The Clorox Company (CLX) Earnings Call Transcript & Summary

Okay. Welcome, everybody. For our next session, I am thrilled to welcome back The Clorox Company to our conference and to Paris. With us today, Chair and Chief Executive Officer, Linda Rendle. Welcome back, Linda. And for the first time as Chief Financial Officer with us today is Luc Bellet. So Luc, welcome, and thanks for joining us. Great. So we're going to use the entirety of our time for Q&A, and we'll just jump in.

Sounds great.

Good. So Linda, we'll start with you. And I guess I've been starting most of the conversation this way just to level set. It's been an eventful start to calendar '25, lots of different crosscurrents and really net pressures on both the consumer and on your retail partners. So if we'd start there and just talk about maybe your assessment of consumer health broadly, and how those dynamics have impacted your categories and your business effectively.

Perfect. I'll start with maybe just a little bit of an opening comment on that, and then I'll get directly to that question. As we entered our fiscal year, which started last July, we expect consumers to be under more pressure. And that meant we expected our categories to be instead of growing 2%, 2.5%, which is what we typically see, growing about 0 to 1% and we saw that through the first half of the year. Beginning in February, in the middle of our Q3 is really when we saw another layer of changes for the consumer that I'll get into. But maybe just the good news for our business is we continue to have strong fundamentals in this environment, and we'll get more into that, I'm sure, Steve through your questions. But just wanted to provide that backdrop largely through our fiscal year we saw what we expected. Now -- what do we see now? And what are we seeing from the consumer and what do we expect? There are really two layers of what we're seeing from the consumer. The first is what I spoke about at the beginning, we expected consumers to be under more pressure, and we expected them to continue to increase their value-seeking behaviors. So that can show up in a consumer buying a larger size because they want to get a better price per use. Sometimes they can buy a smaller size because they're looking to spend less in a shopping trip in a week. And we have seen that pretty consistently over the last 18 months that value-seeking behavior. Importantly, what we haven't seen is consumers trading into private label in our categories or making choices to leave national brands, that's been pretty consistent. So we continued to see that at the beginning of this calendar year and are seeing it now. The extra layer of what we're seeing is this change in consumer confidence and a level of uncertainty that we frankly haven't seen in those 2 things in combination in a really long time. And so what is that doing to our businesses and what are we seeing from a consumer perspective? Beginning in mid-February, consumers began to react to what they were hearing in the marketplace from a macroeconomic perspective, particularly tariffs. So in our space in February, we saw a change in the grocery basket. People consuming or buying more edibles, less nonedibles as a result of thinking that things from Mexico and Canada with tariffs were going to be more expensive. So that was what we saw in February. In March, we saw consumer wallet change even more as they experienced a broader range of potential tariffs. So we were seeing consumers spend more of their disposable income on things like phones and electronics and cars and other things like that. And that resulted in a change in our category trajectory from the beginning of the quarter to the end of 4 points. So they ended flat, but a very big change from the beginning of the quarter to the end of the quarter. Now what we didn't see at the same time was consumers fundamentally changing their consumption behaviors at home outside of those value-seeking behaviors. So they didn't stop cleaning their toilet. They didn't stop changing their cat litter box. So what we believe is happening is consumers are really prioritizing what they have in their pantry and trying to use everything that they have at home while they are making these other choices to deal with tariffs. The question then is when does this bounce back? If you think people are bleeding through inventories, we would expect to see an uptick. If you looked at the last couple of months, these first 2 months of our fourth quarter, it's continued to be volatile. So our categories have been anywhere from flat to down 2%. We ended May about down 0.5 percentage point. And that's significant because we typically see about flat categories even in a recessionary time. So we think this consumer behavior is still happening. We think they're bleeding through pantries. We haven't finished a purchase cycle yet in our categories, which is about 90 to 100 days. So it's hard to say when those are going to start to come back. But it's something we're watching closely. We continue to not see a trade to private label, et cetera. So what we feel confident in is we can manage this through the short term. And we have built obviously stronger margin capabilities, which will mean we'll still deliver a strong year of earnings performance this year despite the fact that we've seen a top line slowdown. But in the mid- to long term, we remain confident. Our categories are essentials to consumers. We continue to see them want better experiences. They continue to buy innovation. Even in a time in value seeking, we can capture many of those consumers through having the right size, price pack architecture, et cetera. But we just need to get through this period now, and we feel well equipped to do that and feel very well equipped to deal with getting back to growing when categories return back to that 3% to 5% level that we target.

