Good day, ladies and gentlemen, and welcome to The Clorox Company Fourth Quarter Fiscal Year 2025 Earnings Release Conference Call. [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.

Thank you, Jen. Good afternoon, everyone, 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 also that our earnings release and prepared remarks are available on our website at thecloroxcompany.com. 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 year 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 identify 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 in our earnings release and the supplemental financial schedule in the Investor Relations section of our website for a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures. Now I'll turn it over to Linda.

Thank you for joining us today. Our Q4 and fiscal year 2025 performance was met, with weaker-than-expected top line growth, balanced by strong margin and earnings performance for the year. In the front half of the year, our fundamentals on consumer category and tariffs played out largely in line with our expectations. In the back half, our category slowed when macroeconomic uncertainties picked up. While this largely stabilized in Q4, it has not yet normalized. To put the quarter in context, we executed many of the elements with Opulence as we shipped higher than expected incremental orders to temporarily build retailer inventories in support of our ERP launch in the U.S. And as a reminder, our new ERP is a critical part of a digital -- a strong digital foundation that enables us to better leverage data and insight to drive revenue and efficiencies. We also delivered strong gross margin and earnings in the quarter. At the same time, when consumers are stressed, the bar goes up and we didn't deliver on all elements of our plans for value superiority on some of our businesses this quarter. We also lapped abnormally high demand creation activities from last Q4, as we continue to rebound shares following supply restoration from our August 2023 cyber attack. This led to lower-than-expected sales for the quarter when we exclude the ERP retail inventory build. Looking ahead, we are core cited on what we need to do to win in the marketplace and deliver clearly superior experiences and value to our consumers in this environment. We see opportunity ahead as consumers continue to seek better experiences and we will lean into this with our innovation pipeline in the back half of the year. Importantly, we're excited to advance our transformation and begin to fully unlock the new modernized capabilities we built. While we have more work to do, I'm confident we have the right plans, capabilities and investment levels, not only to win with consumers, but also to deliver strong financial performance in fiscal year 2026 and beyond. With that, Luc and I will now take your questions.

[Operator Instructions] And our first question will come from Peter Grom with UBS.

I guess just to start, I wanted to ask on the sales performance in the quarter. Obviously, we can see in the data and from your peers category trends have been underwhelming. But if you back out the ERP benefit that you called out, the organic performance is a bit weaker than what we can see in the data and kind of a bit below what you -- was contemplated in the guidance a few months back. So can you maybe just help us understand the gap between the implied performance and kind of the consumption data that we can see. And I understand having near-term visibility is difficult given all the many moving pieces, but just how did it all play out versus your expectations?

Peter, this is Luc. Why don't I just give you the breakdown grom our sales performance and the way to consumption. And then I think in that 1 is just offer a perspective on the consumption performance. So if you look at our organic sales growth was about 8%. And if you back out the 13% to 14% related to the inventory retailer -- inventory build at the retailers. You get -- you call it about negative 5%. And remember, at our last earnings, we had estimated that excluding the impact of the ERP, we were expecting to be maybe negative 3%. So that's lower than we expected. That's also lower than the consumption, which was about negative 3%, but the gap is the inventory destocking that we had mentioned in our last earnings. So really negative 3% consumption is lower. We would have expected to be in line with the category, which was slightly negative. And the difference is really a lower share performance than anticipated.

And Peter, maybe I'll take on what we experienced and share and where we missed versus our expectation. And maybe it would be helpful just to take a step back and put the quarter in an overall context and then talk about what -- where we have confidence moving forward. This was a pretty dynamic quarter, and we knew it was going to be. We are lapping a quarter from last year that had very high spending and had high merchandising, and that was due to many of the activities we put in the marketplace to recover from the cyber attack we had experienced the year before. So we knew we were lapping that, and we had made a lot of decisions to adjust spending and adjust our merchandising plans. At the same time, we saw a very, very dynamic consumer environment as consumers were trading off, trading into smaller sizes, moving to different retailers. And then, of course, we were preparing for our ERP transition. So a lot going on. And just quite frankly, in a few businesses, it didn't go as we had expected to. Some of those elements we didn't execute as well as we could have. And things were more than expected. On the flip side, there were some businesses that were exactly as we expected, cleaning is a great example of that, where we continue to grow share. Innovation plans worked extremely well. The changes we made to merchandising played out. And so that's really the delta between where we thought we were going to be in Q4 and where we landed. We are never like that, but we see clear opportunities to improve moving forward and our plans for '26 contemplate that and really begin to ramp up in the back half, and we feel good about that. And obviously, we'll make progress over the next couple of quarters on that. But this really just comes down to a very, very dynamic quarter, and we didn't get it all right, but we're clear sighted on where we didn't and what we need to do moving forward. The other thing I'll note is really importantly for us, we look at our brands to say, was this a brand issue or was this an execution issue? And our brands continue to be incredibly healthy with consumers. We grew household penetration in fiscal year '25 and although we lost share in Q4, we grew share for the year, and we came off of a quarter in Q3 where we maintained share. And if you look at our consumer value metric, that remains at a high point in fiscal year '25. So we know it's not our brands. They still resonate with consumers and have every right to perform, and we're going to make sure that, that execution comes through for fiscal year '26.

