Good day, ladies and gentlemen, and welcome to The Clorox Company fiscal year 2027 first quarter earnings release conference call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. If you would like to ask a question, you may press star one on your touch-tone pad at any time. If anyone should require assistance during the conference, please press the star zero on your touch-tone pad at any time. 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 that our earnings release and prepared remarks are available on our website at thecloroxcompany.com. Linda will share a few opening comments, then we will take your questions. During this call, we may make forward-looking statements, including about our fiscal year 2027 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 statement 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. I will now turn it over to Linda.
Thanks, Lisah, and thank you for joining us today. We entered fiscal year 2027 focused on steadily improving performance and market share while navigating continued input cost pressures. We made good progress in the first quarter, delivering better-than-expected results through strong execution and some favorable timing benefits. Importantly, the underlying trajectory of the business continues to move in the right direction, with steady progress in organic sales growth and market share. At the same time, we continue to advance the priorities that will strengthen our performance over time. We are improving superiority and innovation across our portfolio, integrating GOJO Industries to unlock the full potential of Clorox Purell ProCare, continuing to evolve our portfolio, and advancing our transformation efforts from a period of significant investment toward one of optimization and value creation. Together, these priorities are focused on building a stronger business that delivers more consistent, profitable growth.
While we are encouraged by the start to the year, we recognize that the operating environment remains challenging and uncertain. Consumers continue to seek value, competitive activity remains elevated, and increased commodity and transportation costs are putting additional pressure on margins. We have a strong track record of managing cost pressures, and we are taking balanced actions to mitigate their impact while continuing to invest in improving our top-line trajectory. The pace of that improvement will be driven in large part by our continued progress on superiority. Our updated outlook reflects these realities, along with the actions we are taking to mitigate their impact. Our focus remains on strengthening brand superiority, improving the consistency of our performance, and creating sustainable value over time. As you saw in our announcement on Thursday, the board has appointed Fabian Garcia as Clorox's next CEO.
Through the process, I have had the opportunity to get to know Fabian, and I have been impressed by both his experience and his perspective on our business. He is an accomplished global consumer products leader with a strong track record of building brands, evolving portfolios, developing talent, and delivering disciplined growth. Between now and January, I remain fully focused on executing our strategy, delivering our commitments, and maintaining momentum while supporting a smooth transition and helping Fabian hit the ground running. With that, we will open the line for questions.
Thank you, Ms. Rendle. Ladies and gentlemen, if you have a question, please press star one on your touch-tone telephone. Our first question today will come from Peter Grom with UBS.
Great. Thank you. Good afternoon, everyone. Linda, if this is your last earnings call, I just wanted to say thank you for everything and then best wishes moving forward.
Thanks, Peter. It is. I appreciate that.
No, yeah. Thank you, Linda. Maybe just to start, just on the commodity outlook, the commentary in the prepared remarks was very helpful. But just given how volatile the external environment is, can you unpack the underlying assumptions embedded in the updated guidance? Is there anything you can share on the phasing of that cost pressure as we think about the balance of the year?
Sure, I can take that, Peter. As you read in our prepared remark, we now expect input cost inflation for the fiscal year to be about $240 million, and that's about $40 million more than we expected at the beginning of the year. The increase is mainly driven by just the range of commodities as well as transportation costs. For perspective, the $240 million is about 2.5x higher than our historical annual average rate. What I would say is, while oil remained an important variable, it's important to recognize that inflation we're dealing with is broader than energy alone, right? We're seeing, on commodities, we're seeing resin being a significant driver, but we're also seeing inflation across a wide range of commodities.
Beyond commodities, we are seeing inflation in broader area of supply chain, including supply, supplier cost increase, as well as transportation and other logistic costs. From an oil standpoint, we're assuming that the Brent annual average price would be around $100. But again, keep in mind that the inflationary pressures are proving much more persistent and extend beyond the oil headline. From a phasing standpoint, we expect inflations will be more pronounced in the first half, and then in the second half. In the second half, we'll also see many of our mitigation actions stacking up and starting ramping up over time. So, that's why you're seeing an imbalance between the first half gross margin and the second half gross margin.
That's really helpful. Then, second, you noted some of the moving pieces around 2Q organic sales, including a shipment comparison and some merchandising and timing dynamics that will push organic sales to be flat to -2%. I know it all depends on where you fall within these ranges, but at first glance, it seems like that would imply a return to growth in the back half of the year to get the flat to up slightly. Maybe first, am I thinking about that the right way? If so, can you maybe unpack what drives the confidence that trends will improve in the back half of the year?