Great. Another layer on that we've been talking about this week is around what the retailers have been doing in response to that consumer environment. There's a lot of conversation around pockets of destocking in the March quarter. Some companies have talked about it who weren't impacted in the March quarter who are now being impacted in the June quarter. What are you seeing in your categories from a retailer inventory level management?

Yes, there is definitely noise in retail inventory, and they're doing exactly what you would expect them to do. They have to manage through the situation as well. And so they're doing 2 things that we've seen. Some of it is continued great smart management of trying to reduce inventories over time, and we're doing the same work because certainly during COVID there was excess inventory in the system to deal with all the volatility. So many of us have put programs in place to try to reduce that over time. So you're seeing some of that better processes, better technology coming in. And then you're seeing more day-to-day activity of I don't have space in the warehouse and so I need to reduce inventory on this. And what I would say is, to us, we're treating this as much as we can as noise because we're -- both the manufacturer and retailers are focused we can't have out-of-stocks for consumers. And that's been a consistent principle in all of the inventory adjustments we've seen. So we did have some impact in Q3. Some we knew about, we had talked about that in our Kingsford business and we saw an impact. And now there are some small impacts that had happened that came up in the course of the quarter. I think that noise will continue as the environment continues, but we don't look at it as a structural change. And anything that's structurally happening, reducing cost and inventory in the system is a good thing as long as we meet consumer needs. And we're continuing that work and we would expect after we get through our ERP transition to continue to do that.

Okay. If we step back from it, do you feel your IGNITE strategy has been effective through this period? Has it helped Clorox navigate the environment? And if so, how?

Yes, it has. And I think it will continue to do that. Really, fundamentally, in our strategy we set out to do 2 big things and they're complementary: we wanted to accelerate the growth rate of the company, and we wanted to transform our company to be stronger for the future. And we've made great progress on both of those. Although growth has been lumpier given the situations we've had over the last 5 years, we feel like we fundamentally built stronger capabilities to deliver growth in the future. We're looking forward to a time when our categories start to rebound and we can fully recognize the growth potential. But really, the transformation is the place I'll spend the most amount of time on and really the proof point would be in the margin transformation program that we put in place as part of that. We fundamentally have changed and will complete a digital transformation over this period, and it is a significant digital transformation. This is not just an ERP upgrade to the next set of software. This is building a complete data infrastructure across the company, changing the way that we do global finance, changing our ERP, putting technologies -- a suite of technologies around to do that in an effort to be more efficient and more effective across a number of areas that we create value for our company. As I mentioned, margin transformation is the place you're already seeing some of that program come to life. We lost close to 900 basis points of gross margin during the inflationary cycle, and we've been able to recover all of that through the efforts that we put in place through pricing, through all of the mechanisms that we've had around cost savings. We delivered historic cost savings over the last 2 years. We expect to deliver another year of that in this year. So you're already seeing the transformation effort come to life. And what we want to see is more of that against innovation, which we have plans to do. Innovation has gotten stronger, but we want even more of that in the coming years. And we want to make sure that we continue to offer superior value to consumers because that's the way that we grow. And our superiority rating has increased over this last 5-year period significantly versus what it was prior to starting that even given several rounds of pricing and all of the activities that we took. So we feel the strategy has been very effective. We want to get back, though, to more consistency, Steve, coming out of these periods and the strategy will help support it -- do that as we finish the transformation coming up here in the next 12 months.