And I guess maybe just to that point, you just mentioned kind of the sequential improvement, it was mentioned in the prepared remarks that consumption trends would remain sluggish but improve in the second half. Can you just unpack that a bit and kind of what drives the confidence that trends are going to improve? Is that a category-based assumption? Or is that a reflection of some of the actions you're taking to drive improved share performance?

Yes, Peter, it's both. But let me focus on what we control and kind of walk you through it. we're really seeing in the front half of the year is continued sluggish categories, and we've adjusted our plans, which will take impact -- effect over time to address what we're seeing in consumer behavior. So as they're going after larger sizes. We've adjusted our plan to deal with that. And you're going to see those types of activities ramp up through the front half of the year, but really take hold firmly in the back half. And then the other thing that I would mention, we have a very strong innovation plan in the back half of the year. As you might recall, we talked about in fiscal year '25 that we would be building on current platforms, innovation platforms that we had. And then beginning in '26, we would be launching new platforms. And that really was a result of the cyber attack we experienced. We decided to double down on what we had versus launching new, but now we're at that point, we'll be launching new innovation in the back half, which we're excited about. And that will support not only category growth, which we care first and foremost about but also we believe market share improvements. So looking at the category lens, I would say it still remains uncertain. Consumers are definitely still under stress. We continue to expect our categories to perform below what they normally do. And we'll see how that progresses throughout the year. But I can't tell you with certainty what the categories will look like, but what's under our control will sequentially improve throughout the year.

Our next question will come from Andrea Teixeira with JPMorgan.

At first, I wanted Linda and Luc, just to go through the NAV of getting back to the levels as you did the ERP and then the pull forward, then the impact -- the negative impact seems a little more outside it, actually not a little probably more upsized than the benefit. I just want to go through the math or like any other peer in the industry having the same impact on destocking. So in other words, the destocking that is happening as we see channel shift into e-commerce. That is even exacerbating that impact? Is that an additional destocking on top of the destocking from the ERP?

Got it. Why don't I hit 2 things? Let me address your more just industry destocking question, then I'll get into the ERP. And I'll pass it to Luc to walk you through how to think about Q4 as it relates to the ERP from a performance perspective and then how to think about '26 coming out of that and what will happen in numbers because we acknowledge there is a lot of noise right now going on in that, and we'll try to provide as much clarity as we possibly can. So first on destocking, as we talked about at the end of Q3, we did expect some destocking to continue in Q4 and largely what we saw was in line with our expectations. We saw a bit more in a couple of our businesses. We don't look at that as a structural issue. We look at that as more retailers continuing to do what we do, which is get better at inventory management. We're not experiencing out of stocks. We do not have any material retailer destocking outside of the ERP, which we'll talk about, which is a different thing in our plans for fiscal year '26, but we continue to watch it very, very closely. And that wasn't the big story for Q4 and as we think about fiscal year '26. With that, let's turn to the ERP, and I'll do some framing and then again hand it to Luc. First of all, we're on track to complete the implementation of our ERP this year in the U.S., which is terrific. And I think it's helpful to remind everybody that the ERP happened at the beginning of July, and it happens in phases that the year, but the big portion really went live at the beginning of…

Yes. Thanks, Linda. Let me offer a couple of comments on what happened in Q4 because it was a little different than our expectations. And once I do that, just let me walk you through the impact of the early shipments to the outlook. So the retailer inventory build ended up being much higher than we anticipated. If you remember, we had anticipated that the retailers would order between 1 and 1.5 weeks of inventory, and that was equivalent to about 2 to 3 points of annual growth. Now it is shown discussion with retail partners in the spring, they all indicated about 1.5 weeks. And based on the learnings from the pilot we did in Canada, also based on some benchmarking we have done versus prior implementation, we expected actual orders to be a little lower than a commitment. Well, most of them ended up ordering more, not less than their commitment. In fact, actually, many retailers ordered the maximum allowed. I think it speaks volume of the past experience with those types of transitions and the risk involved for those transitions. So we ended up shipping about 2 weeks of inventory, which is equivalent to 3.5% to 4%. Now why do we have a range? We do have a very robust tracking process in place, but as probably there's still an element of triangulation, probably, as many of you know, several of our customers have an algorithm-based ordering system, which makes it challenging to separate all the prebuy orders and regular orders. So we expect that we will have a better perspective and a point estimates sometimes after the inventory drawdown. And we appreciate that this creates even more complexity. The last thing I mentioned on Q4 is that the gross margin impact was higher than what we…

That's super helpful. I just wanted to figure like the 7% to 8% volume impact is greater than the positive 3% to 4%. That's why in fiscal '25, that's very simplistic to say, but just to feel how the impact is bigger this year, this upcoming fiscal, I guess, what the benefit was in fiscal '25.

Andrea, I think what it is, is you just have a higher base than '25, and so you have to take that out and then you have the reversal. And that's why it's not double the impact. It's simply the math between years.

That's right.

We will move next to Filippo Falorni with Citigroup.

