Good day, ladies and gentlemen, and welcome to the Clorox Company Third Quarter Fiscal Year 2024 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. [Operator Instructions] 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.

Thanks Paul. Good afternoon and thank you for joining us. On the call today with me are Linda Rendle, our Chair CEO, and Kevin Jacobsen, our CFO. I hope everyone has had a chance to review our earnings release and prepared remarks, both of these are available on our website. In just a moment, Linda will share a few opening comments and then we'll take your questions. During this call, we may make forward-looking statements, including about our fiscal 2024 outlook. These statements are based on management's current expectations, but may differ from actual results or outcomes. In addition, we may refer to non-GAAP financial measures. Please refer to the forward-looking statements section, which identifies various factors that could affect such forward-looking statements, which has been filed with the SEC. In addition, please refer to the non-GAAP financial information section of our earnings release and the supplemental financial schedules in the investor relations section of our website for reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures. Now I'll turn it over to Linda.

Thank you for joining us today. During the third quarter, we continued to progress our recovery from the August cyber-attack while advancing our Ignite strategy to build a stronger, more resilient company. For the most part, our progress in the third quarter was in-line with our expectations. Sales came in lower, as a few businesses experienced slower supply recovery than we planned. Gross margin came in higher, benefiting from our margin transformation program and a [modernized environment] (ph). Despite lower sales and strong investments in our brands, we finished the quarter ahead of our expectations on adjusted earnings per share. Before we turn to questions, I think stepping back and putting these results in context is important. Given the magnitude of disruption from the cyber-attack, we knew our plans to restore the fundamentals of our business would be complex, and a recovery path would not be linear. We have made tremendous progress and are laser-focused on finishing the job. We tracked well ahead of our expectations in the second quarter and knew we had more work to do as we entered the back half of the year to return our business to the strong trajectory it was on at the start of fiscal year 2024. This included fully rebuilding inventories, restoring normalized service levels, and rebuilding commercial plans for each of our businesses, which we accomplished by the end of the third quarter. These actions unlock our ability to fully restore lost distribution due to the cyber-attack and return to normalized merchandising levels as planned in the fourth quarter. Through Q3, we have regained nearly 90% of the market share we lost and expect to make further progress in Q4. With service levels now normalized and strong investment levels behind our brands, we're confident we can rebuild household penetration and return to volume growth over time. Despite the significant disruption and lost sales we've experienced and based on our team's strong work, we are now positioned to exceed our original gross margin target and meet or exceed our adjusted EPS guidance we provided at the beginning of the year before the cyber-attack. Importantly, our recovery progress to date puts us in a good position to exit fiscal 2024 with strong fundamentals. In addition, we continue to execute well against our IGNITE strategic priorities throughout our recovery. We made substantial progress rebuilding gross margins, continuing to target returning to pre-pandemic levels over time. We launched innovation invested in our brands and capabilities, progressed our streamlined operating model and digital transformation, and completed the divestiture of our Argentina business, which supports our goal of evolving our portfolio to deliver more consistent and profitable growth. In closing, we're taking the right steps to navigate the near-term and continuing to advance our IGNITE strategy. I'm confident we have the right investments and plans to deliver against our strategic and financial objectives and enhance long-term shareholder value. With that, Kevin and I will take your questions.

Thank you, Ms. Linda. [Operator Instructions] And our first question comes from Peter Grom of UBS. Your line is open.

Thank you, operator, and good afternoon, everyone. Hope you're doing well. I was hoping to get some more color on kind of the implied 4Q organic sales growth and how this informs you on kind of the path forward here. I know this was always the case, but it seems like you're expecting to kind of close some of these distribution gaps of 4Q, more or less implying that you're going to overship versus consumption. But when you kind of look at the implied 4Q guide and to kind of where you need to be to land at the low end -- of low single digits for the year, doesn't really imply a ton of growth considering this dynamic. So maybe first, am I thinking about that right? And if so, how does this exit rate inform your view on the growth looking out to next year just in the context of the long-term algorithm of 3% to 5%? Thanks.

