管理層發言
Good day, ladies and gentlemen, and welcome to The Clorox Company Q3 FY '26 Earnings Release Conference Call. Operator instructions were provided. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Ms. Lisah Burhan, Vice President of Investor Relations for The Clorox Company. Ms. Burhan, you may begin your conference.
Thank you, Jen. Good afternoon, and thank you for joining us. On the call with me today are Linda Rendle, our Chair and CEO; and Luc Bellet, our CFO. Please note that our earnings release and prepared remarks are available on our website at thecloroxcompany.com. 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 2026 outlook. These statements are based on management's current expectations but may differ from actual results or outcomes. In addition, we may refer to certain non-GAAP financial measures. Please refer to the forward-looking statements section, which identifies various factors that could affect such forward-looking statements, which has been filed with the SEC. In addition, please refer to the non-GAAP financial information section of our earnings release and the supplemental financial schedule in the Investor Relations section of our website for reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures. I'll now turn it over to Linda.
Thank you for joining us today. As we approached fiscal year 2026, we knew it would take a disciplined, phased approach. In the front half of the year, we intentionally focused on implementing and stabilizing our new ERP. That work was foundational to strengthening how we operate, even though we knew it would create some near-term disruption. As we moved into the back half, our focus turned to rebuilding momentum, getting innovation to shelf and sharpening execution. That sequencing is still the right one and it remains central to our plan. That said, the pace of improvement has been slower than we expected in some businesses and as a result, our third quarter results were mixed and fell short of our expectations. We continue to make progress on market share across much of the portfolio, but more gradually than we anticipated in certain categories. Gross margin also came in below expectations, driven by higher-than-expected supply chain costs and delayed cost savings as we deliberately prioritized stabilizing the ERP. Even with those challenges, we remain confident in the path forward. With the ERP implementation now complete, we're better positioned to convert our innovation, investments and distribution gains into value superiority for our brands and stronger results. Our focus is squarely on execution, delivering the fundamentals, accelerating innovation performance and finishing the year with momentum as we set up for fiscal year 2027. With that, Luc and I are happy to take your questions.
分析師問答
Operator instructions were provided. And our first question comes from Peter Grom with UBS Financial.
I was hoping to start just on the top line trajectory. You touched on some of the macro pressures. But as you just mentioned, the progression of your business has not been in line with your expectations. So I mean, you touched on different areas in the prepared remarks, but do you have any perspective as to why the improvement isn't taking shape the way you hoped? And I guess as you look out to '27, do you have confidence that you will see stronger performance across more pieces of the portfolio?
Thanks, Peter. I'll get started and Luc can build if there's anything he wants to add to this. I'll start with there's areas of continued momentum in the portfolio that are going as well as we expected or better. I'd call out our cleaning business, which continues to be an area of strength and of course, is our biggest business. Innovation is going extraordinarily well there. And despite a very competitive promotional environment right now, we continue to win and win share. International, despite disruptions around the world, continues to perform with strength. We're seeing Glad make significant progress, so shares quarter after quarter have sequentially improved. We're seeing distribution pick up on that business and some of the actions that we took investing back in price have done really well. Food, we returned to share growth this quarter. So lots of things going well and where momentum continues. And really, the area of the shortfall is a few businesses we expected to make more improvement that did not quite make the improvement that we expected in Q3. We expect continued progress there in Q4 and then continuing to make improvement in fiscal year '27. And I'll talk about a couple of them. The first and most importantly would be Litter. Category tailwinds continue to be exceptionally strong, and we are committed to getting back the share that we have lost, and we're doing that through a complete reinvention. So for those of you who saw what we talked about in CAGNY, this is really a fundamental reset of our Fresh Step business. We changed all of the items. We changed their names. We changed their claims, pack size through price pack architecture, and that began to roll out at the end of Q3. And while largely that foundation is now in place, now we're doing the really difficult work of mapping consumers from what they used to buy in Fresh Step to the new items. I would say the distribution came in generally in line with what we expected, which was an increased amount of TDPs. But unfortunately, some things aren't quite where they need to be, and we're working on improving those in the next few months. And that would relate to shelf placement on a couple of items in key retailers, et cetera. But we're addressing those fast and making changes. So I think Litter is going to be just bumpier, and it's not totally unexpected given the amount of transformation we're taking on there. And I'd also remind you, Litter is going to be a multiyear process. We talked about this was the first important step, but we've got to get innovation back on track to the place where over time, we can begin building or growing share, not just rebuilding share. And then the other area I would just call out would be Food. And although we did grow share in the quarter, and we saw portions of the elements of the things we put in place working, the category was weaker than we had expected. So we expected a low single-digit decline. It was closer to a mid-single-digit decline in the category. We're seeing high promotional intensity and deep discounting from competitors in that category, which is putting pressure on dollars. And we're also seeing some consumer trends that we're watching closely on GLP-1s, et cetera. But the good news for Hidden Valley is we did some price pack architecture work. I think you all recall, we had made a transition where we flipped our bottle upside down, which was consumer preferred right before last February when kind of value superiority really accelerated from a consumer perspective. So we have since reversed that decision and put our regular 16-ounce bottle that everyone knows and loves back on the shelf. That's playing well. In addition, we've just recently launched a number of trend forward Hidden Valley launches, including protein forward options, Avocado Oil item, and we believe that's why we've seen that inflection in share and that, that should continue moving forward. So net, Peter, a lot is going well, and we're making progress in a lot of the areas we expected to. I would just call out Litter making slower progress than we had expected and Food are really working to get that category going again.