Great. Luc, you are now a seasoned veteran, 2/3 of the way through your first quarter as CFO. I guess, what have been some of your key observations and learnings just generally since stepping into that role?

Yes. Well, I guess, maybe let me first by saying that I'm really honored to be in this role. I've been with the company for 20 years, so it's been a big part of my life. I love our brand, I love our people and I really believe in our team and our strategy. And so I'm looking to what's ahead of us. I think approaching this transition, which is now 2 months, as you just mentioned, I had 2 objectives. One was really in balancing, delivering both the short term and also thinking about delivering and building the future. Now short term, we talked about it and very dynamic. And during this time, what the focus has been really on focusing what you can control. And the good thing, though, is on a relative basis, our fundamentals are strong. And I think we're well positioned to finish the fiscal year with another year of strong earnings. So medium term, coming in with a new -- fresh set of eyes, so to speak, I feel generally good about the opportunities for the company and it has to do with what Linda just mentioned. We just undertook a pretty significant transformation behind the scene over the last few years. One, we fundamentally changed our operating model. And we're now in year 4 of a 5-year journey to fundamentally change the digital and data infrastructure of the company. And so that really creates an interesting foundation for us to fundamentally modernize our capability and strengthening our competitive advantage. And the thing coming into the role is some of it already paid dividend, but we're really just starting scaling some of those capabilities. And so I can see a lot of places where we can unlock additional top line growth or margin expansion, and I think Linda just talked about it. And then the other thing I'd mention is I think we can improve our predictability and consistency of results, and I think it's very important in the current volatile and uncertain environment. And I certainly think a lot of the digital transformation and the tools we're putting in place should help us do that.

Okay. Very good. There's a very large ERP go-live coming. So well timed.

He's been working on this for years. So it's really good timing, yes.

So I guess, just talk to us as we get closer and closer to that switch just your level of confidence and some of the preparations you've taken to ensure that, that goes smoothly.

Yes. Maybe just background for some of you that might not be as familiar with us. We're going live with a new ERP in our U.S. market in July, which is the beginning of next fiscal year and we haven't upgraded our ERP in over 25 years. So it's a pretty significant undertaking. So obviously, our goal is going to be to execute this transition with excellence and make sure that our consumers and customers have a seamless experience. Now we all know ERP transition are a very complex undertaking and they're fraught with risk. And so we took a very thoughtful approach in managing those risks, and I think we have very strong plans. And maybe let me share a few things that gives us confidence. First is the fact that many of our peers have already gone through an ERP transition. So while we're not necessarily proud to be kind of last to the game, that gives us a lot of benefits. And we've been working with very capable consultants and have been working with many of those peers. And we've been embedding learning from their past launches, from their past mistakes in our plans. And we've also been working pretty closely with our retail partners, which had a lot of really good suggestions. So that's one. Two, we added pilots in our markets. We launched a new ERP in our Canada market last summer, and the launch was actually very well. There were no significant disruptions. But we've got a lot of learnings that we're embedding in our launch. And the other thing is we also already moved all our global finance reporting and planning to the new ERP. So we've been live since January, which allows us to really focus on the operational side in July. And then third and last, we have -- we're building pretty significant excess inventory at the retailers in our own network to really act as a contingency and mitigate any risk of out-of-stocks. So net, we feel like we have a pretty robust plan. And so far, everything has been going as planned. I'm looking -- trying to knock on wood somewhere. So that's good. Now that's really managing the short term. Once we're past implementation and stabilization, we're quite excited about having an ERP because it's going to fundamentally modernize the backbone of our operations. Now just that in itself means a lot more opportunity for productivity in supply chain and working capital and in admin. But it also means that we now have a new data and tech foundations to take more advantage of those capabilities that I was just talking about, right? And so whether it's net revenue management, which requires a lot of data and we feel -- we're really excited about what we're doing on net revenue management or whether it's personalization, those capabilities are now amplified with the new ERP. And so net, going forward, we're really excited of what it might do for us over the next few years.