Sure. Maybe let me actually just get us regrounded on the full year, then talk about the phasing over the both halves, and I can briefly touch on the timing for the second quarter. So for the full year, our organic sales growth rate is expected to be 3.5% - 4.5% , and that includes about 3.5 points of benefit from lapping the ERP transition. So essentially, our guidance is organic sales growth, excluding the impact of the ERP, is flat to +1% for the full year. As you mentioned, from a phasing standpoint, we expect organic sales growth, excluding the ERP, to be down slightly in the front half and up slightly in the back half.
Now, the way to think about it, there's a little bit of noise, especially in the front half, between organic sales growth and consumption, and some of it is driven by the Kingsford trough, some of it is driven by some of the ERP lap. But if you really look at the annual retail consumption, it's essentially flat in the front half and then become up slightly in the back half. As a reminder, last fiscal year, we started in negative low- single digits, and so we've been improving sequentially through the front half of this year and continue to improve in the back half of this year. So essentially, while we're not where we want, you can see that the outlook has seen that the business is moving in the right direction, reflecting steady progress on market share and consumption. So that's for the phasing.
Now, specifically to the second quarter, most of it is really reflecting timing and really lapping dynamic. If you exclude that, again, you get to what I mentioned, which is U.S. retail consumption about flat, and then our Pro (Professional) and International business being our top contributors.
Great. Thank you so much.
We will take our next question from Anna Lizzul with Bank of America.
Hi, good afternoon. Thank you so much for the question. Linda, congratulations on your amazing career at Clorox. We will all miss you.
Thank you, Anna.
I was wondering here if you could elaborate more on the mitigation efforts in light of the cost outlook. Just how much of the mitigating actions are coming from cost savings, and then how confident are you in your ability to take that incremental pricing you mentioned in the second half of the fiscal year? Also, you noted your category growth on top line is within your expectations. Is that still around flattish as you kind of started the year here? Thank you.
Hi, Anna. I'll just take your first question on some of the mitigating actions, and then Linda can just add anything and talk about the category growth. Given the inflationary outlook, as we talked about last quarter, we're leaning strongly in a holistic margin management set of tools, and the majority of the margin recovery is still going to come from productivity and cost savings. We have actually really strong cost savings planned this year. First quarter, we're off to a good start. This was one of the highest cost savings on record, quarterly cost savings on record. But we are also going to implement targeted pricing in the front half and some in the back half, as well as some RGM initiatives. Most of those will actually play out more in the back half than in the front half.
As you think about the recovery, I guess I've mentioned two things. The first is balance. We're really going to continue to pace our actions thoughtfully and balance rebuilding the margin while maintaining and accelerating the progress we're making on market share. The second is, third would be confidence. We're confident in our ability to rebuild margin over time. We have a strong track record of doing so successfully in much more challenging environments, and we actually feel that we have a much stronger set of tools and capabilities today. As we look at our pipeline and the actions that are ahead of us, we feel confident in our ability to rebuild margin over time. Now, for the fiscal year, as I was talking to Peter, it's going to take time, and some of this is going to phase in the back half.
We're seeing gross margin compression on average for the full year, but we'll expect to exceed the year with much stronger gross margin.
On the category side, Anna, we continue to see the category in line with the expectations we set for the year. That was certainly true in the first quarter, and the fundamentals of the category are playing out as we've expected. Recall we said the category flat to up 1%. We're certainly within that range this quarter. Moving forward, we're seeing consumers continue to behave in ways that we expect, lots of value-seeking behavior, buying larger sizes, smaller sizes, delaying purchases, et cetera, but in line with what we expect. We have seen competitive activity generally in line with what we expect. Retailer activity, again, generally in line with what we expect. So no indication that our assumptions on category won't hold up for the year.
I would just note, because we continue to expect that in the back half, that implies that we would see better share performance in the back half of the year as well.
Okay, great. Thanks so much. Very helpful.
Thank you.
Thanks, Anna.
Our next question will come from Robert Moskow with TD Cowen.
Hey, thank you. I was hoping for a little more detail on where specifically you're seeing the market share improvement that you talked about. What categories are you seeing some momentum? Where are you gaining share right now?
