While I'm not providing an outlook today, I would say on margin, we fully expect to continue to expand margins as we move into fiscal year 2023.

[Peter Grom, Analyst at UBS]

Okay, great. Thank you. Super helpful. Best of luck.

[Kevin Jacobsen, CFO at The Clorox Company]

Thank you.

[Operator]

Thank you. Your next question is from Wendy Nicholson of Citi.

[Wendy Nicholson, Analyst at Citi]

Hi. A couple questions. First of all, with the amount of money you're spending on the new digital ERP investments, what's your expectation for capital allocation potentially to step in and support the stock and buy back stock here? Because I know your leverage is still really low compared to your peers. Linda, kind of stepping back aside from near term. The guidance for 2022 gross margin, I've covered this stock for 20 years, and I have to go back literally 20 years to find a 40% gross margin for the company. I totally get that we're in a weird period with COVID-19, and you made a commitment to not raise prices, and I think that's great. I think it begs the question, is there something structural in the business?

[Wendy Nicholson, Analyst at Citi]

When you mentioned higher promotional spending, this does not seem like the time to be investing in promotional spending when you're also raising prices and you've got so much commodity inflation. A year into your job as the new CEO, do you think a mid-40s gross margin is the right number and this really is a temporary blip? Or is this a sort of, "Hey, we were maybe over-earning on the gross margin line, and low 40s or even high 30s is really where we're sort of more normally positioned"? I'm sorry for the long question, but the guidance for a 40% gross margin just seems crazy to me.

[Linda Rendle, CEO at The Clorox Company]

Sure, Wendy. I'll start with the second part of the question, and I'll hand it over to Kevin to talk a bit more about capital allocation on your first question. What we are seeing, and you have said it, its absolutely an incredible environment. If you look at all of the factors combined in what's contributing to our gross margin, I hate this term a little bit, but it's really the perfect storm, where we're lapping incredible sales growth, and things like operating leverage. We are lapping promotional levels being down, and I would argue, promotional levels for us are strategic. We've always viewed that investment just like we do our marketing dollars. It helps us build trial. It helps us expose consumers to things like innovation, and that's going to continue to be important in the future.

[Linda Rendle, CEO at The Clorox Company]

It's why we want to put that money back in the system to ensure, as we have record-setting innovation coming into the marketplace, from a top-line perspective, that we're able to support it with those dollars. Then, of course, the cost environment, which I think we're seeing broadly, and it's not just a Clorox issue, but certainly an industry problem. All of that is happening at once. What that leads me to is this is not a structural issue. This is a temporary issue, albeit an extraordinary one, and we're managing with discipline. I think the good news for us is we've managed, albeit not this deep, but certainly environments that have happened like this over time. What we do is go to work and execute, and we're going to do it just like that in the past.

[Linda Rendle, CEO at The Clorox Company]

We're going to take pricing, and you're going to see much more pricing come from us now as it starts to pick up and we've improved supply, as we've spoken about. We're going to put our cost savings machine to work, with a mandate to our team to remove any costs that are possible in the system, and that's what they are focused on every single day right now. We're going to take it one day at a time and execute it. I feel confident in our ability to get back to what Kevin spoke about and get back to those margins. It's just not going to happen this year. Again, we'll see improvement in Q4, and continued improvement as we move through fiscal 2023, but we do view this as a temporary issue.

[Kevin Jacobsen, CFO at The Clorox Company]

Wendy, on capital allocation, I'd tell you there's no change in our priorities in terms of how we're going to allocate our capital. As you know, our first priority will continue to be invest in our base business, and that includes our digital investments. Both Linda and I spoke about that today. If you think about where we were last year, we ramped up investments in our base business, both investing in innovation, investing in brand building, as well as investing in increasing production capacity within our supply network, primarily focused on increasing our wipes capacity. As we move into fiscal year 2022, as we've gotten through some of those investments in our facilities, you should see our capital spending return down more in our normalized range of 3%-4% of sales, where we typically operate. You should expect that this year.