Do those benefits start to accrue in year 1? Or is it more of a build year 2, 3 and beyond?

It's more of a build, as you can imagine. So first, when we're saying going live in July, we will change the order fulfillment and order management in July, but we're actually going to move our manufacturing facilities in a phased period over 6 months. So if you really think about the 6 months -- the first 6 months of next fiscal year, it's really a transition and then there will be a stabilization. And after that, you can work in optimization. And the way to think about it is you would have a new data and tech stack that you need to fundamentally change your process, change your talent to really get the benefit. And so most likely, we'll see most of the productivities in fiscal year '27 and fiscal year '28.

Okay. Good. This is where I really subtly ask about '26, real subtle transition to ask about something you're not going to answer. But as we think about -- I think a lot of investors are trying to kind of piece together, you've got a lot of volatility that you're managing kind of exiting '25 in the operating environment. There's ERP implementation on top of that. And then you're also closing out this 5-year transformation. So as you approach '26 planning, what kind of strategic framework you're taking into that -- those planning sessions, number one? And to the extent that there are financial considerations you can kind of throw out there for us to keep in mind, that would be great as well.

It's a really important question, actually. And I'm going to start with some framing, but I think it's really important that Luc walk you through the noise that the ERP creates and how to think about that because it's really important. So that's probably the most important part of the answer. But just starting with the framing. As we approach '26, given there's so much volatility and change, we're approaching this in a scenario planning way, which we have, frankly, done a lot of over the last 5 years. We have a range of scenarios that we're looking at from consumer health to macroeconomic uncertainties. And what will come out within '26 will, of course, will be based off of a scenario that we pick and we'll give everybody what the assumptions that underlie that are and then what we think the range of outcomes could be on that and that will inform the range. So that's -- as we're just heading into planning, that's the approach, obviously, that we're taking. And we're focused on a number of things, continuing to ensure that we deliver on the margin improvement that we have seen because that has been fuel for our business. And while we have returned our gross margin back to the levels it was pre-pandemic, given all the loss, we still have work to do on EBIT margin, and we want to continue to make progress there. From a top line perspective, we need to be focused and are focused on delivering superior experiences. So we have a good innovation program that we will launch in '26 behind our brands. We want to continue to invest strongly in our brands. Working with retail partners to ensure that we have the right programs. And we want to make sure that we're capturing those consumers as they continue that value-seeking behavior. We don't know to what degree that will be, but we feel confident in our ability to do that, and we have scenario plans around that. So our approach very much is understanding that we don't know exactly what the year is going to look like, but we are confident in our ability with the tools that we have to ensure that we are giving those experiences to consumers, maximizing value creation, continuing the work on margin and then also making sure that we're being very clear, and I'll turn it to Luc now on the noise that exists. Because structurally, the ERP, as you know, we're going to execute it. We intend to execute it with excellence, but there's a lot of noise and we'll come out of it, like Luc said, stronger. But I think it's really important to understand the impact, so I'll pass it to you, Luc, to walk them.

Yes. So as you mentioned, there's going to be a lot of noise in both fiscal year '25 and '26 associated with the ERP transition. And let me try to frame that a little bit. So again, as I mentioned, we're going live with the new ERP in July. And one of the things we're doing to ensure a solid transition is that we're building inventory at the retailers' level. And for perspective, we hold on average about 4 weeks of inventory at our retailers for our portfolio. We're going to build about 1.5 weeks on inventory. So pretty material and significant. Now from an operational standpoint, we feel great about this because, essentially, this will really create a buffer and protect us from any out-of-stock, which will be really structurally impactful. From a financial reporting standpoint, it creates a lot of noise. So that retailer inventory build represents 2% to 3% of annual sales. And so as retailers are going to build their inventory in May, June, fiscal year '25 organic sales growth is going to be overstated by 2% to 3%, meaning that it's going to be higher than the underlying consumption of retail sales. Inversely, in August, retailers are going to start decreasing their inventory and normalized, so that means that our fiscal year '26 sales will be understated by 2% to 3%, meaning lower that the underlying retail sales. So year-over-year, you're going to go from overstated fiscal year '25 to understated fiscal year '26. And so the impact of the ERP year-over-year will be anywhere from negative 4% to negative 6% and that's what you will have to add to whatever is the underlying performance of the company. So a lot of noise. Now as Linda mentioned, this is just temporary. There's nothing structural about this. And so what we're really focusing is the underlying performance of the company. And of course, as we provide our guidance, we'll make sure that we'll provide as much transparency and clarity so everyone has a really good understanding of what is the underlying performance during this period. And of course, fiscal year '27 consumption, retail sales and our sales back to normal. Hopefully, with some productivity savings from the ERP.

