Church & Dwight Company, Inc.

Good morning, ladies and gentlemen, and welcome to the Church and Dwight First Quarter 2021 Earnings Conference Call. Before we begin, I have been asked to remind you that on this call, the company's management may make forward-looking statements regarding, among other things, the company's financial objectives and forecasts. These statements are subject to risk and insurgencies and other factors that are described in detail in the company's SEC filings. I would now like to introduce your host for today's call, Mr. Matt Farrell, Chief Executive Officer of Church & Dwight. Please go ahead, sir.

Thank you. Good morning, everyone. Thanks for joining us today. I'll begin with a review of the Q1 results, and then I'll turn the call over to Rick, our CFO. And when Rick is done, we'll open up the call for questions. Before we begin, I'd like to recognize all Church & Dwight employees around the world for their continued dedication to keeping our company going during the pandemic. especially our supply chain and R&D teams, as we overcame raw material shortages in Q1 as a result of the Texas freeze. Now let's talk about the results. Q1 was another exceptional quarter. Supported sales growth was 6.3%, and adjusted EPS was 83 cents, and that's three cents better than our outlook. Organic sales grew 4.9%, driven by higher consumption. E-commerce shows no signs of slowing. In Q1, our online sales increased by 54% year-over-year, and at a percentage of total sales, we're 14.8% in Q1 compared to 10.2% in Q1 of 2020. We continue to expect online sales for the full year to be 15% as a percentage of total sales. Vaccinations will significantly influence consumer behavior. The U.S. is slowly opening up, which means consumers are more mobile. 60% of vaccinated consumers are optimistic that they will return to a normal or new normal, as we are seeing the first signs that consumers are willing to spend more time in stores based on a study by IRI. In contrast, many countries outside the U.S. continue to experience lockdowns. As described in the release, we have been facing shortages of raw materials due to the Texas freeze. Raw material and transportation costs spiked higher in February this and were exacerbated by the Texas freeze. We expect a tight supply and higher input costs to continue for the balance of the year. To mitigate the cost increases, we have announced price increases in laundry and across our international portfolio, and we have reduced couponing and promotional spending. Rick will discuss this further in a couple minutes. At our analyst day in January, we outlined which categories and brands we expected to stay elevated throughout 2021, recover from COVID lows, decline from COVID highs, and which ones would remain steady. Overall, our full-year thinking has not changed. To name a few categories, demand for vitamins, laundry additives, and cat litter are expected to remain elevated in 2021. Condoms, dry shampoo, power flossers, and women's grooming are expected to deliver year-over-year growth as society opens up and consumers have greater mobility. Baking soda, pregnancy test kits, and oral analgesics are expected to decline from COVID highs. Of the 16 categories in which we compete, eight grew consumption in Q1, in some cases on top of big consumption gains in Q1 of 2020. Of those eight categories, five saw a double-digit growth. Gummy vitamins, toothache, battery-powered toothbrush, pregnancy test kits, and women's electric grooming. Household categories, such as laundry detergent and baking soda, were down in the quarters. unable to cop the huge COVID-19 sales spikes seen in Q1 2020. Looking at market shares in Q1, eight out of our 13 power brands met or gained share within our U.S. consumer domestic business, which grew organic sales 5.1%. I'll comment on a few of the brands right now. Consumers have made health and wellness a priority. VitaFusion and Little Critters gummy vitamins saw great consumption growth in Q1, up 24%. with the help of the new launches described in the release. It appears that new consumers are coming into the category, and they're staying. One survey showed that consumers who are new to the category had a 90% repeat rate. Waterpik grew consumption 15% in Q1, as it continues to recover from COVID lows and benefit from the heightened consumer focus on health and wellness. Waterpik is also benefiting from dental offices returning to pre-COVID patient levels. We expect the frequency of our Lunch and Learn program to return to normal levels in the second half of this year. Now, Batiste. While Batiste remains impacted by social distancing, consumption was up 6%, and we achieved a record high quarterly dollar share of 39% behind our International Women's Day campaign. Now, I want to talk about the international division. Despite European lockdowns, our international business came through with 3.2% organic growth in the quarter, primarily driven by strong growth in our global markets group. Asia continues to be a strong growth engine for us. Waterpik, Fenfresh, and Arm & Hammer led the growth for the international division in the quarter. Our specialty products business delivered a positive quarter with 6% growth, primarily due to higher pricing. Milk prices were stable in Q1 and are projected to increase later in the year due to higher demand. Now turning to new products. Innovative new products will continue to attract consumers. In 2021, we have launched many new products, which are described in our press release. In the household products portfolio, we are introducing OxiClean laundry and home sanitizer. It is the first and only sanitizing laundry additive that boosts stain fighting and eliminates 99.9% of bacteria and viruses. The product is also designed for cleaning throughout the house and on a variety of surfaces. In the personal care portfolio, VitaFusion launched elderberry gummies, triple immune gummies, and power zinc gummies to capitalize on increased consumer interest in immunity. Waterpik launched Waterpik Ion, a water flosser which is 30% smaller and contains a long-lasting lithium ion battery and is specifically designed for smaller bathroom spaces. To capitalize on its earlier success, Waterpik SonicFusion developed the world's first flossing toothbrush was upgraded to Sonic Fusion 2.0 with two brush head sizes and two brush speeds. And finally, Flawless is taking advantage of the at-home beauty and self-care trends with a facial cleanser system, a shower wand for a full-body spa-like experience, and at-home manicure and pedicure solutions. Now let's turn to the outlook. We're off to a good start in Q1. We continue to expect full-year adjusted EPS growth of 6% to 8%, which is in line with our evergreen target despite the heightened input costs. Given our expectations for consumer consumption, we have raised our full-year outlook for reported sales growth from 4.5% to now 5% to 6%. Organic sales growth expectations were raised from 3% to 4% to 5%. And if you look at consumption trends through the middle of April, 14 of our 16 categories were up in consumption year over year. Now in conclusions. I'd like to remind everyone of the many reasons to have confidence in Church and Dwight. Our track record shows that we are positioned to do well in both good and bad times and in uncertain economic times such as now. Categories in which we play are essential to consumers. We have a balance sheet of value and, pardon me, we have a balance of value in premium products. Our power brands are number one or number two in their categories, and we have low exposure to private lending. And with a strong balance sheet, we continue to be open to acquiring TSR accretive businesses. Next up is Rick to give us details on Q1.