[Kevin Jacobsen, CFO at The Clorox Company]

Then we will deploy a certain amount of capital towards this technology investment. The way I see this $500 million playing out is about 60% of it will flow through our P&L, and about 40% of that will flow through our balance sheet. If you think specifically about fiscal year 2022, we're going to invest about $90 million, with about $35 million flowing through our balance sheet. We'll deploy cash. Then after we invest in the base business, we'll continue to look for ways to return excess cash to shareholders. Last year, we generated a tremendous amount of cash through the pandemic, and we returned almost $1.5 billion. I suspect this year, because of the challenging cost environment and the reduced profitability, we'll return closer to somewhere between $700 million and $900 million between our dividend and our share buyback program.

[Kevin Jacobsen, CFO at The Clorox Company]

I'd also highlight, if you look at our dividend program, with our recent increase we announced back in June, we now have an average annual increase of a little over 7% over the last five years, and that puts us in the top third of our peer group. I think we have committed to continually returning excess cash to our shareholders, and we've operated at a fairly high level in our peer set, and you should expect us to do that going forward.

[Wendy Nicholson, Analyst at Citi]

Okay. That's great. Just on the digital investment, what's the sort of payback timing for that? When should we start to see whether this investment was worth it, if you will, bottom line?

[Kevin Jacobsen, CFO at The Clorox Company]

Yeah, Wendy, thanks for that question. This is really an investment set in our future. You'll start to see some of that payback late in our IGNITE strategy, towards the tail end of it. This is really about setting up the company to be prepared to succeed over the long term. We'll invest the $500 million over the next five years. You should see an investment starting our return, starting late in our IGNITE period, late 2024, 2025, and then really accelerating as we get beyond IGNITE. Wendy, our commitment is we'll continue to update folks exactly on our progress in both our investments and the returns we're generating on that investment.

[Wendy Nicholson, Analyst at Citi]

Great. Thank you so much for the color.

[Kevin Jacobsen, CFO at The Clorox Company]

Thank you, Wendy.

[Operator]

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

[Chris Carey, Analyst at Wells Fargo Securities]

Hi, everyone.

[Kevin Jacobsen, CFO at The Clorox Company]

Hi, Chris.

[Chris Carey, Analyst at Wells Fargo Securities]

I want to understand, you made some comments at your quarter about the Health and Wellness business normalizing to something like a $700 million or below run rate, which clearly played out this quarter. That business could grow from that over time, and I'm curious your thoughts on timeline of that trajectory from where we are today, what you think is going to be developing over that time period, whether that's professional getting back in stock in some of your businesses, the promotional spending or the pricing. I guess underlying that question as well is I'm conscious, of course, that the Health and Wellness business has really tough comps in the first half, the household business also has pretty difficult comps and the grilling business is normalizing.

[Chris Carey, Analyst at Wells Fargo Securities]

Just trying to get a sense of, if this trajectory is playing out in Health and Wellness, what you kind of see in your household business for the first half of the year. I guess back-of-the-envelope maths would just suggest that you kind of need to see some improvement on a stack basis there and whether I'm thinking about that correctly, then I just have a quick follow-up.

[Linda Rendle, CEO at The Clorox Company]

Sure, Chris, I'll start with Cleaning. I think this is absolutely a dynamic time for Cleaning given all of the volatility. There were two things that we said at the beginning. We believe that this was a change in consumer behavior that would be long-term, and the evidence continues to support that that is absolutely the case. If you just look at some of the consumption numbers, even though it did decelerate faster than we expected as vaccination rates picked up, at least until we got to the point we are today, you still see a very strong two-year stack of growth. In Q4, that was over 20% for our Cleaning business. Also if you look at consumption, that's been up in the range from 25%-30% versus pre-pandemic levels. We really are seeing that behavior be sticky with consumers.

[Linda Rendle, CEO at The Clorox Company]

Of course, we're lapping incredible growth in those businesses and frankly, demand that we couldn't supply early in the pandemic. What you're seeing is a normalization, but as we said, a significantly higher run rate moving forward, and we expect that to continue. Exactly where that will net out is still unknown, and I think there's a lot of unknowns moving forward. Delta certainly is an unknown, cold and flu season, et cetera, but we have continued confidence that this will be a long-term trend, that we can grow off and will provide us the opportunity to accelerate profitable growth, and as we talked about raising our sales target to 3%-5%, this is a portion of that. Continued confidence there.