Okay, great. I know we'll get '27 guidance in August, but there are a lot of moving pieces here with the $0.90 and the current inflationary pressure. If I look at this year's guidance, it seems the majority of the $0.40 move at the midpoint is related to cost pressures, which, if annualized, would be a pretty substantial headwind. Is there any way to frame how you see costs and inflation looking out to '27 at this stage?
Peter, this is Luc. I can try to answer that. It is a very dynamic situation with a lot of uncertainty, so it's too early to give a perspective for next fiscal year. As you can imagine, we are currently working on next fiscal year and modeling a wide range of scenarios and potential outcomes. What you can see in Q4 is the current impact of the higher oil price. Right now we are assuming about $100 per barrel as the midpoint of our estimate for Q4, which translates to roughly $20 million to $25 million of headwind, or about 130 basis points of gross margin. That gives you a reference point. This is clearly material, but because it occurs in Q4 we did not have time to deploy mitigation actions, so we are essentially taking the full gross impact in Q4 without any mitigations yet. Over time, we are confident in our ability to cover those higher input costs. We have a solid track record over the last few years, we have developed a robust set of tools around integrated margin management, and we have a strong pipeline of cost savings for next year. Again, it is very hard to predict what might happen over the next few months, quarters, or the next year.
Operator instructions were provided. And we'll move next to Filippo Falorni with Citigroup.
Linda, I was hoping you can talk about the shelf space gains that you realized so far versus expectations, especially as we think about Q4 organic sales and as we're heading into fiscal '27. Are they going according to plan, especially around the innovation? And then are you seeing any of the areas of the business where you're seeing maybe more or less shelf space than you were expecting?
Sure. Thanks, Filippo. So shelf space gains are going according to our plan at an aggregate level, and then I'll touch on a few businesses. So if you look at Q3, total distribution points for Q3 were up over 5%. And we know that our retailers are still resetting our shelves and will through the remainder of Q4. So we expect continued progress on that as we move through this quarter. That being said, what we're watching is not only that we got the gains, but the items are in the right locations. So I'll call it Litter. We got the distribution gains that we expected, but there are places where it was shelved in a different place than we had expected or next to an item that we didn't expect. So we're doing that type of detailed shelf work, but all of the distribution points were there. And I would say a number of the businesses, like I called out Glad that we have been working on, we feel good about where we're landing on distribution points there, and that will continue to accelerate into Q4 as well as food behind our innovation and our price pack architecture work. So on track from a shelf space perspective, but now we'll do that work to ensure that items are placed on the shelf where they should be.
Great. That's helpful. And then, Luc, maybe I can follow up on Peter's question on the cost headwinds into next year. I guess as you think about the mitigating potential mitigating factors, how are you thinking in terms of order of importance between cost savings, potential from pricing and any other levers that you can pull to mitigate some of those headwinds?
Filippo, yes, we're looking at a whole set range and looking at essentially all elements of our integrated management set of tools anywhere from leveraging RGM and leaning more in RGM and PPA in some business units to lean more into productivity and cost savings, and it's a whole wide range of potential savings, including potential reformulation, supply chains. And we're also looking to accelerate some more structural cost savings that we had planned maybe later in '28 into '27. And as you probably saw in Q4, we are recognizing a lot of onetime cost, and this is in our gross margin. That's a headwind of 50 basis points, but that's going to allow us to actually accelerate one of those more structural cost savings. So I would say it's across the range of levers. Of course, it will differ by BUs depending on the competitive dynamic as well as the pipeline that was already existing.
Operator instructions were provided. And our next question will come from Andrea Teixeira with JPMorgan.
I wanted to go back to the comments, Linda, you made about the exit of the quarter in the prepared remarks when things got tougher, especially for Food and Hidden Valley. Can you comment on how you landed as you exited the quarter across categories? You mentioned Food was down mid-single-digits, but generally across all categories, can you give an estimate of how much they have contracted? And regarding the view you embedded on mitigations, do you think you could implement an RGM that would allow you to pivot into RGM in the first half of the year, or is that more of a long-term shift that you wouldn’t be able to make in such a short period?