Yes. Yes. It's probably intuitively obvious, but just to be clear, the first quarter you have the reversal of the fourth quarter. And then the fourth quarter will be a difficult comparison as well.

That's right. And so that's an important point, Steve. So I mentioned the impact in fiscal year and I mentioned it in sales. That's true for EPS as well. And where you will see the most noise would be in the first quarter of next fiscal year because we would have the decrease in retailer inventory and in the fourth quarter of next year because we will comp the inventory build in fiscal year '25.

Yes. Very good. Okay. If we pivot back to the business but go down a layer and focus on some of your categories and brands. There's been a lot of focus, I think, firstly, on categories like trash bags and litter and charcoal where with varying forms, we've seen elevated levels of pricing and promotion and competitive pressures. If we take a snapshot today, how would you assess where we are? What's the trend line? And how does that influence some of your planning for next year?

In aggregate, if you look at our categories, we expected the promotional activity to return to normalized levels, so kind of pre-COVID levels. And we've seen that. And in aggregate, we haven't seen a material change overall in our portfolio. But as you know, in Household in particular, we've seen some more competitive activity, and I'll walk them through because they are nuanced. Each one is a little bit different. Maybe starting with litter, which has the most amount of nuance. We had a cyber-attack in 2023 and Cat Litter was one of the categories we had a higher impact as a result of that. And you can imagine why, but I'll be able to give you a little color for those of you who haven't heard this before. If you have a cat, I don't know how many of you have a cat, and you rely on them using a litter box and you want to transition them to a new litter because the litter they use, Fresh Step, which was ours was out of stock, that can be a little traumatic for the pet parent. It can be a little traumatic for the cat. In addition, a lot of our business for that online is subscription businesses. So if you're not available, what ends up happening is sort of retailers automatically sub another brand. So we had a lot of work to do coming back from the cyber-attack to restore our distribution and restore our share. Part of the noise in the litter category is that we started promoting a bit higher in order to get those consumers back and then the category is sort of promoting more, which is not a surprise. So we've seen that. I wouldn't say anything is out of the realm of what we would consider normal, but it's pretty competitive right now. The great news in litter though is it is one of our strongest growers still. So even despite all of the impacts that we've seen from the consumer in the last few months, it continues to be positive. It's decelerated, but positive category grower. So it has great fundamentals. It's very attractive to play in. And we continue to expect it will be noisy for a while as we continue to rebuild our share. We've made good progress. We have more work to do. Feel great about our innovation pipeline. But I would put this in the case of this is a reaction to a pretty material change in the environment, and it's a competitive category. And we feel good about the progress and we think what we're seeing in the market is reasonable. Glad is a little bit different. Glad is more -- tends to go in cycles. We compete in trash and food bags, I'll focus on trash. That's the biggest portion of the business. It's us, another branded player in private label. And this tends to be a category because it is very impacted by commodity prices, particularly resin, that when we see increases or decreases in resin, that can result in behavior. But also when we see difficult economic times, one of the levers that people pull is price promotion. And so that's what we've seen in the category. Price promotion went up at the beginning of this fiscal year and has continued to be elevated. We put a bit more price promotion in place to deal with that, although we want to make sure we're balancing that with maintaining profitability. We lost a little bit of share, but we look at this as a pretty standard cycle in the trash category that happens, and we are well equipped to manage through it. We have a great innovation pipeline. Innovation continues to do very well at the consumer. They continue to trade up in trash bags. It's also one of the categories that had the least amount of impact over the last few months because it's truly essential. You have to throw away your trash and you use up trash bags at a pretty normalized rate. And we would expect, over time, price promotion to normalize. We're watching it really carefully. But again, I would attribute that more to a normal cycle in trash bags. And then in our Grilling business, we have the brand Kingsford. We primarily compete with private label and some other smaller brands. That's actually been a category that's done quite well. Grill penetration is up. We were growing share consistently in Q3. There were weather issues in Q3 and some timing on inventory that was noisy. But overall, feel pretty good about that business and its ability to grow. And we're just seeing, again, that's more of a weather and a timing issue for Q3. And we would expect, hopefully, we'll see what happens for weather coming up here from major holidays, particularly in the U.S. but feel good about the fundamentals of that and our ability to continue to grow share.