[Linda Rendle, CEO at The Clorox Company]

I would say though, as we look to the first half, and as we lap 27% sales growth overall for the company for Cleaning and Disinfecting and for our Household business, we won't expect to deliver accelerated results versus that period. As we start to lap in the back half is when we get to the low end of our sales algorithm and seeing both Cleaning and Disinfecting and our Household business contributing positively to that.

[Chris Carey, Analyst at Wells Fargo Securities]

Okay. Yeah, thank you for that. Kevin, did you have something? I just have a quick follow-up. Just on the Health and Wellness margin in the quarter, I appreciate there is some mixed dynamics and volume deleveraging, but obviously it's quite low, well below our model. Any perspective on, can you expand just on what exactly is occurring in that business and how we should be thinking about the margin trajectory there, going into fiscal 2022 and perhaps why that's going to be improved? Thanks so much.

[Kevin Jacobsen, CFO at The Clorox Company]

Yeah, Chris, as it relates to margin on our Health and Wellness segment, I would highlight a few items. The one is, as I mentioned, we took a charge as it relates to a PPD supplier that impacted our Health and Wellness segment, and that was about 11 points in terms of margin. That was non-cash. That won't continue going forward. Also keep in mind, we are lapping 85% growth in the Q4 prior year. We're lapping a big year-over-year number, as well as we're dealing with increased costs. I think it goes back to what we're talking about. We're dealing with a very challenging cost environment in the very near term, and that's going to pressure margins, but we do think this is short-term.

[Kevin Jacobsen, CFO at The Clorox Company]

We continue to have tremendous confidence that we're going to be able to expand margins as we get to the back half of fiscal year 2022 and then on into 2023. We have to recognize it in the very near term is going to challenge margins. You saw that in the fourth quarter, and you'll see that in the first half of fiscal year 2022.

[Chris Carey, Analyst at Wells Fargo Securities]

Okay. Thanks so much.

[Operator]

Thank you. Your next question is from Jason English of Goldman Sachs.

[Jason English, Analyst at Goldman Sachs]

Hey, good morning, folks, or good afternoon, I guess, depending on where you are. A couple quick questions. First, real quick on cash flow, have you given free cash flow guidance? If not, can you? You've got this target out there of free cash flow conversion as a percentage of sales, 11%-13%. As you migrate away from GAAP and start excluding things, should we expect that ratio to move lower or for you to move to the lower end of that ratio?

[Kevin Jacobsen, CFO at The Clorox Company]

Yeah, Jason, on cash flow, as you rightfully said, our target is 11%-13%. We've done very well against that target. If you look at fiscal year 2020, the height of the pandemic, we delivered a little bit over 19% in terms of cash flow as a percent of sales. We had a good strong year in fiscal year 2021. We ended up at 12.9%. I would say this year, given the challenges on the cost environment, I expect we're going to be at the low end of that range. I think closer to 11%, if not slightly below that. That's really a reflection of the more challenging cost environment. Long term, we have tremendous confidence that we continue to deliver in that 11%-13% going forward.

[Jason English, Analyst at Goldman Sachs]

That's helpful. Thank you.

[Jason English, Analyst at Goldman Sachs]

Linda, I know you're pleased with the market share progress. If we look at it versus pre-COVID levels, particularly for your Cleaning segment, you're still well below where you were pre-COVID, even here in July. In fact, if I look at multipurpose clean spray or Clean Wave, it's only gotten worse versus 2019 for the last couple of months. Is this the reason that your progress on pricing is so slow? Is it to try to sort of reset some price gaps and become more competitive to correct market share? Is it a factor to the service levels you mentioned and really the need to restore them first before you're able to start to push through pricing with retailers?

[Linda Rendle, CEO at The Clorox Company]

Thanks, Jason. I would say I'm very pleased with our share results given the environment that we have. We're seeing significant increased competition. We had supply challenges given the unprecedented demand, and we're making, in my view, great progress. Share up in seven of nine businesses. If you look at the latest 13 weeks, we widened our share gap in Wipes back to double digits and growing, and that's with significantly new competitive entries in the category. We grew Brita eight share points. We have a very strong start to back to school, and that program's working well. Continued strong Kingsford share growth after many quarters in a row of share growth in Kingsford. You've heard my commitment and I continue to stand by it. We remain committed to growing share, and we're focused on that in fiscal 2022 and headed in absolutely the right direction.