Sure, Robert. When we talk about market share improving, we're looking at an aggregate number, but I can break that down by category as well. If you look at home care, which is our largest business, we have continued share momentum on that business with a very strong quarter, up over a half a share point. That is in large part due to great activation on innovation as well as our back-to-school merchandising. We saw strong share growth in Brita. That also was correlated to our back-to-school, back-to-college merchandising, and broad-based strength across promotions, as well as innovation. Hidden Valley Ranch grew almost two share points this quarter, and I think you all know that that category was under a lot of pressure due to the Cyclospora outbreak, and category was down. We saw weeks that were down strong double digits.
Hidden Valley Ranch, given we are a condiment used on more than just salads, was able to win and deliver strong execution. Very strong share growth in Hidden Valley Ranch. I'd note Burt's Bees was about flat, Glad trash about flat. A number of the businesses showing positive share momentum. The continued story on litter, although we have some green shoots that we're happy about as the plans come in, we are still far from the place we want to be on share. That continued to be a drag from a company perspective. The final note is on Kingsford. While the category continues to be under stress, given weather, et cetera, we did see a very strong Labor Day for Kingsford. Delivered very strong, high single-digit growth for that period as well as share growth.
That's a good indicator that as we have made some adjustments on execution, it bears well for fiscal year, or excuse me, season year 2027 for Kingsford. That business also highly event-dependent, and share, you have to win the key holidays to do that, and it was a good indication that Labor Day delivered.
Okay. A quick follow-up. You said that you have good line of sight for synergies for GOJO Industries, and it's moving faster than you expected. At some point, do you think you can raise your accretion estimate for first year on that?
I can take that, Robert. First on the accretion, then I'll talk a little bit about the synergies. So, at the time of the acquisitions, we had estimated that the adjusted EPS impact on year one would be about neutral, and we revised this to positive, right? We didn't share any specific. This is really a factor of two things. First, the base business is actually continuing performing very well. Second, we're actually just progressing very nicely on integration and started accelerating some of the synergies. If you remember from a cost synergy standpoint, we had estimated about $50 million, and our initial estimate assumed that we would capture that mostly in year two and three.
Because the good news is we now have line of sight to the entire $50 million, which gives us great degree of confidence that we will get at least that, and potentially more. But in addition, because we have been making good progress on integration, we are able to actually start seeing some of those later in the first year, which is in fiscal year 2027. So net, I think we feel really good about the progress of both the base business as well as the integrations, and that is starting showing up in our financials.
Okay. Thank you.
Our next question will come from Andrea Teixeira with JPMorgan.
Hi. Good afternoon, everyone. Linda, congratulations on your amazing career at Clorox, and wish you all the best in your next chapter. I was hoping if you can elaborate a little bit more on what you said about some of the categories where you were able to regain share, with basically a lot more merchandising and also potentially promotions. As you think about recovering, continue to recover in the path of getting growth, organic sales growth in the second half, can you talk about how you are planning those actions, and then if there is anything in particular that you are counting on in terms of additional phasing of innovation that would give us confidence that this path is going to materialize?
Sure. Thanks, Andrea, and thanks for your comments. If you look at the share results, first I want to acknowledge that fiscal year 2026 was certainly really noisy for The Clorox Company . We underwent our ERP transition, which is never easy, had a bit of bumpiness in part of that. A lot of the businesses were facing not only a heightened competitive environment, a weakening consumer, but they were also focused on just operational execution and ensuring that we were able to deliver to retailers and keep in stock, et cetera. A lot of what you're seeing is us getting back to executing with excellence now that that noise is well behind us, delivering on our superiority plans, which we invested incrementally behind this year, as well as ensuring that we execute with excellence behind merchandising.
I just want to make sure that I'm clear, the merchandising that we have in the system is the typical merchandising we do, just executed very well. Back to school, we always have strong promotional activity during that time. The team actually made a bet on back to school that it would occur a little later this year, given the consumer stress that it was under. That was a good bet. We actually saw the timing of consumers' consumption move to later in that, and we were prepared for it. I would just want to make sure I note this is not us investing a lot in extra merchandising or price reduction outside of target of activities we've taken, but just executing the things we have to do with excellence.
As we move into the back half, there's a few more things that will enhance what we've seen in the front half, and that is most of our innovation launches in the back half. That happens throughout Q3 and Q4, and we have one of our strongest innovation plans on record this year, and we're hoping it will be a record year on innovation. We've seen good retailer sell-in, and many of these innovations had very, very strong consumer testing behind them. We go in with a lot of confidence that that innovation will work. In addition, some of the innovation is building on current platforms that have been successful, like Clorox PURE, the allergy-removing platform that we have. We already know we have success in market, and we can turn that success into additional areas that those products can deliver on for consumers.