Thank you, Matt, and good morning, everybody. We'll start with EPS. First quarter adjusted EPS, which excludes the positive earn-out adjustment, was 83 cents flat the prior year. As we discussed in previous calls, the quarterly earn-out adjustment will continue until Q4, which is the conclusion of the earn-out period. The 83 cents was better than our 80 cent outlook, primarily due to continued increase in consumer demand for many of our products. Reported revenue was up 6.3%. Organic sales were up 4.9%, driven by a volume increase of 3.1% and a positive price mix of 1.8%. Now let's review the segments. First, consumer domestic. Organic sales increased by 5.1% due to higher volume and positive price mix. Overall growth was led by VitaFusion, Little Critters gummy vitamins, Waterpik oral care products, Flawless Beauty products, Arm & Hammer clumping cat litter, and Kaboom bathroom cleaners, as well as Viviscal hair thinning products. Consumer International delivered 3.2% organic growth due to higher volume, partially offset by lower price and product mix. This was a great result despite European lockdowns. For our SPD business, organic sales increased 6% due to higher pricing partially offset by lower volume. Milk prices have remained stable month to month and are projected to rise as 2021 moves forward. Now turning to gross margin. Our first quarter gross margin was 44.5%. 120 basis point decrease from a year ago. Gross margin drag was impacted by 360 basis points of higher manufacturing costs, primarily related to commodities, distribution, tariffs, and COVID impacts. Commodities which were exacerbated due to the Texas freeze were a 90 basis point drag on margin. Tariff costs negatively impacted gross margin by 40 basis points. These costs were partially offset by a plus 190 basis points from price-volume mix and a positive 170 basis points from productivity programs, as well as a 10 basis point positive impact from favorable currency. As a reminder, our outlook for the quarter on gross margin was down 50 basis points. The entire variance was related to the spike in commodities and tight transportation market. The good news is for the back half of the year, we expect margin expansion. Behind the pricing and promotional actions we laid out in the release, as well as we start to lap some of the higher inflation and tariffs that we experienced in the back half of 2020. Moving to marketing. Marketing was up 2.3 million year-over-year as we invested behind our brands. Marketing expense as a percentage of net sales decreased 30 basis points to 8%. For SG&A, Q1 adjusted SG&A increased 60 basis points year over year, primarily due to acquisition-related intangible amortization. We also had higher investments within IT and R&D, as well as some transition costs from the Zycam acquisition. Other expense all in was $11.6 million, a $3.6 million decline due to lower interest expense from lower interest rates. And for income tax, our effective rate for the quarter was 24.2% compared to 23.2 in 2020, an increase of 100 basis points primarily driven by lower stock option exercises. And now to cash. For the first three months of 2021, cash from operating activity has decreased 57% to $100 million due to higher cash earnings, which was offset by an increase in working capital. Inventory is higher to support increase in sales as we continue to improve customer fill level. Accounts payable and accrued expenses decreased due to the time of payments. As of March 31st, cash on hand was $128 million. Our full-year capex plan continues to be approximately $180 million as we continue to expand manufacturing and distribution capacity, primarily focused on laundry, litter, and vitamins. For Q2, we expect reported sales growth of approximately 4.5%, organic sales growth of approximately 4%, and gross margin contraction of 350 basis points. As higher input costs continue, and we lapped artificially low promotional levels from a year ago. Adjusted EPS is expected to be 69 cents per share, a 10% decrease from last year's adjusted Q2 EPS. As you read in the release, we did a voluntary recall of selected products within our vitamin business. We expect the EPS impacting Q2 to be approximately 4 cents for the quarter, and we are seeking reimbursement by insurance. And now for the full-year outlook. We now expect full-year 2021 reported sales growth to be 5% to 6%, which is above our previous 4.5% outlook. We're also raising our full-year organic sales growth to approximately 4% to 5%, up from the previous outlook of 3%. Turning to gross margin, we now expect full-year gross margin to be flat for the year, primarily due to the impact of higher raw material and transportation costs in the Texas freeze in March. We had previously expected gross margin expansion of 50 basis points for the year, and recently we have seen a large increase in raw materials and transportation costs. We're absorbing $90 million of incremental costs for the full year. Higher sales, reductions in promotions, and price increases across all three of our divisions, representing about one-third of our portfolio, offset a large part of the cost increases. As a reminder, we price to protect gross profit dollars, not necessarily margin. Our full-year tax rate expectations are now 22%, higher versus our last expectations due to lower stock option exercises. This is a two-cent headwind versus our previous full-year outlook. Adjusted EPS expectations continue to be in the range of $3 to $3.06, a 6% to 8% increase year over year. Our cash from operations outlook continues to be a billion dollars while we continue to pursue accretive acquisitions. As you heard from Matt, the company is off to a great start, and we expect 2021 to be another strong year. And with that, Matt and I would be happy to take any questions.