Thanks, Andrea. I got it. I'll start with the categories, and then I'll move to your question on RGM. So from a category perspective, we thought at the beginning of the year, we would be in the range of flat to up 1% in aggregate for our categories. And what's played out through Q3 is exactly that. So we're about in the middle of the range. What we did see in Q3, though, was market differences in January, February and March. January and February were more in line with what we expected, and March was slightly better, meaning that the categories at the end of Q3 were slightly above our expectation of 1%. What we think happened in March was that people received additional tax refunds and some of that money they spent back in essentials categories on stock-up trips. But we're starting to see that decline a little bit as people are having to spend more money at the pump. But generally, still for the remainder of the year, we expect our categories to be in that range of 0% to 1%. Some of them are higher, as we noted. So Litter is closer to mid-single digits. We're seeing Food down closer to mid-single digits, although we're hoping, again, some of those actions that we've taken are going to help mitigate some of that and then a range between those 2. Most of our categories were positive, though, this quarter, which is good news. I think the important part to note here is that even though the consumer is under stress, and you could argue a lot more stress now given what they're experiencing from gas prices and just the uncertainty of what's going on, they're still really resilient in our categories, and that's a good sign. We're seeing them continue to buy innovation. Private label shares did not increase this quarter. They're still shopping for brands. We're seeing the premiums here in many of our businesses do very well as people are looking for value in all of its forms, whether that be convenience or a little bit of joy in their lives as well as trading up to larger sizes and trading down to smaller sizes. So all of that's playing out. But I would say, generally, again, the consumer is pretty resilient in our categories. And we will watch closely for '27 for what this means. I think what Luc outlined from a cost perspective is the single most important variable, whatever happens in the Middle East and how costs play out, that will impact the consumer environment in '27. But again, what we're focused on is that we have resilient categories. They respond well to innovation. They respond well to growth plans, and that's what we're focused on is improving our superiority and being the leaders in category growth as we move to '27 and making improvement on share. And one of the important levers is the second question you had, which is RGM. And this is something that we are live in action right now. So we gave an example, if you might recall at CAGNY that we did RGM work on glass. And we actually took the price down on one of our items that made a significant difference and grew a significant amount of share. We are doing that work across our businesses. And actually, in the coming weeks, we'll have a couple more tests in market. And if those tests do well, we'll expand those. So we have that built into our Q4 plan, and we would expect additional activity as part of our fiscal year '27 plan.
And that's super helpful. And then if I just can squeeze the GOJO's acquisition. I mean, obviously, you have given the synergies. Did that change as you point out, like the impact that I think if I understood you correctly, Luc, you mentioned 30 basis points gross margin headwind. But how does that change for GOJO's when you gave guidance at the time, it wasn't when we saw oil prices at these levels?
So for GOJO, and then I'll have Luc walk through the financials just so we're clear, but I'll make a few comments. We closed on April 1 and have been deep at work on integration and integration planning since then. And I'll just say my confidence remains incredibly high on this acquisition, both from a strategic perspective and the fact that it gives us additional growth exposure in health and hygiene, where we have a long history of strong performance. The team, we were able to retain the management team. We're seeing strong results on the business. And as we think about that moving forward, we knew it had a different profile given it's a Pro business, just like our Pro business has a little bit of a different profile. It has higher SG&A, lower advertising, a bit lower gross margin. But overall, this is financially attractive and will be accretive to the company in the near term, and we outlined that in the prepared remarks. And again, I'll have Luc go through it. But I would just say that my confidence continues to increase that this is a great acquisition for the company.
Yes, I can. I'll add a little more context around how it's impacting the P&L. Some of it was already included in our prepared remarks as we think about Q4, but I'll also give you a sense of how it might impact next year. So let's start with growth. We're adding a business of $800 million that has a solid track record of growing mid-single digits, and so far they're progressing as expected during the calendar year. That means we will be adding $200 million in Q4, which adds about 10% for the quarter and about 3% for the full year, and we'll add the remainder in fiscal year '27. On EBITDA margin, nothing changed. As we discussed, the business EBITDA margin is in line with Clorox, so it will be year 1 EBITDA neutral. We remain confident in generating at least $50 million of run rate cost synergies, which means EBITDA accretion over time. On integration and strategy, we're going to prioritize integration during the first year and expect to start delivering both revenue and cost synergies in the second and third years. The good news is we've retained the management team, we have separate resources dedicated to the integration, and we retained an integration partner to help lead execution, which is already off to a great start. On the rest of the P&L, as Linda mentioned, given the business is about 80% B2B, the P&L looks a little different than the average of Clorox. Gross margin is a bit dilutive, roughly 50 basis points of dilution in year 1. Some synergies will come from supply chain, so we expect gross margin to increase over time and move toward the company average. In Q4 specifically, there was a one-time recognition related to an inventory value step-up, which was about a 150 basis point headwind in Q4 but is nonrecurring. For SG&A, it is a bit higher than the company average and will probably add less than 1 point to the total company average when fully integrated in year 1, then decline as synergies are realized. Advertising is much lower, similar to our Pro business, and will likely lower advertising as a percentage of sales by about 1 point initially and then ramp up as we grow the consumer business. Finally, interest expense will increase. Our pre-acquisition run rate was about $100 million, you'll see about an incremental $30 million in Q4, and next year we expect roughly $110 million above and beyond the $100 million run rate.