The other thing I would note is, as Anna mentioned, we expect the category continue to be in line with our expectations, but we are seeing consumers continue to focus on value. At the beginning, we talked about the fact that we saw consumers stocking up more or buying a smaller size, but we are also seeing them begin to shift their behavior in terms of timing, like I mentioned for back to school. Those are the things we're watching really closely as we execute in the back half, but we feel like we have them well handled and well managed.
But those are the things that are kind of, as we look to executing, that are on our mind, ensuring we deliver our superiority plans, delivering on innovation, executing with excellence against merchandising and new distribution, and then watching the consumer really closely as they continue to navigate a difficult environment.
Linda, this is super helpful. Can you talk about the pricing magnitude that you're including? I think Luc had said some selective pricing, and you said that in the prepared remarks as well. What is, number one, the magnitude, and number two, the timing of the pricing, and if three, is list pricing more selective with innovation? Thank you.
I'll start, and I'll hand it over to Luc if there's any more detail that he wants to provide, particularly as it comes to gross margin, although I think he walked through the bridge at the beginning. So on pricing, we have implemented already this year targeted pricing across all four of our reporting segments, and we looked at those very carefully to decide where the biggest impact was from a commodity perspective. So Glad, for example, is one that is heavily based off of resin pricing, and so we took a price increase on Glad trash. That was a good magnitude, high single-digit price increase that we implemented in July. It took a little while for it to get passed through, so you're starting to see it in the data now at the end of September, and then some other targeted pricing actions against those four segments.
As you would expect, given the environment and the fact that we're seeing additional cost pressures across the industry, it's logical to assume that we will take additional pricing in the back half, and that's what we're working on right now. Of course, as Luc has said many times in the past, those actions take a while to see them show up in margin. So you see the impact from the increase in cost, and it takes a couple of quarters to start to see those mitigating actions.
But we'll use the same principles that we did for the first round when evaluating these price increases, going where we're seeing the most commodity pressure, ensuring that we have superiority plans, and to your point, Andrea, timing it when we can with innovation and product improvements, so that we balance what Luc mentioned at the beginning, which is our top line and superiority trajectory alongside recovering margins.
I guess the only thing I would add, and maybe that's what you were referring to, Andrea, is that we, in our outlook and our gross margin and our top- line outlook, also reflect some targeted investments we're making to improve superiority in some brands. And those investments can come in the form of actually lower prices, either through trade or price pack architecture, and the litter business is one of those. Or in other case, it could be in the form of higher costs, where we're really doubling down to step up the product benefit and performance to further strengthen the proposition as part of the innovation in the back half. That is all contemplated, and that's what you would expect us to do as part of that balancing.
Thank you both for passing on.
Thanks, Andrea.
Our next question will come from Kevin Grundy with BNP Paribas.
Great. Thanks. Good afternoon. Linda, of course, wish you and your family nothing but the best. It has been a pleasure working with you. A couple quick ones, please. First, just to follow up on the pricing. Linda, you commented before, and it makes sense to price behind innovation here in the back half. Can you give us a sense of how much of the portfolio will be covered with incremental pricing? I know it is going to come on in a staggered way, so we will have to sort of reflect that in our models accordingly. I am sort of asking this in the context that there has not been as much pricing yet, but it seems like we are at a level with commodity cost pressure where the industry likely will price up.
I am just trying to get a sense if it kind of moves that way in many categories and the whole basket is moving higher for the consumer, is there potential for even incremental pricing than you may have in your outlook at the moment? I will stop there on that, and then I have a quick follow-up for Luc on margins.
Sure, Kevin, and thank you for your comments. On the pricing front, it is certainly dynamic and volatile from a commodities perspective and what we are seeing on cost, and we are trying to be as nimble as we can on the pricing front. Maybe what I would first say is the vast majority of the portfolio will be covered by RGM, and that activity will be broad-based, and we have all of our teams working hard to drive efforts there. Those are the ones that we can get really sharp on to ensure we have the right price pack architecture, et cetera. The teams are working hard and fast at delivering those. On truckload pricing, as I said, we took pricing across the four reportable segments at the first part of the year.
In the back half of the year, we will continue to look at the opportunities, but we are going to be targeted. If the environment changes, Kevin, we will have to change that posture, and I think the industry would have to change it. Right now, we still want to keep that balanced approach and make sure that we are making the right investments while taking the right level of pricing. Right now, I am not ready to give you a percentage of the portfolio that we would take additional truckload pricing on. Just know that if there is additional commodity pressure beyond what we contemplate right now, that will be a tool the industry, and certainly we look at using deeper, but really focused right now on RGM and targeted pricing.