[Linda Rendle, CEO at The Clorox Company]

I've also called out places where I'm not as happy. I'm still not happy on where we are in Glad. We have work to do there. We're focused on the fundamentals and executing, and this really is completely unrelated to pricing, Jason. Pricing really has to do from a timing perspective with ensuring that we had the supply and then going back and working with our retail partners to ensure that we could implement the new plans in place. That really is the only reason why we've delayed that. We will, of course, do the very important work you call out on price gaps as we move forward, and that will be important.

[Linda Rendle, CEO at The Clorox Company]

Given the incredible cost environment we see across the industry, we would expect to see categories move, and we'll move along with them, and then we'll do the work to go back and ensure that we're in those right gaps. The other piece I would add, Jason, is our brands have never been stronger, and that was our goal exiting fiscal year 2021, was to be in a stronger position to grow off of this new, significantly higher base. If you look at our household penetration, repeat rates, our consumer value, and as you know, we measure the percentage of our portfolio that is deemed superior by consumers. That's at a record high at 70%. We feel fully confident in our ability to take pricing with the consumer. Then, of course, they'll be met with great marketing spend and innovation to continue to support that demand.

[Jason English, Analyst at Goldman Sachs]

Thank you. I'll pass it on.

[Linda Rendle, CEO at The Clorox Company]

Thanks, Jason.

[Operator]

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

[Kevin Grundy, Analyst at Jefferies]

Great. Thanks. Good morning. A couple questions on your outlook. First, just from an organic sales perspective, you're expecting down 2%-6%. My question is perhaps for Kevin, what is embedded in that for category growth? Building on some of the prior questions, you sound pleased for the most part with some of the market share improvements. Is that reflective generally of what you expect for the categories that you participate in, albeit against some difficult year-over-year comps in the first half of the year? Then a little bit longer term, I don't want to belabor this, but maybe I'll just kind of play it back and you tell me if I'm hearing this sort of correctly. The longer term margin restoration now for this company, Linda, I think to an earlier question, you said you don't see this as a structurally lower margin business.

[Kevin Grundy, Analyst at Jefferies]

Kevin, I think you kind of alluded to this as probably a multi-year journey, though, to get back. Down materially this year, some improvement in fiscal 2023, but probably not getting back to what would be, quote-unquote, "normal" sort of margins for this business until fiscal 2024, 2025. Maybe you could just confirm that, and then I have a quick follow-up on pricing. Thank you.

[Kevin Jacobsen, CFO at The Clorox Company]

Hey, Kevin. Thanks for the question. On the two, on organic sales growth, our assumption in the -6% and -2% is that we'll see modest category decline as we see demand moderate coming out of the pandemic, that'll be partially offset by share growth broadly across our portfolio. That's embedded in our assumptions for organic sales growth. On margin restoration, what I would tell you is we are committed to recovering the cost inflation we're experiencing this year. As I said, between our cost savings program and the pricing actions we're taking and the phasing of those pricing actions, we think that'll extend beyond this fiscal year. I see this more as a short term issue, but medium to long term, I have confidence in our ability to get back to that mid gross margin number.

[Kevin Jacobsen, CFO at The Clorox Company]

I'm going to resist providing a gross margin outlook for fiscal year 2023. It's just too early to do that, and there's a lot of moving parts. Embedded in our assumptions right now is we will see a moderation in the commodity environment as we get through the end of this calendar year. If that commodity environment moderates as we anticipate, plus the pricing actions we're taking, you'll see us start to rebuild margins and then continue into fiscal year 2023. Kevin, I'm sure you've seen this before, but if you go back and you look at some of our previous pricing actions over the last decade, we've done this three other times. In all cases, what you saw was a margin decline in the year when the commodity costs spiked, and then we went on to rebuild margins in subsequent years.

[Kevin Jacobsen, CFO at The Clorox Company]

Most recently in fiscal year 2018, if you recall, we had nine straight quarters of gross margin expansion following our pricing actions. My expectation is you'll see something similar where we'll start in Q4, and then that will continue on into fiscal year 2023.

[Kevin Grundy, Analyst at Jefferies]

Okay. That's helpful. The quick follow-up is just I think the comment was you priced on 50% of the portfolio. I suppose maybe some questions on why the delay in doing that. Setting that aside, I guess, and understanding some of the past competitive dynamics, what's the probability of pricing on the remaining 50%? Understanding there has to be a cost justification, but difficult to envision many categories where there's not. Talk about the decision there, what's going on, price gaps versus private label, game theory versus the competition. Why not moving on the other 50% or maybe sort of some further color on expectations there? I'll pass it on. Thank you.