Thanks, Peter. Why don't I get us started and I'll just talk about some of the dynamics that we expect in the fourth quarter. And then I'll hand it to Kevin, and he can talk about the outlook. And of course, you'll appreciate we're not setting guidance for fiscal year ‘25 at this point, but Kevin can certainly give you how we're thinking about the exit. So as it comes to Q4, there are a number of dynamics and things that are important that we plan to do and have the right plans to address. And the first is what you mentioned. We intend to fully restore the temporary distribution we lost as a result of the cyber-attack. And we are well on track to do that. At this point, we know the decisions on the shelf resets from all of our major retailers. We built the inventory in order to supply those distribution losses and are on track to restore that distribution. So certainly, that will help both reported and organic sales as we head into the fourth quarter. The second dynamic is now that we have fully restored our ability to supply and are back to normalized service levels, we are going to return to our merchandising plans, which, if you recall from our earlier conversations, we expect to be higher than they were during the pandemic, basically returning to pre-pandemic levels. And that is on track as well for the fourth quarter, and both of those will support growth. The thing I would mention, And as you can see, the implied range is rather large. And that's because it's still quite variable and volatile what we're dealing with. We're dealing with a complex recovery. shelf resets are all at different times for our retailers. How fast those resets happen. And then, of course, where we are on the purchase cycle with consumers will matter, and that's informing the depth and breadth of that range. But I'll hand that over to Kevin and he can help you think about just how that plays out in the outlook.

Hey, Peter. You know, as it relates to the outlook and I think specifically your question, organic sales growth in Q4. What I expect to see occurring this quarter is improving volume trends. If you look at our volume performance, we're down about 7% the front half of the year down 4% in Q3. I expect that to continue to improve as we move forward. I also expect we'll see some increased trade spending. We continue to work back towards a more normalized promotional environment. Q3 was still below sort of that normal level, so I think you would expect to see some increased trade spending. And then as a result of the divestiture of Argentina business, it's gotten a lot simpler. I don't expect any FX headwinds. I don't expect any meaningful pricing now. Most of our pricing was in international -- that would all go away. So you should see improving volume trends, a little bit of uptick in trade spending, and that gets you down to probably flat to down a little bit in terms of organic sales growth in Q4. And that would keep us on track to be up about 1% for the year.

Awesome. Thanks so much for that. And Kevin, maybe just one follow-up or more of a piece of clarification. In the prepared remarks, you mentioned kind of building on the 43% gross margin exiting the year. Is that a broad-based comment, or are you talking specifically on building relative to the 4Q exit rate?

Yeah, I think there's a few things. You saw where we landed, Peter, in Q3, a little over 42%. We think we'll be closer to 43% when we exit. You know, as Linda said, we're not prepared to provide our outlook for next year. But I would tell you, we fully expect to continue to expand margins in fiscal year ‘25. So we'll exit this year. You know, over the full year, we're probably up around 42%. And I expect a bill on that next year.

Thanks so much. I'll pass it on.

Thanks, Peter.

Our next question comes from Andrea Teixeira of JP Morgan. Your line is open.

Thank you, everyone, and good afternoon there. Linda, you mentioned in the prepared remarks few areas of the portfolio that experienced slower supply recovered than planned, that impacted the third quarter. And I understand the 10% that you mentioned that still is below the service levels. But relative to your 2% organic growth, how much was out-channel consumption given also comments in that same report that you experienced consumption losses? So can you elaborate more on which areas you were still below in share and what gives you confidence that the consumers you lost during that period within your consumption patterns would come back. And then Kevin, a clarification on what you just said about building margins into 2025 -- the fiscal 2025. How do you see rising prices in other commodities? Are you embedding these two inflationary commodities and how would you expect to offset that? Is that mostly on the savings? They IGNITE, how we should be thinking as we move forward.