Got it. Thanks. So quick follow-up. Maybe it is not a quick, Luc. You commented on the ability to rebuild margin over time. I know sometimes it tends to be just a focus on the next 6 - 12 months, but maybe with a longer-term orientation, what is the north star now for margin, the margin profile at Clorox? Maybe the answer is it is not very different than it has been in recent years, and the target is 44%-45% gross margins and maybe 18% operating margins, but maybe better, right? Just given what you are seeing now from a productivity perspective, which is good as it has been perhaps forever, really. I mean, some of the highs we are seeing in productivity. What is the longer-term margin target to share with shareholders? I will pass it on. Thank you.
Sure, Kevin. Maybe before I answer your second question, one clarification on your first question, which is, if you look at margin recovery for the fiscal year, the majority is coming from cost savings and productivity. On the part that is coming from pricing and RGM, the majority is still coming from RGM with a small-
Okay.
-portion from pricing. So that gives you just how to think about the total margin recovery for the year. I think to answer your question is, it has not changed, which is job one is getting back to historical EBIT margin, right, which were about 18%. The way we want to do that is first rebuilding gross margin, because gross margin helps fuel our investment in our brand and in superiority, and so you want to do it through first rebuilding gross margin and over time rationalizing OpEx. So job one will be getting back there. Keep in mind, gross margin historically was 43.5%, 44%. With the GOJO Industries business, it might be a little less initially until we actually just reach out, achieve our cost synergies.
I would say, I mentioned that we feel confident in our ability to rebuild margin over time, and again, we're in an inflationary cycle, so we're seeing the initial inflationary pressure. Besides having a strong track record of doing so in the past, if I look at our pipeline, we have a stronger productivity engine right now. As you know, we always had a successful cost- savings program, then we've been adding new tools and capabilities like RGM and design to value, and it's been working for us. The two out of the last three years had record level annual cost savings, and this year is looking really strong as well. I mentioned the first quarter was one of our highest, and we'll see where we finish the year, but we feel confident. There's a few things going on here.
In addition to those new capabilities, we're also going to start getting the contributions of ERP over the next few years, right? We talked about ERP over the past couple of quarters, and it was all about implementation and stabilization. But now we're entering a phase of value creation, and the cost complexity is really coming down, then the benefits are going to ramp up. It will take time. We just talked about it. In a lot of the process on the supply chain or on the functional admin, you have to just re-engineer for those processes. But we have those savings in the pipeline. Then, I guess maybe the last thing from a margin standpoint, and this is not part of the productivity or cost savings, but it's the synergies on GOJO Industries.
$50 million is a pretty significant number, and we do have line of sight to that number, and hopefully we can drive more. So when you consider all those, we probably have. I think our productivity engine is just stronger than what it's been, and we just have to navigate the current environment, which is we expect it's going to continue to be volatile in the short term.
Okay. Very good. Thank you both. Good luck.
Thank you.
Our next question will come from Kaumil Gajrawala with Jefferies.
Hey, everybody. [Fabian] and Linda, good luck. Thanks for everything along the way. I guess my first question, maybe is the biggest question that we've been having conversations about is, given the share trends, if there was going to be a need to rebase or anything. I suppose now that we're seeing the beginning of share trends move in the right direction, would you say that maybe we're sort of nearing escape velocity, and that's not necessarily the case, or is it something still sort of remains to be seen?
Kaumil, we've been encouraged by the progress we've made. If you looked at what Luc talked about, we've had sequential improvement on OSG tied to improvement on consumption as well as market share. I've highlighted particularly litter, a business where we need to make much more progress. But it is encouraging to see on the other businesses the progress that we've made behind innovation and superiority, and just frankly getting back to executing without going through an ERP transition. Given the trajectory we're on, we expect to have continued improvement, particularly through the back half as we have our very strong plans on innovation and superiority launching across all of our businesses. We feel good about that. We do feel like we have the right level of investment in the business, and we've talked about that in a number of ways.
First would be advertising and sales promotion that we have held at an elevated level. We used to spend about 10%. We spend about 11% now. You see the number reported as 10%, but that is because of the GOJO Industries effect. If you look at U.S. retail, it has been about 12%. We feel really good about the advertising we have. We know our ROIs very well on those businesses. We know where we can invest incremental money, and we are not afraid to move money depending on those numbers, and the businesses are not afraid to invest more if it is warranted. We feel good about the level we have there. We have had more money in on trade funds, and we have talked about trade funds being a place where we can optimize moving forward, applying the new tools we have from technology.