[Linda Rendle, CEO at The Clorox Company]

Sure. Yeah. On the 50%, as we said, I think in an earlier answer and in our prepared remarks, it means we've announced pricing of about 50% to date. We are planning additional pricing that we'll speak a little bit more once the details are in market. Really there were considerations across how we would do that, at what product categories and what time, and we really took it category by category. It started with that first principle that I spoke about, which is we had to ensure we were in the right supply position as a starting place, before we did that. As we've brought supply back online, we've opened more and more of our categories to looking at that.

[Linda Rendle, CEO at The Clorox Company]

Of course, we're doing the really important work to look at each category, look at the dynamics, our position in that, what our innovation and marketing plans look like, and balancing that across every one of the categories. What we're really here to do is maximize the long term on this. What we want to ensure is that pricing is a part of that way that we restore margins, but also that we don't give up the opportunities we see in front of us to accelerate overall long-term profitable growth. That's the balance we've gone through in every category. I think what you're going to see from us as this all nets out is that we're taking a very prudent stance on pricing. It'll be a meaningful contributor to gross margin expansion as we move through the year.

[Linda Rendle, CEO at The Clorox Company]

As Kevin said, we have all confidence that as we move beyond that, we'll be able to restore margins with pricing as an important part of that.

[Kevin Grundy, Analyst at Jefferies]

Okay. Very good. Thank you both. Good luck.

[Linda Rendle, CEO at The Clorox Company]

Thanks, Kevin.

[Kevin Jacobsen, CFO at The Clorox Company]

Thanks, Kevin.

[Operator]

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

[Lauren Lieberman, Analyst at Barclays]

Great. Thanks. Good morning. I was hoping if you could just give us a little bit of color to the degree you have it on where you think retailer inventories currently stand, and same for, PPD and any research you've done on consumer pantries. I know you've built in the category correction in the first half, but I'm just curious where you stood on retail inventory levels, in particular in PPD. Thanks.

[Linda Rendle, CEO at The Clorox Company]

Sure, Lauren. Broadly, as we look across retail inventories, given the good supply progress that we made in Q4, we have largely restored inventories across the bulk of our portfolio. We do have some additional work to do on the broader assortment, a few packs and cleaning and disinfecting here and there, and still have some work to do on Kingsford and Food. Largely, I would say on the retail side, inventories are restored. We'll see how that plays out, of course, as Delta takes on, et cetera, how those inventories continue to progress as we go through the first half of the year, but largely in a good spot now. In the Professional business, it is different.

[Linda Rendle, CEO at The Clorox Company]

If you look at the front half of fiscal year 2021, we had a 70% increase in sales for our Professional Products business, and then we had a big drop off of that in our back half, as we've talked about in both sets of results. What we've uncovered is there does look like there's a lot of inventory in the professional channel, given that front half that we experienced. It's not just our inventory, it's actually inventory across all manufacturers. That network is primarily supplied by distributors. Having visibility into each point of that supply, we do now, and we realize there's more inventory there. That means as we lap that 70% growth in the front half of fiscal 2022, and we start to weed down that inventory, it is going to be bumpy in the short term.

[Linda Rendle, CEO at The Clorox Company]

Continue to have strong confidence in our ability to grow PPD. You look at the two-year stack growth, it's 35%, sales growth, but I think it is going to be bumpy here as we lap this front half, having the inventory in the system and then lapping an incredibly strong first half of last year.

[Lauren Lieberman, Analyst at Barclays]

Okay, thanks. That's super helpful. Then I had a question about variety. You talked about how obviously during the height of the pandemic to increase throughput, SKU rationalization and the smaller packs in particular, now bringing some of those value packs back in larger sizes. Did you consider using this as sort of an opportunity to intentionally kind of streamline mix, as everyone in the industry talks about revenue growth management, right? Ways to actually improve the profitability of what you do choose to merchandise? I would have thought that that could also give you a bit more flexibility, and particularly as you're going through this cost environment.