Sure. All right, I'll get started with that first question. And I think the question was twofold. So I'll start first maybe addressing the areas on supply that we called out that impacted sales for the quarter. And then I'll talk a bit more about the consumer and the confidence that we have about where we are and that we have the right plans in place as we roll into Q4 to continue to accomplish what we intend to do around the consumer and restore our business fundamentals. So in supply recovery, we talked about the last call and actually the call before that we had a couple of businesses that were more challenged given the depth of their portfolio. And that was Glad, and we called out Litter as well. And those continued to be a challenge a bit longer in the quarter than we had originally anticipated at the time of forecast. The good news is that with a few other minor things in businesses, we were able to fully fix all of those by the end of the quarter, and we exited Q3 getting back to normalized service levels to our customers. And so feel good that as we head into Q4, we have the right inventory and we have the right production plans and plans with our retailers to be able to get back all of those distribution points that we lost temporarily and, again, restore merchandising. So again, that was a temporary thing in nature, impacted Q3, but we don't anticipate that it will impact Q4. If you look at the consumer, a few things going on. First, our distribution points are still down versus pre-cyber, which we had anticipated. And we knew that the majority of shelf resets would happen in Q4. That is…

Andrea, your question on ‘25 and gross margin, you know, as I'm sure you can appreciate, we're still in the process of building our plans right now for ‘25. But where we're sitting at today, I fully expect we're going to be growing top line, expanding margins, growing earnings. And so as you think about how we grow margin, I think to your specific question, certainly top-line growth helps build margin. Additionally, divestiture of our Argentina business, that was [margin-diluted] (ph) to the company. So, divesting that business certainly helps our margin. And then our margin transformation efforts. We think collectively that more than offsets what we believe will be a level of cost inflation but continue to moderate. So, we do not believe right now we're going to be in a deflationary environment next year. There will be some cost inflation, but it continues to moderate. And the actions I just mentioned we think are more than enough to offset that and allow us to continue to build margin next year. But the exact amount we're still working through.

Yeah, thank you. That's super helpful. In Argentina, what is the impact of removing Argentina as a tailwind?

Yeah, we don't break that out, Andrea, specifically. But I can tell you it was significantly below the company average in terms of gross margins. You can probably do some math. It was 2% of sales and well below the company average in terms of gross margin.

Okay, very good. Thank you very much, I will pass it on.

Yeah, thank you.

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

Hi, everyone.

Hi, Chris.

I wanted to ask about sales delivery in the quarter excluding international. So in the prepared remarks, you spoke about increased competitive activity as you were trying to get back on shelf. Price mix was negative in your key division in the quarter. And I'm trying to marry that with, I think you had sounded quite good recently on the logistical dynamic of getting back on shelf in the quarter. And so I guess I'm trying to put maybe altogether the why behind sales coming in a bit below your expectations and whether competitors are perhaps a bit firmer on shelf and share gains than you had expected, and you need to increase competitive spending, whether that's in price mix? And obviously, you called out some trade promo in your gross margins this quarter, to get back on shelf and whether you think to your comment to the prior question, you may need to actually accelerate that spending over the next several quarters if this shelf-uplift is not exactly how you expect. So you can tell, I'm trying to wrestle between not just that sales came in below the expectation, but the why and some of the actions that you seem to be taking to try and rectify the situation.

Yes, Chris, we -- from all the data that we see, the progress we've made with the consumer and what we anticipate will happen here in Q4, we do not feel like we have a dynamic that the sales miss was due to a consumer issue that we have or not bouncing back to that degree with the household penetration we lost. This was simply we had two very complex businesses, we thought we would make more progress on supply than we did. It went longer, it went through the remainder of the quarter when we thought we would get it done mid-quarter. That impacted our ability really to supply for merchandising mostly. Distribution, we always knew would come back in the fourth quarter because that's when retailers reset their shelves. So the good news is because we were able to fully restore supply by the end of the quarter, we're still on track to recover that distribution. But this really was heightened competition as we weren't able to supply merchandising events and still not in a place where we were fully able to supply on those couple of businesses. But we're through that, we got through that at the end of Q3. We have the ability now to fully supply in Q4. That investment level, we feel is the right investment level. And I'll just be clear, we have not constrained our businesses. We have said they should spend what they need to -- to get these households back. That is contemplated in the outlook that we provided and we believe we have the right spending on both advertising and [self-promotion] (ph) and merchandising. And if we have to make adjustments as we go through the quarter, we will. But right now, we feel like we have the right plans, we are seeing those households come back. Again, we went through one purchase cycle. We're going through another one here in Q4, but all indicators are that we will restore our business. And we feel like the fundamentals will be fully recovered by the end of Q4 and set us up well as we head into fiscal year '25.