If you would like to ask a question, please press star, then the number one on your telephone keypad. Again, if you have a question, please press star 1 on your telephone keypad. We have a question from the line of Kevin Grundy with Jefferies.

Let's start, I guess, on pricing and commodities. Rick, if you could spend a moment on how much of your commodity exposure you have hedged for the year, I think that would be helpful. And then shifting to pricing, Matt, you mentioned laundry products. And your international portfolio, I think typically the company will lead in baking soda, contraceptives, and Oxy. What percentage of your portfolio do you expect to take pricing? How much is in your outlook? I know pricing is a sensitive topic, but maybe just sort of triangulate between how much is in your outlook and then how much you – there might be additional pricing that may not be in your outlook, I suppose. And then what are you seeing from competition, specifically in your bigger categories like laundry and litter and vitamins on the pricing front?

Yeah, okay, Kevin. This is Rick. I'll take the commodity piece really quick. Maybe two parts. Maybe to give you comfort on the back half gross margin expansion as well. But we're about 80% hedge from a commodity perspective. And remember, we said if we could hedge those, whatever, key six or seven commodities, then a lot of the volatility does go away. We do have a lot of confidence in gross margin expansion in the back half, as we are lapping. some of those higher commodity costs in the back half of 2020. Just as an indication, ethylene, for example, in the first half of 2021 is up 70%. If we keep that current spot rate for the remainder of the year, the back half would be up 30% versus the second half of 2020. So, like I said, we are confident with that, and that's why we think we have confidence in the back half gross margin expansion, as well as the price volume mix.

Okay, and Kevin, your question about the So we'll start with laundry. So if you look at over the past 18 months, our competitors have taken price in a different way, generally through changes in houses. And our estimate is anywhere from maybe 8% to 12% price. And so we announced in early April that we're raising price. We're discussing that with retailers now. But we don't think we're going to be out of bounds with respect to price gaps in laundry. Your question about how much has been priced, we have a third of the portfolio, and that would include domestic, international, and also SBD. And in the U.S. business, it's Arm & Hammer and Extra, you know, or Sheetz's business, Sun Boosters, so it's pretty much concentrated on laundry. A couple other categories in there, raising some price, and also just a couple of specific variants within the Trojan category. Internationally, it's largely a personal care business, so the price increases are largely around the personal care business. And SBD in particular, some of our products are being impacted by PFAD, which is a compound fatty acid distillate, which is affecting inputs for one of our products called Megalac. So we've been increasing prices now monthly for Megalac, and we'll be doing it as well for some of our other products. As far as like a related question might be sold on deal. So how promotional is the environment today? So as everyone knows, the household side of the business is the one that's promotional. So laundry was down 300 basis points. The laundry category is down 300 basis points year over year sold on deal. And litter, similarly, was down 500 basis points year over year in Q1. I think that's probably going to reverse in Q2, and there's a simple reason for that. It's because last year in Q2, promotions were pulled in these categories. For example, last year in the second quarter, year over year, the laundry sold on deal was down 1,700 basis points, 2020 versus 2019. So obviously a different kind of comp in Q2, so we think it may be up.