So maybe just starting with the top line guidance, the -- excluding the ERP sector impact, the negative 1 to positive 2 the -- Luc you just mentioned on an underlying basis. Can you tell us a little bit about what category growth are you assuming within that guidance from an organic sales standpoint? And then also from a promotional level, we've seen a lot of your categories being very promotional, some from your competitors, some from -- from some of your action in cat litter. How do you think the promotional environment will play out in fiscal '26?

Thanks, Filippo. Yes. Let me provide a little perspective on the organic sales growth range. And I believe I can just provide a little more on the promotion. So we have a fairly wide range. And this is really a reflection that we continue to assume that external environment remains volatile and challenging. So we continue to expect that consumer will continue to display basin behaviors. We continue to expect competitive activity to remain at a heightened level, and we continue to expect also constant tariff environment to remain uncertain. So as I look at the organic sales growth range, it might be easier to talk about what we assume for the middle and then just talk a little bit about the high end and low end. For the middle of the range and the midpoint of our estimate, we essentially assuming that U.S. category would be stabilized, but not yet normalized. And so essentially growing at an average of 0% to 1%. Now we could and may see numbers outside that range in any specific month because of the volatility. From a share standpoint, we assumed a little continued pressure in the front half and as Linda mentioned, just improving sequentially and especially in the back half. We're clearly not satisfied with our current performance in the back half of fiscal year '25, but we feel really good about our plan in fiscal '26. We have strong innovation plans and strong net revenue management plan as well in the back half. Now maybe 2 more comments on the range. I would say volume growth would be fairly close to organic sales growth. We expect price mix to be maybe negative 1% or slightly better, which is an improvement of what we've seen this year. And while we continue to expect to see some headwinds from consumers seeking value behavior, channel shifting and promotions. That will be generally offset -- partially offset by strong net revenue management initiatives. And again, as I mentioned, a lot of them are in the back half. So from a phasing standpoint, it's -- if you look at the front end, it's probably -- we expect negative low single digits and in the back half, probably low -- positive low single digits. So that's for the range as far as promotions and I'll pass onto Linda.

We've seen largely the promotional environment fairly rational, and we're not seeing significantly elevated levels in aggregate. There are a couple of pockets where we're seeing more competitive activity, particularly in our trash business as well as Cat Litter, where we're continuing to see some pretty high promotional levels and some very deep discounting. But that is pretty consistent with what we've seen over the last several months, and we do expect that to continue for fiscal year '26. So largely a rational promotional environment a couple of pockets in Cat Litter and trash that we would expect to continue to be more competitive. As we think about this in our approach, what we've really thought about for fiscal year '26 is continuing to pull all levers of superiority in our plan. And we believe that's the right way to drive categories. We want to make sure that we continue to drive profitable growth. So of course, merchandising will be an important part of our plan to remind people that we have new innovation to ensure that we capture them during periods like back-to-school and cold and flu. But we really want to make sure that we're leveraging our claims and advertising, and we'll continue to spend strongly next year. Focusing on innovation, communicating value, ensuring that we have the right promotional activity going on in the categories et cetera. So that's what you're going to see from us is that continued focus on ensuring that we have superiority across our brands and across all the elements that we control. And you will deal with those categories where it's a bit more promotional, but we want to make sure that we are continuing to preserve good profitable category growth.

Great. And maybe a quick follow-up. On the tariff front, what are your expectations in terms of tariff impact for fiscal '26.

Yes, we expect higher costs from tariffs to be around $40 million. Now this is based on tariff announced as of today and of course, assumed and also assume USMCA exemption for some of the imports that we have from Canada and Mexico. Now we expect to offset the impact through a broad range of mitigating actions with that includes sourcing change, sometimes reformulations, productivity improvements, but that will also include some level of strategic pricing, although I would say it's fairly targeted and surgical and generally very modest in magnitude. Now as you know, the situation continues to be very fluid and dynamic, and so the exposure could change, and we're staying very close to it.

And we'll move next to Anna Lizzul with Bank of America.

I was wondering if you could clarify on your expectations for an improvement in the back half of the year. I was wondering if this is based on your expectations for improving underlying consumption given innovation or also an assumption in an improving consumer environment? And then I wanted to follow up on the promotion question, just to better understand the dynamics around trade promotion. You did mention in your prepared remarks unfavorable timing. But given the consumer environment, I was wondering if this makes sense to be continuing with promotion if you are seeing unfavorable mix. And basically, where do you expect these promotional dollars are best allocated in your portfolio? Do you expect to cut down on promotion if this is unproductive and not meaningfully lifting a more challenging consumer landscape?