Operator instructions were provided. We'll move next to Robert Moskow with TD Cowen.
You are one of many HPC companies that have talked about rising inflation from oil-related costs. And the higher costs are all pretty uniform. Is it possible that since everyone is kind of facing the same cost at once, that makes it a little bit easier to go to retailers and argue for either some price increases or maybe some less generous price promotion?
Robert, yes, I think what you've heard from everyone is we expect rising inflation and what Luc talked about was our ability to handle these over time, and we feel confident about that ability given the toolbox that we've built over the last number of years and certainly how we handled the last round of inflation that we experienced in 2022. That being said, on the pricing front, although we're evaluating pricing and expect that we could take potential targeted pricing, we are approaching this with a high level of discipline and caution. We know the consumer is under stress, and our absolute #1 priority is to ensure that we are driving improvements in value superiority to drive our categories and to drive share. So we do see there's places where we think we can take pricing. There are places where we can do trade optimization. The point that Andrea made on RGM is going to be very important, and we can be very targeted with that activity. So I think these are conversations that certainly everyone in the industry will be facing, which always makes it a more productive conversation because everyone sees what we see. But at the same time, we are all focused on the same thing and our retailers are seeing exactly what we see, a stressed consumer, and we want to make sure that we're doing the things for long-term category growth that are right. And so again, I feel like we have the right tools. I know we can handle this. We'll discuss the pacing between sales and margin as we get a better look at what '27 will bring from an inflation perspective. And our #1 priority will be on driving consumer stability and ensuring we have value superiority to do that.
Operator instructions were provided. We'll move next to Anna Lizzul with Bank of America.
Your second-half guidance seems to hinge on your ability to deliver on innovation. I know that innovation is still progressing, but it appears challenging for it to fully materialize in this environment. Can you elaborate on how you are adjusting going forward? Have you changed innovation investments or marketing spend as you plan ahead? We've also seen greater exposure to private label in certain categories based on the data. Can you comment on that as well? And longer term, with GOJO, do you still see the ability to meet your longer-term IGNITE strategy given the business's margin profile and the potential advantages from this acquisition?
Thanks, Anna. I'll go through these, and if I miss anything, please come back to me. Innovation has been largely very successful in this back half. Putting Litter to the side for a moment, our innovation execution has been strong. Our largest innovation, Clorox PURE, the allergen platform, has gone very well. We achieved early distribution wins, we were online early, and we are getting great reviews. Retailers are excited and looking forward to the next round we have coming at the beginning of fiscal 2027, where we will bring new benefits in this category. We secured preferred shelf placement in new sections of the store and retailers are partnering with us to get this in front of consumers. From a velocity perspective, results are currently above expectations. Other Cleaning innovations, including the expansion of our Scentiva line, continue to do very well. We launched a new Cherry Blossom scent that has been our number one scent, and we are expanding it into different forms. Consumers continue to be willing to pay for a premium experience, and Scentiva fits into that premium and joyful scent space. Our food launches are off to a good start, and in our Glad line we have a new absorbent layer in our trash bag that is tracking well in distribution along with plans for a new scent. Overall, innovation execution and performance have been very strong. Litter is still early and was a hard conversion, so it is not unexpected where we are, but we haven’t yet proven it is exactly what it needs to be. We are making adjustments to the plan. I feel good that we are offering better value, stronger claims, improved packaging, and a much stronger digital execution. We are seeing very strong digital pickup on Fresh Step, but we don’t yet have the whole program in market to see exactly where further adjustments are required. Where we do see needed changes, we are working with retailers now to make them. Litter is the one innovation area that is behind our expectations; everything else is at or above. On private label, shares have been flat across the majority of our categories and essentially stabilized. We’re watching carefully because we’ve seen some upticks during certain periods when retailers promoted or introduced a new item. Generally, consumers continue to want brands and value overall, not just the lowest price. Brita is an area where we’ve seen more private-label pickup and are monitoring that trend closely. As we continue to launch innovation, we typically regain some of that share. We’re also watching any other places where retailers are leaning in and investing. Overall, private label hasn’t had the impact many expected and is playing its usual role of offering a low-price option for consumers who need it. Regarding GOJO and the long-term algorithm, GOJO is a strong step toward delivering our overall plan, which we remain committed to. It’s also critical that our categories return to normalized levels for us to deliver the algorithm. Because GOJO is accretive from a growth perspective, we expect it to play a role in fiscal 2027 and beyond. Most importantly, we are focused on getting our core categories back to their prior performance in the low to mid-single-digit range.
Operator instructions were provided. And our next question comes from Chris Carey with Wells Fargo.
I just wanted to ask about just first and foremost, as a clarification. Was there any kind of like shipment versus consumption dynamic in the quarter? I think just health and wellness and household specifically came in a bit different than expectation. I realize that you had the timing dynamics from last quarter, but I just wanted to check how results compared to underlying consumption as you see it. And I have a follow-up.