Does that help you, Kevin? Yeah, yeah, that's helpful, Matt. A quick follow-up on the pricing comment. I brought a question if you don't mind. You mentioned that one-third of the portfolio is taking pricing. Is that to suggest that the other two-thirds are potentially upside, and presumably you're not going to lead, so you're waiting for the competition to lead? It's probably hard to envision many categories where there's not a cost justification for the price increase, so presumably in that two-thirds you're waiting for the competition to lead. If you could just sort of confirm that, is that potential an additional offset to the commodity cost pressure you're seeing?

Yeah, that's the right way to think about it. I mean, the price increases were – or the input costs were very acute in the laundry category, so that's where we thought we'd have to move. But as far as – we wouldn't speculate on any other category but what we might do later in the year.

Got it. Just one more quick – I apologize for monopolizing time here, but sort of like the million-dollar question, Matt, long-term implications from COVID – understanding still a lot of volatility, a lot of uncertainty in the environment, it would seem like at a minimum the company's view would be expect higher consumption in vitamins, even as we sort of get through this and looking out to next year. How are you thinking and planning internally, and what could the potential implications be broadly for Church's portfolio? And I'll pass it on. Thank you.

Hang on, Kevin. Is there a question in the next? six months? What are expectations?

No, the questions are longer term, Matt. The questions are relative to the 3% organic sales guidance, which you guys have pretty consistently beaten for some time now. At a minimum, it would seem like household penetration has and will, to some degree, sustain a higher degree in vitamins, at a minimum, within the portfolio. How are you thinking broadly about Church's portfolio in terms of shifts in consumer behavior as a consequence of the pandemic, focus on health and wellness, et cetera?

Well, certainly the focus on health and wellness is going to benefit not just our gummy vitamin business, but our Waterpik business, which has been just a high single-digit grower perennially since we acquired the business. I think what you're going to find is that 2021 is going to be kind of a reset. that, you know, as we live with COVID this year, we'll be able to grow from there. But we have such a broad portfolio, both in household and personal care. You know, we do think that we're well-positioned, frankly, for 22 and beyond.

I got it. I'll leave it there. Thank you both. Good luck. Yep.

Your next question comes from the line of Andrea Texera with J.P. Morgan.

Yeah, thank you. I want to go back just to basically coming back for the categories that are kind of more impacted by mobility. What are you seeing now? And then as a follow-up to the recall, what is the obviously called out for for a sent impact and you're trying to get insurance payback on that one? Is that any additional... potential charges there and have you had any issues with the, you know, shelf space or anything else for the balance of the year on the vitamins? Any comments on that or any potential changes on production or any disruptions that we should be thinking of? Thank you.

Yeah, so I'll let Matt take the categories and mobility and I'll just talk about the insurance and the recall. So, trying to be very clear, you know, that potential impact is up to four cents We think it's relatively limited to that. To our knowledge, there have been no additional shelf reset issues. This was a small window of production. We've been very clear in the release what we've talked about, and that's kind of the extent of it.

Yeah, as far as the categories go, just to give you some color on that, the gummy category was up 19% in Q1. And even depilatories were up 9%. Again, people who discovered depilatories a year ago when using at-home solutions. So those are a couple of examples, two of the categories we expected to be elevated this year. Litter is another one, and there's 6% more households that have cats. So that's sort of the tailwind for litter. And there were a number of categories we expected to recover. For example, water flossers suck. Water flushers was up 29% as the category in Q1. And even electric grooming was up 3% in Q1. Dry shampoo was down 1% in Q1, but it's way better sequentially. And we have, as I mentioned in my remarks earlier, we had a record share. We grew sales in Q1 year over year in dry shampoo. And as far as the ones that will decline... Baking soda has already started to decline in Q1. Toothache as well was off 3%, that category in Q1. And also cold shortening, as Rick made reference to the Zycam category, was down 70% in Q1. So that will give you a little bit of color on what's going on in the categories.