Yes. on the back half, we really do expect what we control to be the main driver of what we will experience from the back half improving. That includes things like innovation that we talked about, and again, are launching some new platforms and continuing to expand on existing platforms we have in the company, very excited about the innovation plans for the back half, and they have good spending behind them. As well as Luc mentioned, from a net revenue management perspective, we start to see many of the benefits flowing through in the back half of the year and so we expect the fundamentals, our execution and, of course, the things that drive value in our categories over time, like innovation and good net revenue management to take hold mostly in the back half, and that's why we see the improvement. At this point, we are not predicting a significant change to the consumer environment. We expect our categories to be above flat to 1-ish sluggish, but that's very difficult to predict quarter-to-quarter, moment to moment, and we're really focused on reinvigorating our categories through good advertising spend, pulling on the levers of superiority, including innovation. And then that leads to your point on promotion. And we've always felt that promotion is a very strategic activity in the way that we view it. It is a great way to remind consumers at times when they have a life event going on, for example, I'm getting ready to send 1 of my kids to college, and I'm thinking about all those things they need and consumers have the same attitude and we helped them during that back-to-school period to maybe see products they haven't seen before, remind them that their kids are going to need access to fresh water…

Great. Very helpful. And just 1 follow-up. On private label, I know you mentioned you haven't seen a significant change overall, but we are seeing some uptick in certain categories like wipes, for example. Are you seeing this starting on your end? Or is this maybe certain household income tiers or retail channels that we're seeing just the greater penetration of private label starting to uptick here?

Yes. In aggregate, we're not seeing any material shift to private label. With 1 exception we did call out with Glad and that mainly has to do with retailer assortment as consumers are moving into channels like Bob, et cetera. that's having more of an impact on our Glad business. But in aggregate, we're not seeing it. There are some nuances, if you look quarter-to-quarter, you're light on life. We've seen a little more private label on life. But if you look at on life's business, we grew very strongly, including our new Scentiva wipes that were 4x the rate of our growth. And so we -- at this point, again, are not worried about private label expansion based on what we've seen, but we're watching it very closely. We're adjusting our plans to make sure we have the right sizes that people are forced to make a trade into a private label item because they have a lot of pocket. We're doing all of that work to make sure that we can capture the consumer along the entire value cycle. But for now, we feel confident in our brands and the fact that consumers continue to remain in our portfolio and that we give them the options to do that through sizing and price pack architecture.

Our next question will come from Bonnie Herzog with Goldman Sachs.

I just had a quick follow-up question on the ERP transition. Was there a greater build in certain businesses or segments versus others? And then I did want to ask about Kingsford. Linda, you mentioned the pressure on the business or at least it was called out in the prepared remarks in your quarter, but it sounds like trends improved in July and you're optimistic for the rest of the summer. So could you maybe talk about how Kingsford is positioned to win? And maybe touch on some of your innovation and activation plans and essentially how you're also thinking about the price gaps within or with the rest of the Charcoal category?

Yes. Starting with the ERP, Bonnie. No material difference between businesses that I would call out. The only thing you might have noticed in the press release would be that we do have some export business. So there was a lower impact for international simply because the size of the export business isn't corresponding to the size of what we would ship. But on all the rest of the businesses, there's nothing material to call out in terms of the differences in the segments, et cetera. Particularly for Kingsford, we did call out that was a business where the execution just didn't meet our expectations for the quarter. And there was a lot going on. I think you all know there was some pretty terrible weather in Q4 for Memorial Day. But frankly, it came down to us not executing to the degree we know we can and we must execute on Kingsford in the key holidays. And that's what happened in Memorial Day. We had slightly less merchandising. And not necessarily all on the right sizes as we shifted our plan. And so the good news is we adjusted our plan for July 4, and we saw improvement in the plan, and we're seeing the trend on share moved in the right direction. Bonnie, I don't think this is an issue of our price gap versus private label, our value versus private label, all that remains what it was before. This was really just execution, and we are adjusting our plan to ensure that we do that. An example would be, as we can see consumers want some smaller sizes for those who just want to have 1 or 2 grilling occasions. We are doing that to ensure that they have a smaller size and we're able to do that, and we're not just offering them a very large size for them to stock up on when they don't have that out-of-pocket. Those are the types of adjustments that we're making for Labor Day coming up here in a month. But don't feel like this has anything to do with our value equation between us and private label. It really just was execution.

Our next question will come from Chris Carey with Wells Fargo.

I think when -- we on this side are confronted with these sorts of situations where there's swings in sales from 1 year to the next, and there's a lot of volatility in the numbers and is really just a search for, I suppose, the True North. And I guess in that context, right, Luc gave some figures for how you see -- how you all see the underlying business for fiscal '26. But certainly, I think as early as it is, we'll all be, I suppose, looking over the horizon at fiscal '27 for when we can assess the business perhaps a bit more clearly, at least from a high-level perspective, right? So with that kind of as a foundation, how are you thinking about what this business should be delivering over a medium-term horizon from a top line perspective, the 3% to 5% is a long-debated target. Many of your peers have category growth plus ambitions that gives some flexibility for category. You continue to see room in your gross margin given the ERP and some of the mix shifts? Do you still see S&A savings as longer-term objectives. I know it's a big question, but I think at least for us, personally, here, it would be helpful to kind of understand how you see more the medium term and whether some of these debates -- the markets have evolved your own thinking.