Yes, Chris, I can take that. There was certainly a lot of movement across segments and a difference between shipment and consumption. For the total company U.S. retail, it all netted out to about one point of negative timing relative to consumption. If you remember, in the second quarter we shipped volume ahead of consumption in Health and Wellness ahead of our last wave of manufacturing ERP implementation, so we expected that point of favorability in the second quarter to reverse in the third quarter and that happened. That's on Health and Wellness. But then you had more noise in both Household and Lifestyle, related to a mix of retailer inventory adjustments, mostly in Lifestyle, as well as some early shipments mostly in Household, both in Litter and in Kingsford. Those two offset each other. There were about a point of total company each. The retailer inventory adjustment is just one-time and non-repeating, but the early shipment is something we expect to reverse in the fourth quarter, so that will be a little less than a point of headwind in the fourth quarter. Now the fourth quarter has a lot of merchandising leading up to the July, August, September period, so there might be more noise, and we'll see what happens. But that's the gist of it as you think about shipment relative to consumption.
Okay. The follow-up question is just around the portfolio. There are some areas of the portfolio which have been challenged for some time. There are some categories where maybe they're not traditionally where you would think you are right to win exists. When you go through moments like this where market shares are maybe progressing a bit slower, there's potentially an opportunity to be even a bit more focused. Are you having those portfolio review conversations? Is that activity becoming a bit sharper? Any context on just when you're going through these kinds of cycles, how you think about them and how you react?
Sure, Chris. First, I'd start with we're always doing portfolio work, and we have a regular review process as a management team and, importantly, a regular review process as a Board where we're looking at our portfolio, and we're doing a number of things. We're deciding how we allocate resources within the portfolio that we have, where we want to place bets, where we think we need to be more efficient. We do that on a regular basis. In fact, we'll do that again coming up for fiscal year '27. We are also evaluating the portfolio more strategically and looking at inorganic options, and that's led to many of the things we have done, including the divestiture of Argentina, the acquisition of the majority ownership in the JV we had in Saudi Arabia, the sale of VMS, and, importantly, the acquisition of GOJO and our expansion in Health and Hygiene. That is exactly the result of the work we have done, and we'll continue to do that work. It's important work to ensure we have a portfolio set up for success. The thing I would note is some of these issues, we just have to execute better and we have to deliver better superiority. A case in point is Glad. Trash can is a tough category. It's very competitive and consumers can be price sensitive, but innovation works in that category. Through the work we've done on getting sharper price points, better innovation, and stronger plans, Glad has begun to make progress. We saw the trash category was quite strong this quarter, up over two points, and our share is sequentially improving significantly. We feel good about our Q4 plan. It's a great example of an area that has been a bit of a thorn for the last couple of years, but by putting the right measures in place, being disciplined about cost management, and ensuring we have superiority, we can make progress, and we're doing just that. I would expect that for any of our businesses. So to sum up, Chris, yes, we're always doing the portfolio work. That leads to actions like the ones we've taken. Job number one, no matter what, is always ensuring that we have a healthy core, and that's exactly what we're focused on.
Operator instructions were provided. Our next question will come from Javier Escalante with Evercore ISI.
Hello, everyone. I guess mine are for Luc, I think. So double-clicking on that. Hello, can you hear me?
We can hear you. Yes, perfectly.
Okay. Sorry for that. Okay. So perhaps for Luc, I think, because they are very mechanical my questions. One clarification about price mix for household. So reported was flat, right? But Circana data shows pricing running down mid-single digits. So trying to bridge the difference, should we think of that to be some sort of an artifact, meaning that you advance shipments of litter and grilling and that trade and marketing spending will accrue in Q4. So shall we expect pricing to become negative in Q4? And then I have a follow-up on Glad.
Yes, Javier, in general, like the price/mix for household, I would step back, and we might have a little bit of noise by quarter, but we expect it to be about a point of headwind, meaning that volume would grow about a point ahead of sales. That's the average for the quarters. We'll see a little bit of difference by quarter, and it depends, of course, on promo events. And in household, especially if you have different promo at club, this can actually really distort the data and which might not be fully reflected in the same exact period from a P&L standpoint. So that's maybe what it is. But I wouldn't expect a big shift in Q4. Again, just we're currently tracking as expected on price/mix for the remainder of the year.
Very helpful. And on the Glad JV buyout, what category growth and pricing assumptions you guys built as you presented the capital spending model to the Board when you value the acquisition, right, and whether you compare that NPV and return of the buyout against divesting it, for instance? Could you elaborate on that?
Javier, we won't get into that level of specificity. But what I will say is when we were talking about this with the Board, we felt really great about what we did in Glad. We saw an opportunity to move faster. Our Glad joint venture delivered great innovation results for a number of years, but we knew that by having full control we would be able to move faster, get innovation to market sooner, and make changes more quickly. We've seen that come to life in the plan, and we believe that's part of the reason we've been able to have an inflection in the Glad business. We look at all the businesses — as I said with Chris — and we're always reviewing our portfolio. There are a multitude of things that have to be true: there has to be a buyer, there has to be interest, it has to be the right move for our company, and we have to make sure we have the organizational capacity and resources to execute, whether we divest a business like Argentina or VMS or acquire one. We're evaluating all of those things with the Board. Net, where we landed is that ending this JV and moving forward with our Glad business was the right thing to do. We continue to be focused on innovation in that category, ensuring we get prices right, and managing through what I don't know exactly will look like, as Luc said, but a potentially difficult cost environment for an uncertain period of time.