Okay. Good. And then Hidden Valley, which we're talking about before the event, that's a business that historically has been very strong for Clorox really for years. It, too, has softened. And I guess, what's your diagnosis there and what needs to be done to kick start growth?

This is a really interesting one. One of the most impacted categories over the last several months of that consumer behavior I talked about around switching was the salad dressing category. And Steve, you're right, that's been a category that's grown low to mid-single digits consistently for years. And we have grown share almost every single quarter for many, many years on that business. And the good news is we continue to grow share. So our Hidden Valley franchise is very healthy, but the category took a significant turn. We saw it as low as down 5% during that time, and again, we think it's as consumers were adjusting their basket. It has since rebounded to a better level than that, but still is depressed. And we feel good over the long term. But I think this is just the result of consumers making different choices. One interesting dynamic is we saw a number of consumers buy our very smallest size during this period. So they didn't want to go without their Hidden Valley Ranch, but they were really making sure that they could make those other purchases. And we would expect that category to rebound over time. And from our case, we have a terrific innovation program. We've launched 7 new flavors. In this first half, we have partnerships with a number of restaurant partners, we do one with Taco Bell. We're doing with one now in the retail space with DiGiorno and Hot Pockets that's going very well. Consumers love Hidden Valley Ranch on those things. So partnerships with those brands are terrific. And again, we continue to grow share. So feel very good about the business over the long term, but certainly one of the most impacted -- surprisingly impacted businesses over the last several months.

Okay. On a more positively framed question, are there pockets of the business where you see better momentum that you can carry forward? Or the foundations of better momentum that you can kind of lean into and that can help lead the portfolio back to more algorithmic growth?

Yes. And we spoke about litter, we want to get more of that growth. It's very attractive, a strong grower and we will. We're making progress there. But I'll call on another couple, maybe one to focus on, which is our actual largest business is our Cleaning business. That business is comprised of liquid bleach, which is in a compacted form that can be diluted, used in Laundry and Home Care. And then we compete in a number of Home Care segments. We compete in the professional space in the Cleaning business. And then actually, it's a global business for us so we have it in countries all around the world. That has been a very consistent and strong grower for our company for a number of years and is very attractive from a margin perspective. I mean, we cover the whole consumer kind of gamut. So if they want the best price per use, they can use one of our dilutables. We have a brand called Pine-Sol that's done very well, or they can use our jug form of bleach up to the most premium occasion, which is the Clorox Disinfecting Wipe, which is the highest cost per use, but very, very convenient and easy for consumers to use. So we've been able to, regardless of economic times, we can trade them within that portfolio. We have consistently grown share over the last several years through all of what's gone on. And if you look at what happened during COVID, we took significant pricing after COVID, 3 rounds of pricing in that business. And our volume is still higher than it was pre-COVID. So that gives you the idea. You usually have a significant volume impact from pricing, but that business is materially bigger and we feel great about it. That's an area we'll continue to grow. It has one of the strongest equities in our portfolio, which is the Clorox equity that grew household penetration significantly over the last year. And it's been a real star. So that will be one we continue to invest in on the Professional side, which delivers accretive growth to the company; internationally, which is accretive to the company; and then, of course, in the U.S. Retail business, which is performing strong. The category was impacted in this period, so it decelerated, but it was still one of our stronger growers from a category perspective if you looked across our portfolio. It's a great example of one where we want to continue to lean in. And then I would call out other ones where they have strong fundamentals. You mentioned Hidden Valley. As much as it's going through times right now, it is a very strong grower, very attractive financially. And we have other businesses we want to get more out of Burt's Bees is a great example where we think innovation and good marketing can play a stronger role in ensuring that innovation works in that. We've had some bumpiness given the last few years. We had a supply issue with a plant fire from a third party. We had the cyber disruption, but that's another one that we want to get back on track from a growth perspective and feel good about the category dynamics.