Okay. One quick follow-up would just be Manufacturing and Logistics was a 210 basis point negative impact to gross margin in the quarter. That's a pretty notable step-up. And I don't think we're seeing logistics inflation at that level. Kevin, can you maybe just contextualize what happened there in the quarter? And whether that specifically is durable going forward or whether this is just an anomaly? Thanks.

Sure, Chris. The increase you referred to that is primarily driven by inflation in Argentina, you might recall before we divested that business, we were projecting about 300% inflation, and they had a significant devaluation in December. So that was playing through and it's the biggest driver. To your question, as you go forward now that we divest the business, I would not expect to see Logistics and Manufacturing be that level of a drag. Logistics is turning on us, it's fairly benign in terms of year-over-year cost once you strip out Argentina. So, this is one of the additional benefits of not having that business in our portfolio any longer, given the disruptions it had broadly across the P&L.

Okay, thank you.

[Operator Instructions] And our next question comes from Dara Mohsenian of Morgan Stanley. Your line is open.

Hi guys. I get you don't want to be too explicit for fiscal '25 at this point, but I just had a follow-up question on top-line growth as we move into next year just relative to a normal base this year. Kevin, can you just talk about or Linda, any puts and takes as you look out to fiscal '25 as we think about top line growth? And maybe also just quantify what level of sales did you lose in fiscal '24? Do you expect to lose in fiscal '24 from the systems issue relative to a typical year?

Hi, Dara, what I'd say it's a little too early for us to talk too specifically about the '25. As I said, we're still developing our plan. Maybe the one item, I would just make sure remind folks is, with the divestiture of Argentina business, that's about 2 points of sales. We'll see a portion of that in Q4, but you'll probably still have about 1.5 point headwind next year as a result of that sale. But for the other items, we're going to wait until August to have that conversation because we're still working through our plans. It'd just be too early to talk any detail.

Okay. And then on gross margins, you talked about a CAGNY to focus on holistic margin management and RGM. Can you give us a little more color on how important that might be over the next couple of years? And as you think about recovering gross margin pressure over time as you indicated in the prepared remarks, is that a big piece of the recovery? And as we think about the recovery, is this a multi-year effort? Should we think about a lot of progress coming out in fiscal 2025? How do you think about that conceptually from a timing standpoint?

Sure, Dara. Without obviously, again providing any guidance for 2025 or beyond on specifics. I think I can say with really strong confidence, one based on the track records, if you look, we've delivered our sixth consecutive quarter of gross margin expansion behind this toolkit that we have. And what we talked about at CAGNY is important. Pricing and cost savings have been the majority of the tools that we've had, and we put them to good use over the last couple of years as we've dealt with inflation. But we knew that we wanted to take a broader look and the fact that we are implementing a digital transformation, and we have more visibility end-to-end, gave us a great opportunity to look and see where else can we go beyond traditional cost savings. Revenue growth management is certainly one of those tools, price pack architecture within that. And the teams all have plans in place to use those tools to continue to make progress against our commitment that we stand behind to return gross margins to pre-pandemic levels and then grow from there. And we feel very confident in our ability to do that. Kevin and I have talked before, it's really dependent on two things. One how fast we implement this toolbox and feel good about that. But second will be what the cost environment looks like. And as what we continue to look forward, we continue to see inflation in people's reporting. Again, we are not providing any specifics around our business at this point. But the pace of recovery and when we returned to pre-pandemic levels will be those two factors, but we feel very good about what's in our control and that we have the right toolbox to be able to accomplish what we set out to do.