We would expect to get more bang for our buck in the future when it comes to trade spending, but feel good about the overall level of investment we have there. We talked about investing in superiority, and that comes in a few forms. We have invested in price. Cat litter and Glad are two examples that we have given. We are also investing in product improvements, many of which hit in the back half of the year, and other ways that we can drive superiority through execution and e-comm, et cetera. I do not know if I would call it reaching exit velocity, but what I would say is we do expect continued improvement.
We like the momentum we are seeing, and we would expect, given the plans that we have, we will make continued progress throughout the remainder of the year, and that the investment we have is working for us and at the right levels.
Okay, great. Maybe just a softer one, which is, congratulations on finding and hiring Fabian. Is there anything you wanted to share as you went through the process on why he is the right person for the job? What were maybe some of the more appealing characteristics? I am sure you had met many people. Why is Fabian the guy?
Yeah, sure. As we spoke about, the board went through a very comprehensive process, and felt really good about the broad-based look that they had in the market to assess who the right next CEO was, and landed that Fabian was absolutely the right person for the job. If you look at Fabian's track record of experiences, of delivering, and also the values that he holds, those are all a great match for this role. He has lots of experience in innovation and brand building. In fact, he ran teams that just did that in growth in a number of companies. He is a disciplined executor, which is exactly what we need at the moment as we continue to deliver executional excellence and improve that coming out of the ERP transition and some of the disruptions we've had. He shares our values.
It was the first thing he said to our team on Thursday in the video. He believes in do the right thing, put people at the center, and play to win. I think play to win is high on that list for him, which is going to be great for The Clorox Company as we move forward into this next phase of growth, and certainly the next set of challenges that we have in the environment. The board and I are 100% supportive of Fabian. He and I are in regular contact and beginning to transition, and the two of us are committed to a seamless transition where the organization doesn't miss a beat, which means, of course, I will, up until January 5th, be 100% focused on delivering our plans, and getting Fabian on day one to be ready to take the reins.
I'm excited to see what he'll do for The Clorox Company, and I think The Clorox Company is excited as well. Fresh perspective is always a wonderful thing, and I think he has some good ideas for The Clorox Company, and he'll continue to talk to you about how he'll implement our strategy once he starts in January and have a chance to speak to you both at CAGNY and, of course, the February earnings call.
Great. Thanks very much.
Thank you.
Next question will come from Chris Carey with Wells Fargo.
Hey, everybody. Thanks for the question, and congrats, Linda. Wishing you all the best.
Thanks, Chris.
Hey, Luc, going into fiscal Q4, I think you said something to the effect of that gross margin, you expect to exit the year much stronger. Can you contextualize that a bit? The reason I am asking is because the fiscal Q2 gross margin is implied to be lowest of the year. We are seeing inflation. Inflation presumably carries into the back half of the year. That exit rate, it almost felt like fiscal Q4 gross margin will be the highest of the year based on that comment. I do not know if that is some of the incremental pricing or productivity, so I just wanted to get a bit more context there.
Sure, Chris. The main comment I was making is that gross margin in the back half will be higher than the average, right? I did not intend to comment specifically on Q4 versus Q3. As I mentioned, inflation is actually going to be a little more pronounced in the front half than the back half. You have to remember, some of the inflation that we are experiencing now for us started showing up in our P&L in March and April. So I am lapping that. It is not only that. It is just based on the projections. If I look at also the timing of our margin recovery actions, they will be more elevated in the back half. So, that is what is creating essentially a front half that is about a point, 1.5 points below the average, and then expecting the back half would be higher. That is the only thing that I was pointing to.
Okay, understood. That back half margin recovery will be more driven by productivity and RGM as opposed to the incremental pricing. Is that correct?
That is right. On the relative basis, that is correct. They are all contributing, but on a relative basis, that is correct.
Okay. All right, perfect. Thank you. The second question just around margin is the SG&A outlook was slightly changed today. Is that also just the incremental productivity that is flowing through the model? I mean, effectively, both of these questions are just trying to understand core drivers of the anchoring to the full- year guidance, so as to think about durability going into fiscal 2028. Thanks so much for that.