Great. Linda had mentioned margins as a key source of recent past success for Clorox and it definitely has been. Luc, what is your perspective kind of looking through the noise we talked about, just sort of the trend line on margins, because it's been both a gross margin story but also points of leverage on the SG&A line as well. So as we think about the medium term, just the runway you see from a margin perspective.

Yes. Just as a reminder, our goal is to grow on average annual EBIT margin by 25 to 50 basis points. And as you mentioned, we had a pretty strong performance in the past 2 years. I think we had 10 consecutive quarters of gross margin expansion. And generally, we feel actually pretty strongly about our ability to expand margin over the next few years. Now there's always some controllable and some uncontrollable. So we'll see what happens on the cost environment. But on why we can control, we feel like we have one of the strongest pipeline that we had in a very long time. And there's a few things. One, a few years ago, we shifted from what had been a very robust cost savings program to a more holistic margin management, adding new capabilities like design to value, net revenue management, a lot of it empowered by new data and tech investments. And this has been really working for us. So we just had last 2 years with 2 record level of cost savings. And this year is going to be another extremely strong year. And then the pipeline is actually looking quite strong as we continue to just really scaling those capabilities across our businesses. And then you add to that, the ERP. Now we talked about it, it's probably going to take another year or so before we start seeing some of the productivity. But we see a lot of opportunity from a productivity standpoint in our supply chain, in our working capital, and of course, in SG&A, right? And SG&A, there's a few things going on. There's the fact that we will reduce labor, just empowered by more automation. And we'll also be able to further expand our global business services because now we would have essentially a global data platform, which we didn't have in the past. So between those 2 levers, we think that we'll see some productivity benefit in SG&A, again, probably starting -- most of it playing in '27 and '28. So net, I think as I look at the next few years, we feel like we have a pretty strong pipeline and runway for us to continue to expand margin going forward.

Okay. And from that follows cash, I assume?

It's all about cash you're talking to, Steve. So yes, we have a pretty attractive business model that generates strong cash flow and pretty high return on invested capital. Now our goal -- our stated goal is to generate free cash flow between 11% and 13% of sales. And we've been meeting that goal pretty consistently until fiscal year '22 when we had our margin decline, and we've been rebounding since then. This year, we're going to meet that goal. And actually, this -- if I exclude the impact of the ERP transition, which is really a tax from a working capital standpoint, we'll be slightly above that range. Okay. And I think going forward, I feel very confident in our ability to continue delivering at that level. There's a few things going on. One, first, all the comments that I mentioned in our confidence in managing margin expansion, but also a lot of great work we're doing on the balance sheet. We don't talk about it often, but we took about $450 million of working capital out of the balance sheet over the past few years. And now with the new ERP, we feel like we have more opportunity to continue to optimize the balance sheet. So all in all, I feel really good about our free cash flow. And then maybe talking about capital allocation. Well, I figured that's where we're going next. Listen, our capital allocation priorities have been really consistent over the years and we don't expect them to change. First and foremost, I think we want to invest in our core and base business, this is where we can strengthen our competitive advantage, really drive profitable growth and then really generate the best return for our shareholders. And then after that, we'll continue supporting the dividend. We have a really long track record of consecutive annual increase. Then third, manage our debt leverage. Our target is to have a debt-to-EBITDA ratio between 2 and 2.5. We've been on the lower end. We think it's prudent given the current environment. And after that, return any -- we're committed to return any excess cash to the shareholders. So this year, our plan was to return $250 million to $300 million. And we'd probably be on the high end of that, if not slightly higher, by the time we finish the year.