Operator instructions were provided. And our next question comes from Olivia Tong with Raymond James.
I wanted to ask about a comment you made in your prepared remarks on Glad that you're prepared to adjust plans as needed to balance growth and profitability. That business is most impacted by resin costs if they start to move materially. We've seen many of your staples peers double down on brand support and not pull back despite inflation and consumer anxiety. Could you elaborate on how you balance growth and profitability, where you might find flexibility within the P&L now that Glad has begun to turn the corner, and how you plan to sustain that momentum?
Thanks, Olivia. Yes, we really do mean a balance. Glad is one example, as you rightly note, that can have a big impact depending on energy complexes and how that affects resin costs. It is a brand where we have a long history of taking price actions, including reducing prices over time depending on those market conditions. It is too early to say what we'll face in fiscal year 2027, so we're evaluating it closely. A comment that applies to Glad and the entire portfolio: our number one priority now and in fiscal year 2027 will be driving value superiority in our brands by investing in them strongly, and I mean that broadly in advertising and sales promotion. We're strengthening our plans and investments as we think about 2027, ensuring we have the right RGM activities in the market, as I mentioned with Glad, and we will put more tests in the market that we think will pan out well and could become more permanent. We have invested in data and technology, so we're making our spending more efficient, moving more dollars into working media and away from nonworking media, and using AI to reduce costs. We're taking a holistic approach to get more investment to our brands and drive superiority, and that will absolutely be true of Glad. We will evaluate whether pricing is the right move and whether we would change trade terms, but that's our order of operations: first, value superiority to drive categories and share; second, recovering costs, which we believe we can balance over time. We think we have the toolbox to do both, and Glad will be no different from the rest of the portfolio. Finally, it's important that we remain focused on innovation. We said we were ramping up in the back half of the year, and we have; most of it has gone very well. We expect to continue making progress in fiscal year 2027. We feel great about our innovation pipeline over the next couple of years, and if we can gain another point of innovation, that would be a significant driver of our top line and market share.
Operator instructions were provided. And our next question comes from Lauren Lieberman with Barclays.
First, I wanted to ask about the ERP stabilization you mentioned this quarter. On a technical level, where does the incremental cost from that show up in the gross margin bridge you share, so we can understand the magnitude of the pressure as we think about next year’s comps? Also, could you explain when during the quarter you felt you reached stabilization and what that entailed? I have a second question afterward.
Lauren, thanks for the question. I'll start and then hand it over to Luc for the technical margin question. We were able to complete our ERP in Q3. If you all recall, we did the major portion in the U.S. at the beginning of our fiscal year, but then we had a series of changes at our plant that finalized in Q3 with very minimal impact as we had expected. ERP stabilization is mainly about getting our performance and service levels up, and we continued that stabilization in Q3, which affected cost. I want to reiterate how important this transition is to the company. We recognize it has created some dispersed focus, but it's critical to building the foundation that allows us to use data and technology tools to grow the business and make it more efficient. We acknowledge the noise and the dispersed focus, but we feel good about where we are and that we've reached the point where all three rounds are complete. It did have a margin impact. As we discussed last quarter, we expected some incremental costs that were a bit higher than anticipated. I'll have Luc walk through those details now.
Yes. Lauren, one more piece of context: we rolled out a number of different modules as part of the ERP transition. Some support our manufacturing operations, and some support our logistics, demand fulfillment and order-to-cash. If you remember, in the first and second quarters we were slower to ramp up order-to-cash and stabilize our service levels, and we expected to continue that stabilization through the third and fourth quarters. We incurred additional costs in the front half as we stabilized service levels, primarily in logistics and fulfillment — costs such as expediting orders, moving inventory more than ideal, suboptimal transportation, and incremental labor. We expected these to linger into the third quarter, and they were somewhat higher than anticipated. The good news is that as we moved through the third quarter we began to make more progress on stabilization; toward the end of the quarter and this month we incurred very minimal costs, and we're seeing those come down. For the fourth quarter we expect no incremental costs or very minimal costs. That was one portion of the shortfall relative to our outlook. We also delayed some cost savings and realized less cost savings than planned, which further pressured gross margin, and that again related to stabilizing order-to-cash and service levels. In Q1 and Q2, at the peak of the ERP disruption, we had lower cost savings than historical levels — especially in Q1 when the organization was focused on stabilization and ramping up service levels. Because it took longer to ramp up in the third quarter, we had to delay additional cost savings; some will occur in Q4 and some will carry into next year. The good thing is we already have a strong pipeline for next year, and that will only strengthen going forward.