Okay, thanks guys.

Thanks Dara.

Our next question comes from Anna Lizzul of Bank of America. Your line is open.

Hi, good afternoon. Thank you for the question. You mentioned in your prepared remarks a consumer who remains under pressure. I was wondering if you're seeing this across all income tiers? Or is this comment primarily related to the lower income consumer as some other companies have indicated so far in Q1? And then you mentioned your levels of merchandising and promotion are increasing along with the higher advertising spend in the second half here. So, just wondering how much of this is driven by the need to rebuild share loss from the cyber-attack versus just trying to win over a financially weaker consumer. Thank you.

Sure. We're seeing pressure across all consumer groups. And we are seeing behaviors broadly outside of our categories changing for nearly everyone, as they evaluate what's going on. And as they think about what's happening in the future whether that come down to the interest rate environment, et cetera, cost of housing, a cost of a basket of groceries when they go to the store. So we are seeing that behavior quite broadly, and we called it value-seeking. People are buying larger sizes, they are buying smaller sizes and they are thinking about the trips they take, et cetera. I would say, in particular, we always have our eyes focused on the lower income consumer as they are more pressured. And I -- and to-date, we have stood very well with them. And we tend to do it during times -- tough economic times for low-income consumers because we deliver products at a great value that work really well, and they can't afford to make a mistake in our categories. And so we typically fared-well, and we continue to see that we are doing well with low income consumers. And we haven't seen a material trade to private label that isn't due to the cyber-attack. And of course we are watching that closely as we get our distribution and our merchandising back, but we largely believe private label growth is due to the fact that we weren't on the shelf. And we are seeing Q3 their share was lower than it was in Q2. We are seeing all the right indicators our households are coming back that might have tried private label during that time when we were off the shelf. So we're watching all income tiers always focused on low income, but that was a very general comment to…

Okay, that’s very helpful. Thank you.

Our next question comes from Javier Escalante of Evercore ISI. Your line is open.

Good afternoon everyone and thank you for the question. I actually have two. One is if you could -- on the commentary when it comes to market share and household penetration, it feels as if you are referring always back to the cyber-attack. But if I understand the trajectory correctly, there was also market share losses relative to say pre-pandemic because of the supply chain issues that you mentioned. So if you can comment on that -- whether the intent is to restore market share to pre-pandemic levels in these highly contested categories like pet litters and trash bags? And then I have a follow-up.

Sure, Javier. I mean it has certainly been a complex last few years and lots of puts and takes. And so what I would comment on is we intend to grow market share. That is our mid- to long-term goal, and that is the bar we hold for ourselves to say if we are winning with the consumer or not. Clearly, given the cyber-attack, we have not grown market share this year, but we're seeing the trend move in the right place. So for perspective, we lost about 5 points of share, nearly one-third of our market share during the low point from a cyber perspective. And we are back down -- we ended the quarter down about [0.75] (ph). We've made progress since there if you look at the weekly data. But what we first need to do is restore market share and then grow from there, and we believe we have the right plans to do that. If you look at many of our businesses, they are variable versus the market share they had in the past. But in aggregate, we mostly returned and some businesses were higher, for example, on our cleaning business. We made significant progress on market share, even though we had COVID and then, of course, multiple rounds of pricing. And our brands have held up really well. So my evaluation would be heading into the cyber that we were in the right place from a market share. We had plans to grow market share. Cyber has unfortunately caused another place where we took a step back, and we have to rebuild, but I'm confident in our ability to return and then we're working on plans in fiscal year '25 and beyond to deliver that market share growth we aspire to.

Thank you. And then the follow-up, and it's a little bit in the line of Chris' question. It seems -- rarely you are seeing consumer businesses, and it could be accounting that you have negative pricing and negative volumes at the same time in the quarter. So what gives you confidence that you didn't take too much pricing and the value players are gaining share in trash bags and pet litter and I believe most recently in Glad that you don't need to reset prices into 2025.