Thanks, Chris. First of all, I just want to acknowledge, it's never easy to go through these types of transitions, and we want to provide real clarity on the shifts because we know that it's difficult to do that. But I also want to emphasize how absolutely necessary. Unfortunately, this noise is to do exactly what you talked about, Chris, which is get back to a place where we're delivering that accelerated profitable growth as a stronger company moving forward. And so I just appreciate everyone's patience as we go through this. And we're frankly excited about what's ahead of us because of this transformation. And what it does unlock is our ability to accelerate revenue having the access to data and insights that we've never had before being able to move as fast as consumers do. Seeing end-to-end to ensure that we're able to remove waste in new ways that we haven't done before. Are all of the reasons we're going through this pain now to get to the other side and build a stronger company that does this more consistently. And I know it's hard in the noise to get all that, but I want you to hear how excited we are and I am as a company to do that. That being said, it is a year where we have volatility. And also, as we've acknowledged, and I think everybody is acknowledging right now, it's a tough consumer environment. So unfortunately, our categories are lower growth. Of course, it's incumbent upon us to reinvigorate that category growth, and we intend to do that through innovation and through good spending, which we have in our plan. And of course, we want to win share over that period of time. And very, very importantly, we have built a capability…

Our next question will come from Kaumil Gajrawala with Jefferies.

I'm here. Sorry about that. I wanted to talk a little bit about the -- or dig in a little bit more on the consumer in that we're hearing from yourselves and other household goods companies on a weak consumer, but we're also hearing the opposite from a lot of other industries and retailers and banks and things like that. So have you been able to dig into what it might be that's specific to household goods or in personal care that the consumer seems to be a lot more, I guess, value seeking or sensitive or pressured than perhaps they are in some other sectors?

Yes. I think it's helpful to start and take a step back on the consumer and aggregate. And we've talked about this a bit over the last couple of quarters and what's really unique and going on. If you take a step back and look at consumers overall, if you look at jobs, if you look at income inflation, if you look at the broader fundamentals. Yes, you see some strength in the consumer. And that was, I think, what made people very optimistic heading into this period that we would start to see improvements in places where it was a bit weaker. But the dynamic that's going on, and I would highlight 1 word, it's uncertainty. And maybe I'd add volatility to that is that there's so many things uncertain right now for consumers as they see macroeconomic policy, trade, other things coming into life that they are making trade-offs based on the information that they have at the moment. And that information, to be fair, has changed pretty rapidly over the last number of months. And we talked about a little bit of this in the last quarter, at the beginning, it was the end of February through March, we saw people making purchases of goods they though were coming from Mexico and Canada, for example, to get ahead of tariffs. We saw an influx of spending into edibles versus non edibles. People were really trying to be sharp on their spending in these stores in order to make sure that they could kind of deal with the uncertainty that they had in their wallet because consumers have 1 wallet at the end of the day. At the same time that you see this value seeking and you see this uncertainty behavior from consumers. Interestingly, you also see…

Our next question will come from Olivia Tong with Raymond James.

Great. I wanted to ask you about the efforts that you're making in fiscal -- in the next fiscal year to improve your value superiority. You talked about innovation in the second half, talked about more promotion potentially. If you could talk about also the flexibility you have either on promotion and other brand support, if necessary, to really sort of drive home that message. And then -- maybe if you could step back and just talk about some of the major drivers of the weakness beyond, obviously, the consumer environment because some of this is trade down, but perhaps how much of an impact is the product lineup needs some improvement. Your channel and category exposure and where your over-indexed versus under-indexed and just the mix of your categories, that would be helpful.

Sure, Olivia. So superiority is fundamental to how we win in our categories over the long term. And as you know, it's incredibly important that our '26 plans improve that superiority. And there are places that we're starting from a very strong place. And if you look at our categories overall, our consumer value metric were 60% superior, which is higher than it was even pre-pandemic, and we've continued to maintain that even through the tough times of the last few years. And so what we want to do is in those categories where we already have goods superior, we want to continue to raise the bar and we will do that through new innovation through continued good claims work through making packages work better for consumers, not just what's in the package. To ensure their shopping experience is as simple as it possibly can be and being assorted wherever they are. And we have pretty good assortment now, but those are things that we want to make sure we're really tight on all of the right locations have the right sizes, that things are available on e-commerce as we see e-commerce accelerate. And those are the things the sharpening that we do every single day on that businesses on our businesses. And the places that are starting from a place of superiority, we want to be driving the narrative and changing what superior needs. We want to set the bar. And then there are some places where we don't have the superiority. And I think Cat Litter is very fair to say that's a place where we need to improve our superiority. You've seen us have to go through what we did on cyber. We lost some of our consumers. We got that distribution back. We've got a lot…

Got it. That's helpful. And then just following up on gross margin for fiscal '26, you're still looking for something in the flat to plus 50 ex ERP despite the top line challenges. So can you talk about your level of confidence here on potentially driving continued expansion and just the key drivers there? Because you're already back to peak levels now. And you don't have a ton, but you do have some exposure to tariffs. It sounds like there's going to be more promotion next year. So I'm just trying to think about the tailwinds that gets you to the flat to 50 when we know the headwinds that could be appearing.