[Linda Rendle, CEO at The Clorox Company]

Absolutely. We've spoken about adding net revenue management more aggressively to our toolbox to deal with margin moving forward. That is absolutely the plan. Two things. One, as we brought SKUs back into assortment, we did just that, Lauren. We did not bring back the full assortment. We took the opportunity to simplify, which helps us, in many areas in the cost lines in P&L, also from a retailer perspective, optimizing their mix and leveraging their store shelf space as well as online mix in the right way. You will see a smaller assortment. Our goal was to ensure that we had share of assortment right, full knowing that distribution points might come down, and we're certainly seeing that play out. Your point moving forward is exactly right.

[Linda Rendle, CEO at The Clorox Company]

We intend to use more net revenue management tools, which would include things like assortments, and getting the mix right to drive margin over time. All of our business units are developing plans to use that as a bigger lever moving forward.

[Lauren Lieberman, Analyst at Barclays]

Okay, great. Kevin, if I just can sneak in one more. I did have a question for you on the charge this quarter, related to the PPD supplier. I thought it'd just be helpful to better understand what was underlying that, because I think, you discussed paying up for supply, which obviously, given the commitment that the company made to supplying these critical products during a very tough time, is important. I'm curious at the charge piece of this, like why that choice would effectively be excluded from results. I know this is backward looking, but I think it's just helpful to get that perspective.

[Kevin Jacobsen, CFO at The Clorox Company]

Yeah, sure, Lauren. Happy to talk about the charge we took. As we mentioned, we took a $28 million charge in the fourth quarter. This was related to a PPD supplier. What this is related to is very early in the pandemic, when we saw the unprecedented increase in demand, we invested to help scale this supplier up to help increase their ability to supply product. What we've done now is, as they've done that, they've had some challenges more recently. We've made a decision we're going to move away from them. What we're doing here is we wrote off the investments we made in that supplier, which was really done to help scale them back when the pandemic first began. At this point, we've moved our business away to other suppliers.

[Kevin Jacobsen, CFO at The Clorox Company]

We think we're in good shape going forward from a production perspective. We excluded this as a non-recurring, non-cash item in terms of the charge we took in Q4.

[Lauren Lieberman, Analyst at Barclays]

Okay. Thanks so much.

[Kevin Jacobsen, CFO at The Clorox Company]

Sure. Thanks, Lauren.

[Lisah Burhan, VP of Investor Relations at The Clorox Company]

Thanks, Lauren.

[Operator]

Thank you. Your next question is from Stephen Powers of Deutsche Bank.

[Stephen Powers, Analyst at Deutsche Bank]

Thanks very much. Linda, and maybe Kevin as well, I listened to the discussion on the strategic investments that we started with, and it makes good sense to me logically. I'm not debating the business case at all. I guess I'm not clear on why we're adjusting out those investments from recurring EPS. I know we talked about this move to adjust earnings last quarter, and I get the rationale to provide investors clarity. Backing out a one-time gain or a charge or impairment, I think that's different than what I'm hearing, which is backing out strategic investments for a pretty long time, five years after years of not doing so.

[Stephen Powers, Analyst at Deutsche Bank]

Why are these investments different from what at least I perceive you guys to have been doing proactively for the last any number of years to get you in a position where you are now? This seems almost normal course in evergreen for Clorox. I guess just more clarity on why these particular investments are unique and different enough for you to consider them non-recurring and worthy of adjustment. That would just help philosophically on this idea of adjusted earnings.

[Kevin Jacobsen, CFO at The Clorox Company]

Yeah. Steve, this is Kevin. Thanks for the question. You know what I'd say about these investments, a couple of thoughts. The one is just in terms of the size of the investment. As we mentioned, $500 million over five years is a big investment for us. The vast majority of that investment will go towards replacing our ERP system. I think this is pretty typical for large ERP investments that you typically do only once every 20 years or so to isolate that so people can understand the investments we're making there versus the underlying performance of the business. Then the other aspect on this investment, Linda mentioned it, is this investment really is about the future of the company, much more so than what it's going to do to benefit our IGNITE strategy through 2025.

[Kevin Jacobsen, CFO at The Clorox Company]

We're making some pretty significant investments here, both in replacing our ERP as well as upscaling our digital capabilities that really will start to benefit us as we move beyond 2025, our IGNITE strategy. We thought it's appropriate to be able to isolate these and help folks understand our underlying operating performance, which has been pretty volatile, as well as the investments we're making really to set the company up for the long term.