Yes. I would say, first of all there is a price mix in a trade component of Q3, and certainly, Kevin can walk through that in more detail. But if I just take step back and say, what were the dynamics in Q3 that give us confidence and what were the dynamics that negatively impacted us? It's pretty clear. We weren't able to fully supply on a couple of those businesses that you mentioned, Glad and Litter in particular. And that means we weren't fully available for the consumer, which we don't like. But the good news is, as I've said, we recovered that ability to supply by the end of Q3, and we feel good heading into Q4. And also, there were more competitive dynamics, given that fact that we couldn't fully supply. We saw more merchandising from competitors, et cetera. As it specifically relates to private label, if you look -- there was a stressed consumer prior to the cyber event, and we didn't have any material loss to private label and share during that time, nor have we, in any recessionary time lost any material share to private label. We offer brands with great value. We offer innovation, the consumer trust us, they love our products. They love our brands, and we spend behind those brands to ensure that they understand the superior value we deliver. And we see that beginning to take hold and work in Q3, as we restore distribution and inventories. We saw private label share come down versus Q2 and heading in the right direction back to what we would expect it to be in a more normalized environment. We expect to continue to make progress as we restore distribution in Q4. So I think it would be pretty understandable to say -- when you are not fully on the shelf and you don't have all your distribution, a consumer is going to choose what's on the shelf, and they did. And -- but we feel confident in our brands, confident in our spending plans that we'll restore that back. And history would tell us when we were out of stock in COVID that happens. When we've had product issues where we're out of shelf on time sell, we came back. We restored our share in distribution. We have a long history of doing this, and I remain confident in our ability to do it in Q4 and beyond.

Thank you very much.

Our next question comes from Filippo Falorni of Citigroup. Your line is open.

Hi, good afternoon guys. I first wanted to ask on the recovery from a shelf space standpoint. In prior earnings call, you sounded very confident that you're going to recover the full of the TDP that you still haven't recovered the distribution points. Is that still the expectation and in the quarter, and in the year, I mean? And was the weakness in the quarter? Like does that change a bit the full year expectation versus what you had expected, particularly for Glad and for the Cat Litter business? Thank you.

Thanks, Filippo. We fully expect to recover in Q4, the distribution against our plan that we had fiscal year '24 that we lost. We view that as temporary. And we have seen the shelf decisions from retailers. They are now in the process of converting their sets. As we speak in some of our categories and some will happen throughout the quarter. So we have strong confidence that we will restore that distribution. And that really was not the Q3 story because we always knew most of that distribution would come back in Q4. That's really more of a supply and service level issue story in Q3. And again, we have fully recovered from that, and we are heading into Q4 in a great place. We're able to fully supply that distribution that we will recover. I'd also just note, I did a recent roadshow with all of our top retailers. And they want our business pack on shelf-two. We are the brand that leads their categories. They're very invested and growing with us. Our conversations we're focused on growing, moving forward, our innovation plans, what we want to do to unlock our joint digital plans now that we're well underway on our digital transformation, now that we know 100 million consumers, how can we personalize better to them. The conversations were very growth-oriented, future focused and they're looking forward to having our full distribution back as well so that we can grow their categories.

Got it. That's helpful. And then maybe, Linda, just a longer-term question. I remember when you updated your long-term outlook to 3% to 5% from 2% to 4%, a component of that higher outlook was the international business. Obviously, you made the decision to divest Argentina. So maybe you can review what's left in the international business and how that contributes to your long-term target?