Okay. Great. And then my second question was just about TDPs earlier in the call, Linda, when you shared that TDPs are up 5%, which is great. We can definitely see that when we look at the Nielsen data. But what we have seen is that the velocities have actually been pretty weak. I guess you shared that the items are in the wrong place. So maybe the answer is just that simple. But I just wanted to check in if that's kind of the right way to think about it and that as you get that on-shelf execution more in line with your plan and your thinking that, that's where we should see the indication of change. Is that right?
That's right, Lauren. We would expect that ramp-up as we get things fully on shelf and we turn on advertising related to those specific items. I'd also note on Litter, if you're specifically referring to velocities there, which you likely are given what we've seen in performance, because that was a hard conversion, and I know you all know this, but I'll take the opportunity to explain it a click more. We took an item and then we completely changed it. So actually changed the UPCs, and that requires a hard conversion at a retailer. So what happens is in the old item, they start to discontinue it and they sell it down before they bring the new item in. And in some places, they don't want to have any overlap in that. So there were places where we had some out of stocks. It's pretty normal in a conversion, which can impact velocities, and that's what we think some of what the noise was in Litter and will continue to be until we get the shelf fully reset is, and we're also noticing there's some change in velocity data, Lauren, due to the fact that people are making value choices with trading up to larger sizes and small, make the velocity information a little noisy. But where it's cleaner, we see strong performance. And as we continue to ramp up spending, we would expect that to continue. But literally, we'll be watching very closely, and we might have to make additional adjustments so we can get those velocities back up.
Operator instructions were provided. We'll move next to Stephen Powers with Deutsche Bank.
Great. I thought I was on mute. I'm glad I'm not. Okay, fantastic. First question to round out the gross margin. I guess, and maybe I'm a little slow with the punch here, but can you, Luc, bridge exactly what's changed and what the drivers are between last quarter's full-year outlook for gross margin down around 100 basis points and now down 250 to 300? I think I've got the buckets qualitatively, but I'm having a hard time assigning numbers to those various drivers.
Yes. And Steve, just confirming you're asking a bridge for the third quarter or for the fourth quarter?
For the full year and prior guidance versus current guidance.
Good. Yes, you mentioned it. There are essentially two impacts. For the third quarter we just talked about it — it was a little over a point, and we discussed what drove that. Then there is Q4, and Q4 I will unpack a little because there is certainly some complexity. The most important thing when we look at Q4 projected margin is to frame it within the context of several temporary and nonrepeating items. So let me do a quick comparison versus a year ago and then explain what is different in the new outlook. Versus a year ago, we are seeing about a five-point decline versus last Q4 gross margin. About 150 basis points of that is coming from the fact that we are lapping strong shipment and operating leverage associated with the ERP transition. That was in our prior outlook, but it is still significant on a year-over-year basis. Then we have about 200 basis points coming from the GOJO acquisition. We expect ongoing in the first year to see about 50 basis points of gross margin dilution, and in Q4 we have 150 basis points of one-time items related to the inventory value step-up of the business we acquired. That won’t repeat, but it creates a total of 200 basis points. The last item is recognizing about 100 to 150 basis points of elevated input costs related to the conflict in the Middle East. That accounts for the five points versus a year ago. What is new is that we already had the lapping of the ERP transition. Both the GOJO impact and the Middle East input-cost impact are new, and those create most of the variance. There are a few other puts and takes. Probably the most meaningful is that we have about 50 basis points of headwind associated with some one-time expenses related to a large cost-saving project that we are accelerating into fiscal year 2027. That is the bulk of the difference between our prior outlook and the current outlook.
Okay. Yes. I actually I follow that. That's very helpful. Okay. My follow-up then is 2 parts. One is you said earlier that the fourth quarter Middle East impact at $100 oil was a pretty full impact at $20 million, $25 million a quarter. So I'm assuming that annualized at $100, your impact at $100 of oil would be $80 million to $100 million. And therefore, we'd be looking at roughly $75 million incremental in fiscal '27, if you follow that kind of math. My second question is on advertising. You held the 11% of sales even as we layered on more sales with the addition of GOJO. So there's implied more advertising dollars in the guide now. And I'm just curious if that incremental A&P is intended to go against the GOJO portfolio or if it goes against your legacy portfolio? And if the latter, kind of where you'd be targeting it?
Perfect. Steve, I'll start with a brief framing on the Middle East and cost, then hand it to Luc for a few more details, and he can cover advertising in Q4 as well. From a Middle East perspective, what's important to note, and I'll echo what Luc said, is that Q4 is right in front of us. We can see the energy complex effects that are happening, and you captured that in the $20 million to $25 million estimate. Looking to the year ahead, I would caution everyone that there are many potential impacts depending on how this conflict plays out, how long it lasts, and other related downstream commodity impacts; we're watching these carefully and they are very uncertain and volatile right now. If everything continued as is and it were only energy complexes, that would be a reasonable assumption set. But given what we know and what moves through the Strait of Hormuz and the infrastructure developments now, we will be better positioned to tell you in '27 exactly what we think that looks like, depending on the assumptions at that time. I wouldn't simply multiply that figure; it's only one of the impacts. We'll continue to watch the others carefully as we move forward. I'll hand it over to Luc.