Okay. From a portfolio optimization perspective, Clorox has done divestments over the past few years to mitigate volatility and also enhance growth by subtraction essentially. On the acquisition side, it's been quiet outside of the Saudi JV majority acquisition. What's the stance and the perspective on portfolio curation kind of over the medium term and the appetite for M&A?

We are always evaluating this, of course, as a management team and with our Board. And we really like the portfolio that we have and our ability to take the capabilities that we have and apply that. But given that, we would love to have another growth runway. And we've been looking at that and the thing we demand is strong returns, and we want to make sure that whatever business that we acquire really fits with the capability model that we have. And that could come in the form of a tuck-in to a business that we own today in a category that we really like or could be a new growth runway if there was something that we felt that the innovation and brand building capabilities, our margin transformation capability really applied well to that business and we could deliver growth or cost synergies. It's a difficult time right now. It's been a difficult time off and on over the last 5 years on that work, given what's just going on and all the uncertainty now. But we still -- we're looking. We're very disciplined about it. But the job #1, 2 and 3 is ensuring that our core, we're getting more out of that core. And our portfolio, as Luc said, from our capital allocation strategy, that should be clear. And we think there's room on our own portfolio now to get stronger growth and stronger returns. And that's what we're focused on, at the same time, being focused on what does the future look like and ensuring that we're doing that work. So we're very open to it, but we'll be disciplined.

Got it. If we -- in closing, we have a couple of minutes left. If we look through '26 into '27, '28 and we're envisioning what is possible in '29 and '30 and we're all back here talking about all the great successes that Clorox has had over that time, what are some of the 1, 2 or 3 most major accomplishments you want to be able to report back?

As a team, we really set out in the strategy period and particularly as we got through COVID to build a stronger company that delivered stronger growth profitably. And I feel like we've done a tremendous set of efforts to do that, and we're starting to see those play out. Really, the goal as we move forward is to maximize the value creation coming out of the transformation that we put in place. We want to get the much -- as much as we can out of the digital transformation we've invested in. Of course, we have to execute with excellence to do that, and we intend to. But we see so many opportunities because we have taken a more difficult road on this to really fundamentally transform the company's data infrastructure, all the technologies, how we work, the capabilities and we are laser focused on driving value in each one of those transformation efforts that we've done. As Luc said, we quietly kind of did the operating model. We talked about it as a savings. We changed the way the company operates and we need to really operationalize that. So what should that result in? And hopefully, what we can look back with in pride in 2030 when you and I have this conversation on stage would be faster growth. And we really want to get more out of innovation in our brands through driving superior experiences, and we think we've put all the capabilities in place to continue to do that. Continuing to drive margin performance that allows us to invest in our business, and of course, deliver great returns for shareholders. Luc mentioned the dividend is very important to us. So hopefully, we'll be sitting here on stage and our commitment to the dividend remains strong and we deliver returns for shareholders. But really now, this focus is on delivering stronger growth more consistently. And we look back on that and say we've built just a stronger company with better capabilities that really delivers more value for our shareholders.

Great. And with that, the clock hits 0.

Perfect.

Thank you, Linda. Thank you, Luc. Thank you, everybody, for joining us. Until next time.

Thanks, Steve. Thanks, everyone.

Thank you.