Sure. You are absolutely right that we talked about international being a portion of that growth. And if you look at the performance of our International over the last couple of years, it certainly has played a role where it's growing faster. But we also talked about having a more consistent less volatile business. And Argentina was a high source of volatility and variability. And certainly, you saw the FX impact play out, and you heard Kevin talk about what we expect moving forward. So that was definitely on our minds to reduce the volatility and variability that we had and then be able to grow from a very solid base. And you might recall from a few years ago, we had purchased the majority ownership of a JV partnership we have in the Middle East, was a good example of looking at markets that we could grow faster in that were more stable and predictable and that has played out very well. We continue to have a really healthy consumer there. Innovation is working well in that marketplace. And so what I’d say is, it's very consistent with what we've said before. We have continued business in Latin America that we feel good about, and we'll continue to grow business in Asia, Europe, the Middle East. And we continue to have growth pockets on businesses like Litter, et cetera, our cleaning business, which is the majority of our business is international and we continue to expect international to be a strong contributor, but it will be much more profitable and stable versus what it was before.

Great. Thank you.

Thank you.

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

Great. Thanks. Just a couple of things. So first was just in the release you specifically called out that part of the increase in the gross margin outlook was a more favorable outlook for raw material cost or for input. So just curious on a little bit of color there. And then secondly was thinking about Argentina, I know we are not going to do business planning guidance for '25. But just thinking about when you lap Argentina, like Argentina FX is such a huge impact, for example, on gross margins even this quarter, last quarter. Do we like reverse that? Or is it just the impact disappear because the business is gone. I'm just kind of thinking ahead. Again, not about the totality of gross margin, but just how to think about the absence of Argentina moving forward and the margin impact on the business.

Yes, Lauren, happy to take those. As it relates to gross margins – I’m going to start there and kind of what we're seeing from a cost perspective. We are seeing costs continue to moderate, I think as you saw in Q3, is a fairly small impact, particularly if you look at commodities, we are seeing some commodities become deflationary. You see that a bit in soybean oil, which is something we use in our food business. You're seeing it in other categories, substrates, some chemicals. We are seeing still some cost increases, particularly on petroleum-based products, solvents, diesel. Resins up just a little bit. That's more supply-demand driven more than input costs. And so I'd say, it is definitely going in the right direction. It is a fairly modest hit for us in Q3, and that's certainly been an ongoing improvement. I would say, on the other piece of inflation, which is more wage driven, it's generally playing out as we expected. That tends to show up in manufacturing and warehousing. We're still seeing ongoing inflation there. But on the commodity front, it is certainly easing and as we step out of Argentina, which is a source of inflation, I expect it will be fairly benign by the time we get to Q4 on the commodity side, and then we'll continue to deal with the wage inflation. And then [how] (ph) thing about Argentina next year, I think you said exactly right, is -- as we move forward, a number of the areas you talked about, you will not have that impact going forward. So let me give you an example. You highlighted FX this quarter, to your point it was about 180 basis point hit to margin. That was almost entirely Argentina. As I look forward, even starting in Q4, we should have almost no FX hit to gross margin. So you get that benefit. But keep in mind, that will be offset by other areas, things like pricing, but pricing you see in Q3 was primary Argentina, that will also go away. So you'll strip all that out. Ultimately, the net impact of all that is Argentina was a margin-dilutive business for us. So by stepping out of that, all the different lines, when you look at it in totality, our margins will go up as a result of exiting Argentina. But you'll strip out each one of those elements that Argentina drove.

Okay. And that impact from Argentina from the exit and just going back to it's actually a pretty small business. It is a small net impact when you put all these pieces back together on the year-over-year margin like in this quarter next year for example?

Yes, that's right. I mean you look at the business, it is 2% of sales, and you can probably do the math pretty quickly. It is a very dilutive business to us that when we owned it and represents 2% of our sales. So you can probably do the math, you see there is some modest benefit to our gross margin going forward now is out of the portfolio.

Okay. Great. And then one thing I just want to clarify. I think I figured out the call in on, but there were two conflicting statements in the release in the prepared remarks about supply chain constraints being a problem in the quarter, but having resumed normal service levels. So I didn't know if it was a timing difference, like normal service levels as you exit the quarter, but constrained by supply chain during the quarter. I just wanted to make sure it's clear on how those two statements fit together.