Yeah, and, Andrea, I think, you know, Matt's comment in his – has prepared remarks about 13 of 16 categories being positive in April. And that's a pretty broad base across household and personal care. So all those socially distant impacts are starting to mitigate.

Okay. Thank you so much. Okay. Your next question comes from Chris Carey with Wells Fargo Securities.

Hi. Good morning. So I have a couple questions. You know, on the back half, gross margin expectations, I guess it feels like something like 225 basis points, average midpoint of gross margin expansion versus 2020. Appreciate easy comps, appreciate lower promos and pricing. But it's also, I guess, implying a slightly higher gross margin level than even in 2019, despite this higher inflation environment. I wonder if you can just, maybe number one, is that a better way to look at it? And then number two, Maybe just unpack that a little bit, you know, and how much is that? Maybe a little promo, the mix of the business relative to 2019, the higher pricing levels, just anything you might think relevant to better think through that dynamic. And then I have one follow-up.

Yeah, sure. I'll do it two ways. The first way, I'll just give you some of the details of the full year outlook. We were in New York in our annual meeting. or at Cagney, we give you a full-year outlook on gross margin and give you the pieces. So I'll do that again, and then I'll kind of bridge it to you. So the full-year outlook for margin is plus 200 basis points for price-volume mix, plus 120 basis points for productivity. So those are the two big tailwinds. Price-volume mix, for example, is a lot higher than it was, given all of our expectations for, number one, lower promotional spending, but higher pricing, and really baseline volume is doing better than we expected. Then we have inflation down 300 basis points, and then tariffs down 40, M&A up 20. That's how we get to the zero. Now, if you take a step back and you think, well, the first half of this year, to get to zero, the first half is going to be down about 235, and the back half is going to be up about 235. That's a delta trend. of about 470 basis points. So why are we convinced that we can go from the first half down to the second half up? 200 basis points of that, 470 is because of price-volume mix. Those are the actions that we talked about. The other 300 basis points is really cost-related. Inflation, I gave the example in relation to Kevin's question that, you know, Ethylene, for example, is up 70% in the first half of 2021. HDPE is up 85% in the first half of 2021. Ethylene is only up 30% in the back half if we keep current spot levels. HDPE is only up 50% if we keep current spot levels. We're lapping tariffs, right? We had tariffs in the year-ago numbers in the back half. We had some higher COVID costs in the back half of 2020. So that's a little bit more color, but I just wanted to walk you through it.

Okay. I appreciate that. And just, uh, you know, one followup would be on the vitamin category. So I, you know, I know that this was, um, has been approached a few different ways already, just from a category growth and higher per capita consumption perspective. But, um, it's not just that, right. I mean, you outperform the category. I don't know. Um, at least in scanner, roughly 50 points, um, maybe a little bit less, uh, in 2020. And, um, you know, the relative outperformance has, you know, certainly sustained, not that high of a level, but it certainly sustained on a year-to-date basis. So, like, there's clearly a pretty significant share gain story here, too, and it passes different ways in the past, but can you just offer a little bit of perspective on exactly why you think that's the case, whether that's the, you know, incremental capacity that you had already invested into, whether you think your product skews or, you know, the price tiers or the specific subcategories that you're in are particularly relevant in the current environment. Just just broadly what you think is contributing to the relative outperformance in a category that's doing quite well. So thanks for that.

Okay. Well, I, Remember, in the gummy category, we have number one brands. So let's start right there. We know the transition from pills and capsules continues to gummies. I mentioned earlier that household penetration is up. So the households that were already buying VitaFusion and Little Grizz gummies are taking more. And new consumers are being attracted to the categories. So we stand to benefit from that being the number one brand. we've had a lot of success with new products over the last couple of years. So we're able to spread out on shelf. And something else, too, is, you know, you may recall from earlier calls that we had third-party production come online late in 2020. So our end stocks are way better right now. So a combination of all those is what's going to sustain the elevated consumption in 2020.

Opera, are you there?

Yes, I'm here. Okay. Your next question comes from the line of Rupesh Harik with Oppenheimer.

Good morning. Thanks for taking my question. So I wanted to go to the international segment. So clearly Q1 was impacted by some of the European lockdowns. I was curious how you guys are thinking about it for the balance of the year, and do you still think a 6% type growth rate is achievable for that segment?