Yes, sure. I'll take that on. Well, you'll notice that we provided a fairly wide range excluding the impact of the ARPU of it basically being flat to 50 basis points. And that's acknowledging there's a lot of uncertainty in the cost environment in the first place. But I mentioned the current assumptions for tariff, we'll have to see how that evolves. But in terms of general supply chain inflation, we probably expect between $80 million to $90 million of headwinds. So you're right, with the tariff. This is slightly higher than what we normally experience. Having said that, we just talked about it. We've been ramping up for the past 2,3 years, our margin transformation and holistic margin management effort, I should say. And we really still have a pretty strong pipeline. And so I think we feel generally good about offsetting the current cost assumptions. We'll have to stay close to it, especially with tariffs. And the good news is, while again, the ERP creates a lot of effort, complexity and noise from a reporting standpoint, once we stabilized this will provide another source of productivity for years to come. But in general, I think right now, albeit staying close to what happened from a tariff standpoint, we generally feel good about our ability to deliver our guidance.

We'll move next to Kevin Grundy with BNP Paribas.

I also wanted to maybe pull out a little bit away from the quarter and ask a longer-term question, kind of along the lines of Chris Carey's question, but further down the P&L. So Luc, this may be for you, but Linda as well. So I think the way I understand it, some of the ERP benefits here, the idea is to get to around 18% operating margin. There were some norms, obviously, this year, there'll be noise again in '26. I think the expectation is you're probably around 16% or so operating margin this year, all in, including the noise from the ERP and the deleverage associated with it. So the question is, I think the target is to get to 18% with some of the benefits the ERP is going to afford you. So I fully appreciate everyone on the call does the amount of volatility over the next 3 months, let alone the next 3 years. But I'm really curious, when you guys are putting together the plan, how quickly you think you can get to that 18% before you kind of get back to sort of like a normal 25 to 50 basis points sort of cadence. And I'm also curious, too, Linda, for you, if this gives you any pause, like what you thought was potentially going to flow through. Now it just seems like there's more necessity for investment up and down the P&L, whether this is artificial intelligence, supply chain, the market share is not what you want it to be, et cetera. So what you thought was potentially going to flow through we can all agree, getting the top line going, what's going to drive the most value for shareholders. So how you're thinking about that? So sorry, I know that was a bit robust and a bit rambling, but I hope you get the gist and I'd love your thoughts.

Yes. Maybe I can take a first pass as we look at the P&L. I mean you're right, there's so much volatility. And you have sales that are higher than they should have been in the base year lower than it should have been. But I would say we're pretty much close to that target of 18%. That has been mainly driven by the fact that we have now fully rebuilt our gross margin beyond where they were actually at -- when we had 18% EBIT margin. Now the goal is going to be -- and I think once the noise settles down, we are pretty confident that we'll be essentially there by next year. And then the goal will be to continue improving 25 to 50 basis points. And of course, that can come from different places from the P&L. We're going to continue being extremely focused on driving the gross margin because that really creates the fuel for the strategic investments, both from a brand and capability standpoint, as you mentioned. And then we have to acknowledge that our current selling and admin is higher than we expected. And this year, again, it's dropped by the time the last year of onetime investment associated with the API transitions, but we -- it doesn't include any of the productivity that we expect from the ERP. And so that would be another source going forward. So that's as we think about the P&L over the next year or 2. But essentially, where we want to be from an EBIT margin once the noise settles down, and we feel like we have between the gross margin and between the work we're doing on SG&A, we feel like we have the fuel to continue expand EBIT margin going forward as well as we invest in the business.

And I'll just emphasize that point that Luc just made, Kevin, to the question that you've asked me that's exactly why we've made these investments. We made investments in solidifying our supply chain coming out of COVID and ensuring that we had more protection as we saw dynamic events happening, and that has served us really, really well. We invested significantly in this transformation for both our digital transformation and new processes and tools for our team. I mean that includes AI. So we've already put investments in AI in this plan. We're using it today, both generative AI and AI across how we plan, et cetera. And we'll continue to invest in our business over time, but that's more of a normal rate like we normally would over time. You see the capital investments that we make in the company year after year to ensure we're improving our supply chain. And of course, we make those same investments in technology. This was just a big reset given we haven't had a technology upgrade in so many years, 25 years, our ERP was in place. So that being said, I feel still confident on our ability to get the value from these investments. And that is what our team is laser-focused on just like we were in getting those margins back from a gross margin perspective, and you saw that we've done that and exceeded that target. We're doing the same to make sure we realize that benefit in EBIT margin. And then the same to extract the revenue and the productivity benefits moving forward. And we see that again as a virtuous cycle, and we feel confident in our ability to do that. So I believe we have the right investments. It's about 11% of advertising and sales promotion next year. with healthy promotional levels. We had healthy investments in our different businesses. We're getting better and better at using those and we have industry-leading return on investment from an advertising perspective, and we continue to expect our team to improve that. So I feel like we do have the right plan, the right level of investment, and we've created that flywheel. And again, to your point, it's a bit noisy right now as we get through that other side, but remain confident in this transformation and this ability to ensure that we deliver profitable accelerated growth moving forward.

Our next question will come from Javier Escalante with Evercore ISI.

I guess a question first for Luc. Could you help us understand why price mix in the quarter got so negative? I understand that you guys are not promoting. Is this channel or package? And then I have a follow-up for Linda.