[Stephen Powers, Analyst at Deutsche Bank]

Okay. Fair enough. You talked a little bit about this already, the building blocks, Kevin, from the double-digit declines in the first quarter to achieving the low end of the long-term algorithm in the back half, can you just talk a little bit more about, just for my own benefit, the bridge from 1Q to back half, and really where your confidence comes from that that 3%+ will be kind of achievable in the back half and extrapolating forward?

[Kevin Jacobsen, CFO at The Clorox Company]

Yeah. Thanks, Steve. If you think about the top line, the front half of the year, we said it's going to be much more challenged. A big portion of that is we're lapping 27% growth. We had record growth in the front half of fiscal year 2021 we've got to lap. As a result of that, we expect our business to be down high single, low double digits. I think as we get into the back half of the year and we get back to more normalized comps, and we think we've gotten through the bulk of the demand moderation that we expect in the front half of the year, that gives us more confidence that we're going to be in a more normalized operating environment with more normalized comparison periods, that we should be back in that 3% range or so.

[Kevin Jacobsen, CFO at The Clorox Company]

Linda and I continue to have tremendous confidence in the opportunity for the extra point of growth. I think a little bit of that is getting hidden by the comps we're going through and the normalization. That's really a short-term issue for us that we think plays out over the next six months. As we look to the back half of the year and we think we get to a more normalized environment, then I think you'll start to see the benefits we've been talking about that we continue to see going forward that we think is really a medium to long-term opportunity.

[Stephen Powers, Analyst at Deutsche Bank]

Okay, great. If I could squeeze one more clarifying. In your release, Kevin, there was a line about unfavorable price mix, driven by supply improvements that led to the reintroduction of value packs. I'm assuming that's all mix. It does say price mix. If there was a price component to that, could you just talk about that, or am I right that it was essentially mix?

[Kevin Jacobsen, CFO at The Clorox Company]

It was essentially mix in terms of the headwind. There was favorable pricing because we continued to price in international. We had about a point benefit in price within that price mix as it relates to the international pricing that we're doing. The rest of it was about three points of negative mix. That mix was, I'd say, twofold, Steve. It's certainly, as we talked about, reintroducing additional SKUs. The other item that we're seeing is as we now have wipes back in supply, consumers are changing to more convenient forms. During the height of the pandemic, when we couldn't supply wipes, it increased our bleach sales in less convenient form. Now that we can produce wipes, consumers are moving back into the more convenient form of wipes versus using bleach. Ultimately, that's good for consumers. It gives them a more preferred solution.

[Kevin Jacobsen, CFO at The Clorox Company]

That comes at a slightly lower mix for us. A combination, I'd say, of conversion within the product families, as well as introducing additional SKUs, we get to a more normalized environment.

[Stephen Powers, Analyst at Deutsche Bank]

Okay. Understood. Thank you very much.

[Kevin Jacobsen, CFO at The Clorox Company]

Sure.

[Operator]

Thank you. Next question is from Andrea Teixeira of JPMorgan.

[Andrea Teixeira, Analyst at JPMorgan]

Thank you. Linda, I wanted to follow up on your comments on Glad. I was hoping if you can comment on why it's taking so long to recover, even after your main competitor has been narrowing these price gaps and leading in prices increasing, I believe, twice already. Is that because you always led on innovation, and competitors and private label caught up to it, especially during COVID-19? Following up on another question, you had committed to keep prices intact during the pandemic, but what do you need to see now that your capacity is back on track and vaccinations are up? Are you still thinking you need to narrow those price gaps in particular for the value proposition in that category, and in particular, in large count packs for Glad Trash? I have a follow-up question on commodities for Kevin, please.

[Linda Rendle, CEO at The Clorox Company]

Sure. On Glad, if you look at Q4, just to set the backdrop, sales were down double digits, but we lapped very strong double-digit growth in Q4 of last year. We had a two-year stack of Glad of 9% sales growth, and the fiscal year results, low single digits. Overall, from a sales perspective, we were happy with where we landed. Really, it's a share disappointment that I continue to have. We want to grow market share and particularly in a category like Trash. We are seeing the share trends improving. We were down about 0.9 points in the latest 52 weeks, down 0.5 points in the latest 13, and down 0.4 in the latest four, five. Definitely trending in the right direction behind improving distribution, getting the fundamentals right, et cetera.