Yeah, I'd say on a full year basis we're still expecting 6% from international. The engine for international growth in the last few years has been a global markets group, so that does spread your risk quite broadly across many regions around the world, so we're not wholly dependent upon the countries where we have operations. And you may recall that Global Markets Group is about a third of our business and has been growing at 15% or better for the last four or five years. So we think that will be sustained in the 2021 repesh.

Yeah, and just to give a little bit more color repesh, our outlook in February for organic was 3%, and that was 2% domestically, 6% internationally, and 5% SBD. Now we're thinking it's closer to 4% domestically, 6% internationally, and 6% for SBD.

Okay, great. And maybe just one follow-up question. So in Zycam, it looks like, I think if I'm reading the numbers correctly, that you guys took down your expectations for Zycam this year, and clearly everyone's calling out the cough and cold challenges. So I don't know, as you guys look out this year and next year, would you expect the business to be back on track, I guess, next fiscal year?

In 2021? Yeah, absolutely. Look, I mean, it's kind of announced that that incidence of flu and cold and coughs is way down, so it's affected many, many brands in the category. We remain focused on the fact that we're the number one share, and we have a 73% share in cold shortening. So it is a strong brand. We bought it for the long term, and we do expect it to be a contributor to organic growth, particularly in 2022 and beyond.

Okay, great. Thank you. I'll pass it on.

Your next question comes from the line of Camille Garawala with Credit Suisse.

Hey, guys. Good morning. Maybe good afternoon. I'll ask a question maybe about stimulus and the impact on demand. You know, in particular, you mentioned water flossers, you know, water flossers are very strong. We've also heard from pretty strong device sales at Procter & Gamble in this morning career at Dr. Pepper. Do you think there's maybe something in the figures that we're seeing which are very strong that is a bit less sustainable because of the impact of stimulus?

I wouldn't think that that would apply to water flossers, just because of the growth rate that we saw beginning in 2017 when we first bought the business. So we've had high single-digit growth for the past several years, and we have so much opportunity internationally. That's where all the growth is going to come from long-term.

Yeah, and I do think that, remember, we're copying over periods of time a year ago that were just super depressing. and nobody was in retail stores or doing shopping for devices. So I do think it's also comp.

Yeah, it's a super easy comp year over year, so I wouldn't be swayed by the fact that the category might have been up 29% in Q1. But long term, it's going to be a grower for Church and Dwight.

I love it. And outside of water flossers, any view on impact of stimulus?

Well, look, I think this stimulus can affect virtually every category. I mean, the way you think about the economy, or the way we think about it, is savings rates are up. The stat that I've seen is 13% of disposable income, and the average for the last five years is between six and eight. And certainly stimulus checks are helping us. those in need. There's labor shortages, right? So there's more jobs that are available and average hourly earnings is up. So I think all of that suggests that the household balance sheets and the consumer is healthier and getting healthier. So I think that benefits all of our categories.

Okay, great. And just a very quick one. Obviously, there's a lot of discussion about raw material prices and transportation prices and stuff, but we're also hearing about kind of real supply issues that, you know, maybe just can't get what you need. Is that impacting your business anywhere at all?

Well, it certainly does, right? I think I gave the example of boards the other day that normally here we might have one force majeure for one of our suppliers, and in the quarter we had six. So there is tightness in supply. Our ops and R&D teams are doing a great job, you know, getting substitute supplies or working with suppliers to – To get through that, we have largely on SCAP. There's always stuff to hand a mouth on, but by and by, we've announced everything else. Great. Thank you.

Your next question comes from one of Beale Chapel with Truist Securities.

Thanks. Good morning. Just a follow-up on one of Tevin's 23 questions on pricing. In terms of timing, P&D had said that they were looking at pricing kind of in September. I think you're talking about a little bit sooner. So do you think there's any risk of kind of price gaps being extended kind of over the summer before everybody kind of pushes it through?

No, the timing for our price increases is – starting in July, Bill. Is that what you're trying to drive?

And, Bill, I think what Matt was trying to allude to before is some of the compaction activities that happen with some of our competition kind of means that our price gaps aren't really that out of line versus historical levels.

Gotcha. So you see everybody kind of, in terms of the competitive front, everybody kind of taking price in lockstep at the same time? No.

Our decision with respect to raising prices in laundry was unilateral and was driven by the cost increases that we've been experiencing. My reference was just simply the fact that, hey, you know, over the past 12 months or so, our competitors had raised their prices by reduction in ounces and things like that in their products. So consequently, we didn't see that raising prices on our part was going to create a difficult gap for us. Impressive.