Yes. Javier, you're right. It was abnormally high. Price mix was about negative 4 points in the quarter. And we did have some onetime items that increased trade spending for the quarter. We have a normal process at the end of fourth quarter to really evaluate trade spending accrual and trade promotion that took place throughout the year. And we had an adjustment, and that was really onetime in nature. I think if you exclude this, price/mix would have been about minus 2%. And that's generally about the average that we've seen throughout the year. And as I mentioned, going forward, we expect it to be about minus 1%.

And particularly in household why it was down 6%. Is that -- which of the businesses saw such a negative price mix? .

This is driven by a significant merchandising events that we didn't took place in the prior period. So the year-over-year was impacted by that. That's an additional 2 points for the segment.

Sure. I got it. So Linda, more kind of like a bigger picture question, I understand the promotionality and the value-seeking behavior and these are transient, these are not structural. But the 2 categories where problems to reoccur are categories and there are 2. One is Glad and the other is pretreater is categories where you have value brands. And I understand that the impetus is behind the innovation, but. Have you considered a price realignment, so you can stabilize market share? And if not, why not?

Javier, you're right that we've spent a lot of time over the last year talking about Cat Litter and Glad. Those are 2 very competitive categories and different dynamics going on. Just so everybody is on the same page. Primarily, we compete in very premium segments in both of those categories. Our FreshUp brand is a premium and Cat Litter as well as Glad. We play in the premium tier and we've leveraged innovation for a number of years to grow in both of those categories. What I would just call out, just frankly on Cat Litter, our superiority is not where it needs to be. So this is not about price, in my opinion. This is about ensuring that we have better innovation, that we execute that better on market, that we get our price pack architecture right, et cetera, and we absolutely have plans to do that. And of course, I will acknowledge that was 1 of the businesses most hit by the cyber attack because of the behaviors that are unique to Cat Litter owners. But I feel confident our ability to do that over time, confident in our ability to command a premium over time, but you'll see our plans in this year start to take hold and realize that. And then in Glad, the way that we have created value in a category where consumers are generating more trash is getting more value out of every single trash bag. And that's by offering them a better experience. And trashes can be a pretty terrible experience. If it smells in your house or if you take it out in the bag reps, and we have launched innovation after innovation platform to strengthen the bag to make it a better experience, to add some visual to light. And we know that's worked for consumers. For example, we launched and we talked about this in the last few quarters, our Bahama Bliss line, that's done very well. We've been expanding that, and we continue to see opportunities to do that. We need to make sure now given how competitive this category is that those elements work even harder, Javier, than they have in the past when you're faced with competition that is doing deep discount. And we want to make sure that we continue to drive profitable category growth through innovation that helps consumers to have better experiences in categories like these, and that remains true today. As I noted, we're seeing consumers continue to value that. They're willing to pay a premium. They're willing to trade up if you offer them that. And that's where you'll continue to see us sharpen on both flat and Cat Litter and frankly, across the rest of our portfolio are superiority to ensure that we can continue to win in 2 very competitive categories.

And we'll move to our next question. This will come from Robert Moskow with TD Cowen.

Luc and Linda, I wanted to ask about the $0.35 of spending on digital capabilities that you exclude from your adjusted earnings this year, $0.68 in fiscal '25. I assume that this will eventually get down to 0. I think in fiscal '27 when you're done with your projects. But I think you might agree that the digitization and things like AI are a moving target, and you're probably going to have to keep investing in your capabilities and adjusting to an ever-changing world. Just to keep up. So what makes this spend so unique that there's an end point to it and it doesn't. We don't end up having to think about another investment a year or 2 from now.

Yes, Robert, you're absolutely correct that every business, including ours, we'll need to invest over time to ensure that they have modern capabilities, modern technologies. And we definitely intend to do that moving forward. But I would consider that to be normal course of business. We have spending that we have in our plan every year behind capital spending as well as operating expense dollars that are to invest back in our business in all sorts of technologies that might be improving technologies in a manufacturing plant can be implementing different AI technologies, et cetera. And we do view that as a normal course of business and accounted for in how we think about the overall algorithm for the company. What's so unique about what you just spoke about and the fact that we've been excluding this is this is kind of a once in a generation reset of our technology platform. We hadn't upgraded our ERP in 25 years. And the corresponding set of technologies that go around that needed to be upgraded as well. We're talking things like just having a warehouse management system, some basic things that are in the industry. And so what we chose to do is to do a big project to do that all at once and to maximize the value and of course, the resources we have to put that could be doing other things in our company are having to do this implementation. And that's why it's onetime in nature because it really is less about just upgrading the normal course of things that we'll do from here on out. And it's about I'll call it a once-in-a-generation reset. And moving forward, again, you would expect to see that in our normal capital spending, our normal OpEx dollars. And if there was never anything that we needed to do, one time, of course, we've raised the visibility to that, but we believe we have the right spending in place to be able to deal with that technology transformation over time.

Next question comes from Lauren Lieberman with Barclays.

I had 2 quick questions. The first is that the advertising spend this quarter was down dramatically in dollars, the lowest level of spend since the fourth quarter of 2019. So just curious if you could comment on that. That was a big swing factor in the quarter. And I know you're talking about it going back up as a percentage of sales next year. But just overall, surprised the advertising that low. And the other thing was earlier the question on drivers of gross margin next year. I guess this year now, I think the Glad JV was coming to an end. So it was just in the January, I believe. So just curious what kind of benefit that should look like to gross margins?

