Q3 2024 Earnings Summary
- The company has fully restored its supply chain and normalized service levels by the end of Q3, positioning it to recover lost distribution and return to normalized merchandising levels in Q4. Retailers are supportive and eager to have the company's full distribution back on shelves.
- Significant progress in gross margin recovery, with expectations to return to pre-pandemic levels over time. The company has recovered about 650 basis points of the 800 basis points lost due to inflation, and with moderating input costs and the divestiture of the margin-dilutive Argentina business, it expects to continue expanding margins into fiscal year 2025.
- The company is increasing investment in advertising and sales promotion to over 11% of sales, aiming to rebuild household penetration and regain market share. Early signs indicate that nearly 90% of lost share has been recovered, and consumer households are improving.
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Gross Margin Outlook
Q: Will gross margins continue to expand in fiscal 2025?
A: Management expects to continue expanding gross margins in fiscal '25, building on an anticipated 43% gross margin by the end of this year. They anticipate that ongoing margin transformation efforts, including cost savings and revenue growth management, will more than offset moderate cost inflation. The divestiture of the Argentina business, which was margin-dilutive, will also contribute to margin expansion. -
Fiscal 2025 Top-Line Growth
Q: What are the expectations for sales growth in fiscal 2025?
A: While specific guidance for fiscal '25 isn't provided yet, management expects to grow the top line and expand earnings. They noted that the divestiture of the Argentina business will create about a 1.5-point headwind to sales next year , but they remain optimistic about growth prospects excluding this impact. -
Supply Recovery and Sales Impact
Q: How did supply issues impact sales, and what's the confidence in recovery?
A: Sales were impacted by extended supply constraints in the Glad and Litter businesses during Q3. These issues have been fully resolved by the end of the quarter, restoring normalized service levels heading into Q4. Management is confident in recapturing lost distribution points and believes they have the right plans to rebuild consumer households and restore fundamentals. -
Q4 Organic Sales Growth
Q: What is the outlook for Q4 organic sales growth?
A: Management expects improving volume trends in Q4 but anticipates increased trade spending as they return to normalized promotional levels. After considering the divestiture of the Argentina business, they project organic sales growth to be flat to down slightly in Q4, keeping them on track for about 1% growth for the year. -
Pricing and Competitive Dynamics
Q: Do you need to reset prices heading into 2025?
A: Management believes they do not need to reset prices into fiscal '25. The negative pricing and volumes in the quarter were due to supply issues, not consumer resistance to pricing. They are confident that as they restore supply and distribution, along with effective spending plans, they will regain market share without lowering prices. -
Impact of Argentina Divestiture
Q: How will the Argentina divestiture affect margins and sales?
A: The divestiture of the Argentina business, which was about 2% of sales, will result in a modest benefit to gross margins as the business was margin-dilutive. It will also create about a 1.5-point headwind to sales next year. Exiting Argentina reduces volatility and FX impacts, contributing to a more stable and profitable international business. -
Gross Margin Recovery Strategies
Q: How important is Revenue Growth Management in margin recovery?
A: Revenue Growth Management is a key tool in their margin recovery strategy. With the digital transformation providing greater visibility, they're leveraging initiatives like price pack architecture to drive margins. These efforts aim to return gross margins to pre-pandemic levels and grow from there, depending on implementation pace and cost environment. -
Consumer Behavior and Promotional Spend
Q: Are increased promotions aimed at financially weaker consumers?
A: The increased levels of merchandising and promotion were always intended as they return to pre-pandemic spending levels. While acknowledging that consumers across all income tiers are under pressure, the promotions are part of normal business plans and also support the recovery of share lost during the cyberattack. -
Market Share Recovery
Q: Is the intent to restore market share to pre-pandemic levels?
A: Management intends not only to restore market share but also to grow beyond pre-pandemic levels. They have recovered nearly 90% of the share lost due to the cyberattack and are confident in their ability to fully regain and then expand market share with the right plans in place. -
Advertising and Promotion Spend Timing
Q: How is the timing of advertising spend changing this year?
A: Due to the cyberattack, they spent less on advertising in the first half and are spending more in the second half of the year. They still intend to spend about 11% of sales on advertising and sales promotion, as originally planned , ensuring support for their brands as consumers face more challenges.