Got it. Can you give a little bit more of an update on where you see the flawless franchise? Since you bought it, there hasn't been a normal environment from bed bath issues to supply issues to COVID and people staying at home to somewhat kind of a turn to normal. I know it seems like on shelf it's gotten better positioning. It's that retail more with the shaving kind of category. It seems like you've expanded some SKUs, so it's a bigger block when you walk through the retail doors. But kind of any thoughts, you know, X kind of the COVID bounce back you see on that franchise?

Yeah, well, we've talked about this in the past, and you're right, we've kind of gone sideways since we bought the business for a variety of reasons. We bought the business in 2018. It had net sales of 186. and then 2019, 180, and then last year, 171. So this year, we expect to be up approximately 20%. And the reason why we believe that is because we've got a nice array of new products to go with our existing products. And I mentioned those in my remarks. We've got a body cleanser, face cleanser, and some mani-pedi products, which are really good. Plus, we've got influencers now that are getting behind the product, so notably, yeah. Ashley Graham and Dove Cameron. We also have a celebrity, Halle Berry, who is pitching Flawless. And all of those are hitting in 2021. So consequently, we're optimistic about the future for Flawless. Got it.

All right. Thanks so much.

Your next question comes from the line of Lauren Lieberman with Barclays.

I was hoping you guys could talk a little bit, two things. And the primary thing is the driver of the change in outlook for consumer domestic from 2% to 4% growth. I guess, one, to what degree is that greater optimism on how well the vitamin business holds in? And secondly, how does that relate to what we're starting to see in the Nielsen data, which is that market shares in laundry are are down and softening, and, you know, it's not multiple periods, you know, but now we're talking about going into a pricing environment. So just curious on your thoughts on laundry market share performance and how that ties in, again, with that change in outlook to a more optimistic view on consumer domestic.

Thanks. I'll take the just changing the organic outlook and what brands are driving it, and then Matt can add on. So, Lauren, it's really two or three things that are driving the confidence and the strength and the outlook from 3% to 4.5% at the midpoint. Vitamins is a big one. Waterpik is doing exceptionally well. PTK, our Percy Teske business, is doing well. So it's kind of broad-based. Those three, though, are certainly helping raise our outlook. Now, in terms of laundry, just real briefly, you know, we review, share information all the time. Really, there's two things. One primarily is Unidose. Unidose is down slightly in share, and that's not because consumers aren't choosing to buy our product. It's because we continue to have a transition from making that outside to bringing that in-house. And so, you know, outside supply is very tight at the moment, but the good news is we are in the ramp-up stage right now of bringing everything in-house. So we have to take a short-term blip.

As far as the laundry category, Lauren, if you look at Q1, Arm & Hammer gained share. XPRID did not. You know, we have been prioritizing Arm & Hammer for quite a few quarters now throughout the pandemic. We do expect that shares could be impacted, certainly, by our actions with respect to price. I mean, that's pretty normal. How competitors react to that is unknown. And certainly if competitors were to raise price or reduce promotions, less sold on deal, obviously that could affect our shares as well. But unpredictable right now. We're committed to raising price starting July 1.

Yeah, I'll also give you an optimistic comment. You know, all of our assumptions in our outlook include assumptions that and competition doesn't follow, so we've taken down the volume on the elasticity and everything else, so that's kind of a conservative way to do it.

Okay, great. Thanks so much. Our next question comes from the line of Steve Powers with Deutsche Bank.

Yeah, hey, thanks, guys. So, just building on that last comment on elasticities, you know, you've got momentum and brand strength. It seems like you've approached it conservatively relative to competition, but At this point, as we've listened to so many CPG companies talking about raising price, either already having done so or pricing to come, the majority of the consumer shopping basket seems like it's poised to be going up. Can you talk about how that factors into your thinking and relative cross-category elasticities that might benefit or complicate your scenario analysis?

Yeah, it's sort of an umbrella statement, Steve. You know, we've pointed out to investors for years that we have a balanced portfolio between premium and value. And when you have number one brands, you know, typically you're going to fare better in difficult economic times than companies that do not have number one brands. we like where we are right now going forward. We think we're in a good position.

Yeah, and a lot of our brands are value brands. And even in the laundry example, despite any increase, the price gaps are in line with historical levels and are great values compared to competition.

Okay, fair enough. I guess there's been just a tremendous amount of volatility in shipments and consumer takeaway patterns as inventories rebalance both at retail and I presume in household pantries. As you try to cut through those dynamics from where you sit, do you have a sense of how actual consumer usage of your brands or your categories is trending today? I don't know what the right benchmark is, whether sequentially versus the fourth quarter of last year versus 2019 or a year ago, but just any benchmark on actual usage that might give us more insight into your confidence in raising the full year outlook.