Yes. Sure. On the advertising spend in Q4, maybe just put this in context, we obviously don't provide guidance at a quarterly level on advertising. We are lapping a very large spend of advertising from last Q4, which, of course, was about returning share growth to our business post cyber. So we knew we had that lap. But if you kind of take a step back and look, we said we spent about [ 11% ] for the year, we spent 11% in the front half. We spent 11% in the back half, and we expect and about 11% next year. So it's really just noise between quarters, Lauren, and not something that's an indication of our investment in the business.

Yes. I'll talk about that. And maybe just on the advertising, there's a little bit of upticks too because your revenue is essentially 13% or 14% higher. So if you were -- and of course, the shipments were not concerned. So really, if you just adjust for that, I think you're about 10% just within the normal variability between quarters. So on Glad, yes, I mean, as we talked, we're going to be exceeding our contractual agreements we have with P&G this coming January, right? And so essentially, we will repurchase 20% of that P&G currently own, and we'd probably finance that through a mix of cash and borrowing. So there's probably 2 impacts that I was mentioning. The first 1 is the impact on the P&L that you alluded to, Lauren. Under the current agreement, we pay P&G, about 20% of our cash flow every quarter. And that cell charges through the cost of goods sold. So of course, when we buy back their interest, we will longer pay that 20%. And for perspective, that represent about 50 basis points of gross margin annually. Now given that we will exceed the agreement at the end of January, the impact for '26 is probably around 20 to 25 basis points. And there's another onetime -- there's another impact that we'll keep an eye on is potential onetime EPS impact of the acquisitions. Because right now, we're making a very simple assumption that the acquisition price will be in line with our current estimated value on the balance sheet. So if the purchase price was to be different, higher, lower, that would create a onetime impact on EPS.

Our next question comes from Steve Powers with Deutsche Bank.

I guess 2 quick ones for me, too. Obviously, a long way to go before we get to the end of the year, but just to not everything that we've been talking about so far and just confirm your base case in, I guess is there any way -- any reason why from where we sit today that we shouldn't be thinking about kind of the midpoint of your normalized earnings exiting the year at around $7 or maybe slightly higher. If I just take the midpoint of this year's headline EPS guidance range and add back $0.90 or so for the ERP shift. Is that is there any reason why that's not the right way to kind of think through the noise and come up with a kind of a normalized base?

That's exactly right, Steve. That's the simplest thing to do. Of course, there's a range because we acknowledge all the noise that is relative to the ERP and, of course, on the uncertainty environment. But right now, our best thing as it.

All right. Perfect. Perfect. And then on the ERP transition, clearly, a number of benefits that I know you're excited about given that you're effectively leaping forward the IT capabilities of the company by a couple of decades. So that's exciting. But I guess, is there any potential risk of transition from an offsetting standpoint, I'm thinking, I guess, in some kind of structural period of essentially but would translate it like a destocking headwind. As on your top line, as retailers take advantage of your theoretically better capabilities, better agility, better service levels and essentially run Clorox a leaner level of trade inventory, which as we transition would be a headwind on your revenue. Is that -- is there any consideration that we should be thinking about there as we think through the transition?

Interesting question, Steve. The way I would look at this is no. And the reason why is this doesn't fundamentally change any retailer processes. This is not about that improving they're doing that work all the time to ensure that they are like we are managing our inventories. Now on our end, it absolutely gives us the ability to better manage inventories, have better line of sight to where things are in our network and move them most cost efficiently. But there's no structural reason why our ERP should translate into a different posture from retailers on their inventories with us. We already have to do that stuff manually on our side. So it's really just a cost that we get to remove over time. They still -- they don't -- because we are on an old version of ERP in the past, they didn't give us more inventory in their system in order to account for that. It's just that we had to work harder and it cost us more on the back end to ensure that we could meet their expectations. So I don't see that as a structural risk moving forward. What I am excited about that was what you highlighted, which is our ability to do things like managed inventory over time and better manage trade spend and advertising and have better line of sight to end-to-end costs in places that we can drive savings. And those are the structural things that we are excited about.

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'd like to note that this is a big moment for our transformation as we lay the foundation for a stronger future and unlock new value streams. While I recognize the timing noise from our ERP implementation in the U.S. is not ideal, in the short term, it's absolutely necessary for our long-term growth aspirations. The costs are winding down and the benefits are just ramping up as this new digital foundation and operating model will help us continue to reimagine work, scale our digital tools and move faster as an organization for years to come. I'm excited for the future, and I'm confident we're taking all the right steps as we advance our IGNITE strategy. Our fiscal year '26 plan lays a strong foundation for new scalable innovation platforms as we work to reinvigorate category growth and deliver solid margin and earnings growth. Through it all, we are transforming Clorox into a stronger company poised to deliver more consistent profitable growth and enhance long-term shareholder value. Thank you for your time and questions. We look forward to updating you on our continued progress.

And this concludes today's conference call. Thank you for attending.