No, I think that's right. And I mean, it's still a very helpful number, and it certainly materialize what we're currently seeing. Maybe just switching to your advertising question. So the short answer, Steve, is it's just rounding. So you are correct in Q4 we will see advertising as a percentage of sales going down by 1 point due to the integration of the GOJO business. But because it's only 1 quarter, it's about negative 25 basis points or so for the full year. So we're still rounding to 11%.
Operator instructions were provided. And our next question comes from Edward Lewis with Rothschild.
I guess just a couple of ones for me. Just Linda, you talked about value superiority in the last month. We've heard you talk about this a lot. I guess just wondering now how much of a role does price take when you're considering sort of value superiority, how it's sort of calculated or perceived just in light of what you were saying around the actions you've done about Glad. Just any color on that would be interesting. And then you talked about making some investments to address further cost savings going forward. Can you just elaborate a bit more on those? Because obviously, we've got pretty used to seeing very consistent cost savings coming through. And so interested to hear what you're doing there.
Ed, I'll start on value superiority, and I'll cover investments as well and if anything Luc wants to add. So on value superiority, that is, by definition, a combination of the entire experience that we provide to a consumer. It's the product, it's the package. Is it where it needs to be? Is the place right? And is the proposition right? Does the brand stand for something? And then, of course, importantly, price. And those 5 things work together, those 5 Ps to give an overall value to a consumer. And what we aim to do is take those 5 and create overall superiority. And what we want to do is drive superiority through a better brand experience, through a better product, through a great package that gives consumers a new way to use a product or an easier way. And then we want to be able to price to that superiority, which usually means we can command a premium, which is what we do in most of our categories. And we just got to make sure we have that balance right. So for example, in Glad on that RGM activity where we took price down on 80 count, we didn't have that quite right. We took the price down, and we got back to a place where we felt we had overall value superiority, but we did need to pull the price lever to get closer in line to the right price gap that we needed. We're testing other things, as I mentioned, in RGM that we'll look at that for other brands where we want to be targeted to ensure that we have that overall equation right and where we think price is playing a little bit more of an important role or because we took 4 price increases as did the industry during that significant period of inflation, and there might be some places and we said we knew we would have to do this where we'd have to adjust. And again, we're testing a few of those now. And we also want to use things like price pack architecture and other RGM levers where we don't have to just take a truckload price, but we can do take pricing in different ways as we trade off benefits. So I would say price plays a very important role, but it is really about connecting it to those other 4 levers and making sure you have overall superiority. The most important thing that we can do, though, is have those other things right. So I'll take PURE, for example. We have a superior product that we know gives consumers more benefits to remove allergies. It's in a great package that consumers love and makes it easy for them to use. The proposition is clear. The claims are clear. We're spending against it strongly. And then we've leaned into digital and on-shelf placement to ensure they get it, and we can command a premium for that experience as a result and velocities are quite strong to start. That's the magic and that's where we want all of our brands to be. But if we need to lean into price in a couple of places to get back in line, we will, Ed. We've done that, like you said on Glad, and we'll do that in other places. Yes. And then moving to the second point on your investment on cost savings. So I won't give specifics on the project. We'll talk about it more later, but it's a big supply chain project that we're able to accelerate and will offer significant savings moving forward. But as we looked ahead into the cost environment in '27, we thought the right thing to do was to go ahead and accelerate that project. And so we made that investment in this quarter, and we'll talk more about what we're doing as we head into fiscal year '27.
Yes. And Ed, maybe just as added context, we always have one-time investments associated with cost savings and usually plan pretty tightly by quarter. Since we've been removing and delaying some cost savings and accelerating others, that created a little bit of a difference in the fourth quarter. And just the magnitude of the project is a little larger than normally what we see. Those investments can be asset write-offs or engineering costs; for example, a manufacturing cost-saving project.
Operator instructions were provided. And this concludes the question-and-answer session. Ms. Rendle, I would now like to turn the program back to you.
Thanks, Jen. As we close out today's call, I want to reinforce a few points. First, while our third quarter results did not meet our expectations, we're operating from a much stronger foundation. The ERP implementation is complete, service levels have stabilized and complexity and costs are coming down. These are critical enablers of better execution. Second, we see clear signs of progress as we focus on driving value superiority across our portfolio. Innovation across the portfolio is strong. On-shelf presence is improving and teams are sharply focused on the fundamentals that matter most: availability, pricing and promotional effectiveness and end market execution. These actions are essential to building momentum through the fourth quarter. Looking ahead, we're also strengthening our plans and investments in targeted areas to accelerate share gains. And finally, we remain confident in our ability to translate these efforts into improved performance over time. While the environment remains challenging, we have the right strategy, capabilities and teams in place to finish the year stronger and enter fiscal 2027 with greater momentum. We thank you for your time and questions and look forward to updating you on our continued progress next quarter.
And this concludes today's conference call. Thank you for attending.