Understood, Chris. Let me make two comments. One, broader on how to think about what changed in our outlook, and then I can talk a little bit more about SG&A specifically. What changed is mostly the inflation being higher now, $40 million higher. That is 60 basis points of margin headwinds. We will mitigate part of that in the back half, but what we are going to fill in the second quarter, we are just not going to mitigate it. That is the main driver. There is a little bit on SG&A, there are two things that I would mention. One, there is a little bit of favorability as we are accelerating some of the synergies on the GOJO Industries acquisition, and that will show up in the back half.
Now, I think we adjusted the SG&A from 16% to 15%, so that is half a point, but there is a little bit of rounding in those percentages. Keep in mind the benefit of the incremental synergies is probably less than that, maybe a quarter or so. So, that is the main thing on SG&A. There is a lot of noise in SG&A between Q1 and Q2. I think we talked about it in the prepared remarks, but essentially, we had a few discrete items, timing items on both tax and SG&A. Tax was really driven by a restructuring of an international legal entity, which was completed earlier than expected. Then on SG&A, there was a little bit of timing of certain one-time and project spending.
But if you look at SG&A, or actually tax for that matter, for the front half, it would be pretty close generally than the rate for the full year. SG&A might be a little higher for the front half than the full year, just because there is some more productivity in the full year. And effective tax rate might be slightly lower, because Q1 was so favorable, but Q2 would be above normalized level. So, that is as you think about your modeling and as you think about OpEx and tax.
Okay. All right, thank you. Thank you for all that. Much appreciated.
We'll move next to Javier Escalante with Evercore ISI.
Hi. Good evening, everyone. Linda, thank you for our discussions. I learn a lot talking to you. I have a question, I guess it's for Luc. Again, is the mitigation of the commodity costs, the cost savings on the gross margin is one of the highest, I believe, in quarterly highs in, I guess, 15 years. So, if you can help us understand how much is actual changes of things that you're doing, perhaps because of GOJO Industries allows you better capacity utilization, I do not know. But what is driving this step up in cost savings going through the gross margin line, and how sustainable that is into the carryover into the balance of the year? I have a follow-up.
Yeah. Yeah, you are correct. I think we mentioned this in the prepared remark. The cost saving was one of the highest from a quarter standpoint. But I'd go back to what I just was sharing earlier is, we have a stronger productivity engine than we used to have. Last year, cost savings were a little limited just because we had to reallocate resources, quite frankly, to deal with the stabilization of the ERP. But if you look at the two years before that, you start seeing a step-up in our cost savings contributions relative to the past. It's a lot of what I just shared is essentially the benefit of adding really data and tech-driven capabilities like RGM and design to value.
We do see this step-up, and it might not always be at the same level every quarter, but a step-up is definitely something that is sustainable. I would say we have not yet seen some of the benefits of the ERP. It will show probably later in the year, so that will feed that pipeline, and that will help maintain a more elevated rate. That does not include some of the synergies on GOJO Industries. Actually, just most of the synergies, most precisely, will show up in the savings numbers. You will see this, and a lot of them will be, some of them will be in the supply chain, but some of it will be in selling and admin as well. Net again, we really feel good about our productivity engines.
We have a big year ahead of us to deliver, and that is important given the inflation that is ahead of us, and we will stay close to what is going to happen this year from an inflation standpoint, as we mentioned, it continues to be volatile and uncertain.
That is very helpful, but I imagine that, in essence, is that the ERP is allowing you to identify savings that you could not see before. I guess this is what I am explaining to myself. The other thing is, when you look at divisional gross margin, Household products drop below 30%. I know that there is Kingsford, there is cat litter, some of you already are recovering pricing, as you said, Glad. How much pricing do you think you need to reinvest in cat litter? Because we see in this kind of data, price mix down for Fresh Step about -5%. Is that all, or are we going to see even more price investment? If you can help us understand how you see the Household division now with gross margins below 30%. Thank you.
Javier, I will take that in a couple pieces. First, on Glad, as you note, Glad is one of our more impacted businesses as oil and resin move in the upward trajectory. But also a business we have a long history of taking pricing on, and we just took pricing on Glad trash, and you are seeing it flow through in the data. So far, the data looks in line with our expectations in terms of consumer acceptance, volume impact, dollar sales impact, et cetera. If you look at litter, we have absolutely invested back in price in a portion of our portfolio to get our value equation right.