That's right, Lauren. So we were not able to fully service our retailers throughout Q3 until the end. So at the end of Q3, we restored normal service levels and we entered Q4 with them back to being normalized and that marries with the supply chain comment that we had some constraints, which impacted those service levels throughout the quarter.

Okay, all right. Thanks so much.

Our next question comes from Olivia Tong of Raymond James. Your line is open.

Great, thanks. I wanted to ask you two questions around margins. First, on gross margin. Obviously, the EPS outlook for this year is now higher than where you were pre cyber-attack and much of that is due to the gross margin expansion of about 100 basis points ahead of where you thought you were going to be at the beginning of the year. So in the past, you've talked about 200 basis points of gross margin improvement annually, as you recover from the post-COVID decline this year, now [$2.75] (ph). Last year, obviously, a lot more than that, despite all the ups and downs with the cyber-attack. So, can you just talk about ex-Argentina, ex the cyber, all these things, the ability to keep outperforming on gross margin, what you learned from this year last year, what capabilities continue versus some of the one-offs that are helping and hurting this year? Or just sort of the ongoing recovery on gross margin relative to the post-COVID timing? Thanks.

Sure, I'll be happy to take that one. As you think about gross margin, and you almost have to separate what we've been doing for the last several years in terms of where I think it's going longer-term. We're still working to recover from the record level of inflation that we've had to absorb. And as I think you know quite well, Olivia, we lost about 800 basis points in gross margin due to this inflationary cycle. And Linda and I both talked quite a bit, we remain committed fully recovering that. To your point, with the work we did last year, the work we're doing this year, we'll get about 650 basis points – we will recover. We've got more work to do and feel quite confident we'll get there. The process to get there, we were leaning into pricing. We took four rounds of pricing, which is very consistent with what you saw broadly in our industry to recover from this inflation. As we move forward though, now and get back into what I described as we believe a more normalized cost environment, typically, our cost savings efforts is more than enough to cover normal levels of inflation and allows a little bit extra that we can either invest back in the business, take to the bottom-line to further expand EBIT margin. And that's where that long-term goal of 25 basis points to 50 basis points was generated, which is normal level of cost inflation, which for us tends to be about $75 million a year. Our cost savings more than cover that and we use the extra to modestly improve margins each year. That's where we're going. We're not there yet. We're still working on recovering from the inflationary cycle, not was through pricing, but it's certainly moving in the right direction. So we will get back to fully recovering these gross margins over time. And then I expect assuming that the commodity environment gets to a more normalized level, that's how you should expect to see us continue to grow margins over the long term as our margin transformation efforts more than offsetting regular levels of inflation.

Got it. And then just a point of clarification on your call for higher advertising in the second half --. Are you talking about higher as a percentage of sales sequentially or that the year-over-year change in second half is higher than it was in the first half? And how much of that is due to the clear pullback in spend in first half when you had -- you're out of stocks versus just desire to have greater programs, greater opportunity to support some of the innovation? Thanks.

Sure. Olivia, if we wind the clock back to the beginning of the fiscal year, we actually had intended to spend more money in advertising and sales promotion in our original guidance, we said about 11%. And -- we still intend to do that. But you're absolutely right that given the cyber attack, the shape of that over the course of the year has changed. So we spent less in the front half of the year, we are spending more in the back half, still with the intention of spending. What we're seeing now is over 11% of sales. I want to be clear on the dynamics there, though. It is about -- we're spending about the same money we had intended. But given what we've talked about from a sales outlook perspective and Argentina it would put us above 11%. But we're still spending about the same amount of money as we intended to when we first gave that guidance. But again, this was more about supporting our brands as consumers are more challenged. We felt good about our innovation plans and we wanted to spend behind them. And again, just the shape of the year has changed given the cyber event.

Great. Thank you.

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

Thanks so much, everyone. We look forward to updating you on our continued progress on our next call. Until then, stay well.

This concludes today's conference call. Thank you for attending.