[Linda Rendle, CEO at The Clorox Company]

When it came to pricing, again, we announced pricing back in the fourth quarter. It's being implemented now. We took a larger first round than what we saw in the marketplace, to take into account what we saw from the category. We're evaluating that again, if an additional price increase is warranted. We feel like we've made the right move on Glad, and again, we'll continue to watch that. Innovation continues to work incredibly well in Glad, and we're committed to that program moving forward, to differentiate our bags. What we're really focused on right now is in-market execution, ensuring we have the right distribution at every retailer, implementing pricing flawlessly, and then getting back to merchandising, which will be important in this category.

[Linda Rendle, CEO at The Clorox Company]

Again, this is less of a comment overall in terms of sales, but more around winning in the market, ensuring that we have plans that grow share in the future.

[Andrea Teixeira, Analyst at JPMorgan]

That's fair. Thank you. The question for Kevin is really what are your guidance embeds for gross margin in terms of, is that fair to say the guidance embeds what you announce in pricing, which is the 50% of the portfolio? Then in terms of resin, are you baking in resin to stay as a spot or you are actually using forward curves to basically soften it up? In other words, if it gets better from here and you take more pricing, there is upside to your guidance.

[Kevin Jacobsen, CFO at The Clorox Company]

Yeah, thanks, Andrea, for the question. As it relates to how we thought about commodity forecast, we have projected out what we believe is a commodity environment over the course of the year. We are not using a spot rate. Our fundamental assumption is we will see commodity costs continue to increase. In fact, we think this quarter we'll see them peak and then begin to moderate in the fall, late calendar year. Commodity costs will start to moderate and continue in the back half of the year. This is, and I think I mentioned on one of the earlier questions, we anticipate about 75% of the commodity cost increases we're projecting for the year, we're going to see in the front half of the year. This is going to be the most extreme comparison period.

[Kevin Jacobsen, CFO at The Clorox Company]

Just to give you maybe a little bit of additional information, help dimensionalize it. When you think about resin, we're projecting over 100% increase in the cost of resin in the front half of the year. That's the type of environment we're dealing with. That's in a difficult environment to recover that type of margin compression in the time that it's rising. We do think we're positioned well to recover that over time. Right now, we're projecting for the full year what we think where commodities will land. Any change in that, we'll certainly update you as we learn more.

[Andrea Teixeira, Analyst at JPMorgan]

If I can squeeze just one question on inventory at The Pantry. Is there any anecdotal evidence that you've heard from basically your customers saying that consumers, or even your market studies, that consumers have built a lot of inventory on bleach in particular? To your point earlier, that they're using bleach to disinfect, and that is still a dynamic. Or just consumption still remains elevated from your commentary before? It's just a question of having them switch back to branded as you supply more.

[Linda Rendle, CEO at The Clorox Company]

Yeah. We don't have any evidence from consumer studies or from retailers that there's excess pantry inventory across any of our categories. Where there was pantry loading that happened early in the pandemic, for example, on Glad, those things have already reversed themselves out. What we're just seeing is continued elevation of consumption in the Cleaning categories as you articulate, but lower than levels at height of the pandemic. Really, we don't see this as a pantry loading issue.

[Andrea Teixeira, Analyst at JPMorgan]

Thank you so much. I'm going to press one.

[Linda Rendle, CEO at The Clorox Company]

Great. Thank you. I believe that's the end of Q&A. Thanks again, everyone, for joining us. We look forward to speaking to you again on our next call in November. Until then, please take good care.

[Operator]

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

Participants

Executives

• Kevin Jacobsen, CFO
• Linda Rendle, CEO
• Lisah Burhan, VP of Investor Relations

Analysts

• Andrea Teixeira, Analyst at JPMorgan
• Chris Carey, Analyst at Wells Fargo Securities
• Dara Mohsenian, Analyst at Morgan Stanley
• Jason English, Analyst at Goldman Sachs
• Kevin Grundy, Analyst at Jefferies
• Lauren Lieberman, Analyst at Barclays
• Peter Grom, Analyst at UBS
• Stephen Powers, Analyst at Deutsche Bank
• Wendy Nicholson, Analyst at Citi