What we would suspect over time, as innovation hits the marketplace and we have our first round of innovation in cat litter hitting, actually will be shipping this quarter, but for the most part will be a back half loaded innovation cycle. We would expect over time to be able to remove some of those price investments as we deliver a superior product and a better experience to consumers. But for now, we think this is absolutely the right investment. Where we've made that, we're seeing an increase in share, seeing consumption improve, et cetera. We're not afraid to make those investments where they're warranted, and certainly on litter it is at the moment. Over time, as that pricing takes effect, and we'll see what happens with commodities, we would expect the household margin profile to begin to get back to what it was before.
It'll take a little bit of time, as Luc said. We experience all of the cost and the investments upfront, and then we work that out, but we're fully confident in our ability to do that given the toolbox that Luc just outlined.
Thank you very much.
Thanks, Javier.
And we'll move next to Olivia Tong with Raymond James.
Great. Thanks. Good afternoon. Linda, wishing you the best of luck with everything, most importantly your health, and we'll miss speaking with you on a regular basis.
Thanks, Olivia.
Can I ask you about, one of the areas that was stronger than expected is price mix, particularly in Health and Wellness. Can you elaborate on that a bit? Was that primarily GOJO Industries, or did the ERP-related timing shifts have an impact? How do you think about the contribution from price mix for the remainder of the year? Then secondly, what's your visibility on costs at this point? Are there hedges in place so that you have visibility on the cost inflation? Have you had those discussions in some cases with pricing that you're planning to take but haven't implemented yet with retailers, and a better sense of how long it would take for that pricing to come through, given how long it did take with Glad earlier in the year? Thank you.
Hi, Olivia. On your first question, yes, we saw pretty strong price mix in Health and Wellness segment. I think it was about 7%. About 6% actually came from the GOJO Industries acquisition, which is a favorable price mix. Still, we saw about one point of favorable price mix in the base business, and that was a mix-up coming from both RGM and some very targeted pricing on some smaller brands. That's for your first question. I would say on the visibility on cost, maybe a few things. First, obviously, we're operating in a cost environment that remain fairly uncertain and volatile. You can imagine we're planning across a range of possible scenarios and our outlook reflects what we know today, and what we believe is the most likely scenario.
Now, from a hedging standpoint, I think we have a number of mechanisms in place to manage cost and commodity volatility. We selectively use financial hedges for some commodities where the market are liquid and economic makes sense. But for some others, we manage exposure through contractual agreements, purchasing strategies, or even inventory. Those mechanism means that different costs flow through the P&L within different timing, right? In the case of fuel surcharges, we're going to see it pretty much right away and moves with the market. For other commodities, we can have contractual inventory timing can create lag of anywhere of several months, anywhere from one to over six months. On average, on aggregate, we generally tend to have good visibility two to three months out. That gives you a sense of the visibility.
As far as pricing, I think you heard from Linda earlier that some that's already been implemented in the market, some that might come later in the back half, it's still relatively targeted and selected, but obviously, as part of the scenarios that I'm just talking about, we're contemplating potentially other pricing actions.
Thank you. Best of luck.
Thanks, Olivia.
Thank you.
This concludes the question-and-answer session. Ms. Rendle, I'd like to turn the program back to you.
Thanks, Jen. Thank you for your time and questions today. We are focused on continuing to improve our top-line trajectory by strengthening the superiority of our brands and products, advancing consumer-led innovation, and improving execution. At the same time, we're taking balanced actions to mitigate cost pressures and protect profitability, drawing on a track record of successfully managing through periods of volatility. We're also continuing to advance the strategic work that will strengthen Clorox for the long term, integrating GOJO Industries, evolving our portfolio, and delivering value creation from our transformation investments. We are encouraged by our progress and remain focused on building a stronger company capable of delivering more consistent profitable growth over time. Before we close, as many of you acknowledged, I want to acknowledge that this is my final earnings call as CEO of Clorox. I really appreciate all the comments you made during the call.
It's been an incredible privilege to lead this company through one of the most complex periods it's both faced both operationally and strategically, and for years, to have the opportunity to speak with you all about our performance, our strategy, and the opportunities ahead. Thank you for your engagement, your questions, and the perspective you've shared along the way. I'm proud of the stronger foundation we built, and I have tremendous confidence in our brands, our strategy, and our people. To our team around the world, thank you. Your work made our strong start to the year possible, and I am deeply grateful for everything you continue to do for Clorox and for one another. With that, I look forward to supporting Fabian through the transition, and you will have the opportunity to hear from him and Luc on our next earnings call in February.
Until then, please stay well, and I wish you all the very best.
This concludes today's conference call. Thank you for attending.