Just based on looking at consumption patterns in the categories, consumption equals usage. I wouldn't point to pantry loading or panic buying anymore. I think it's steady state now, Steve.

Yeah, and just to add to that, Ryan talked about in the release about personal care categories that are at double digits in consumption. That's partly because there's low comms a year ago, but gummy vitamins, as an example, Matt referenced, is growth on top of growth. And if you look at most of our categories and whatnot, it's growth on top of growth. Because, you know, April last year we grew, but April of this year, Matt just said, 13 to 16 categories are up. So, again, growth on top of growth.

Okay. Thank you.

Your next question comes from the line of Nick Mudai with RBC Capital Markets.

Hello, Nick. I noticed. Hey, so there's been a lot of talk about, you know, declining birth rates, and I noticed in the release and in the commentary during the call, you called out positive, you know, pregnancy test kit trends. So I'm just curious, is this a relation to just easy comparisons, or do you think there's something else going on that happened over the last 12 months, you know, as we're all locked up in our homes?

Yeah. I think one way to look at it is if you look at the period like February, March, April last year, That was down versus 2019. So you sort of have easy comps year over year. And when you look at kits in the first quarter, you see the category is actually up 23%. And that's one of the categories we thought that would fall back a bit in 2021. So I think best case, maybe it doesn't fall back and maybe it's flat year over year. But it's one of the facts that I could give you, Nick, is that typically if you're in a recession, the birth rate declines. But, I mean, I think in the last people who thought we were going to the session, it's clearly we are not. So the category could be better than we are for 2021.

Great. And one other question, Matt. You know, I was just thinking about how more and more of these kind of testing kits that you can do at home to diagnose a lot of things, like, you know, in terms of what you should be eating and what kind of vitamins you would need and things like that. And I'm just curious, you know, given that you're already in that business, Have you ever thought about expanding the portfolio to deal with other types of diagnosis?

You know, Nick, I think you have a future in new products. I think that's exactly the types of things that we would be looking at. And, of course, we have a great brand name at First Response that is certainly portable in other categories. But, yeah.

Great. All right. Thanks, guys.

And our final question comes from the line of Jason English with Goldman Sachs.

Thank you for signing in and letting me back clean up here. Appreciate it. I wanted to come back to the gross margin question that I think was asked earlier, because I don't think you ever fully answered it. Your guidance suggests that you're going to hit a pretty high gross margin of back half. In fact, going back over the last 10 years, it will be the highest back half margin you've ever achieved, which in context of the environment seems surprising. So I was hoping you could explain, like, why structurally you're going to be at a higher margin, even with these cost pressures. And then the second related question is, gosh, if you can hit all-time high margins in the back half of this environment, what is the right margin for this portfolio? Because the streets out there are looking at fiscal 23, maybe you're at 46, 46.3. Do you think with the portfolio you have today, your normalized gross margin rate should be in the 47s, 48 type range?

Yeah, no, Jason, I thought I gave some context to it. I hear you on absolute numbers. You know, I think I'm trying to explain that we're going to have a lot of confidence in being up in the back half, and part of it was the comp on inflation, the comp on COVID, the comp on tariffs. But underlying that, remember, all the things we talked about with our evergreen model are certainly true, right? Our productivity program over the last couple of years has almost doubled in relation to where it was just five years ago. So we have a new capability that's offsetting these things that has been masked for a period of time because of all this inflation, all these tariff discussions, all these COVID costs. So that's certainly coming to bear in just a great way. You know, MPD, as an example, when we buy businesses that have higher gross margins, it's typically an ad as well. So Zycam, even though As an example, the revenue number will be lower than we had hoped for because there's zero cold and flu season. The margin impact is still a tailwind. So all those things that are structural are also tailwinds. I think over the long term, we have a lot of confidence in the evergreen model, expanding post-margin. You know, we've got to get past all these one-timers like tariffs and whatnot, but I really do believe that we have more upside, more room to run. And so I do think that we're going to be into the higher 40s over the long term.

Okay. Okay. Yeah, no, I appreciate all the year-on-year stuff you gave, but just sequentially, forget about year-on-year. You've got a cost structure in the first half. Do you expect it to be a lot lower in the back half?

Yeah, so not year-over-year, but just sequentially, do we expect it to be lower? For right now, like all the inflation, as an example, we are assuming that it's kind of spot pricing. We've locked in Like I said before, about 80% of the commodities. So it's really the absence of higher inflation, the absence of higher tariffs, the absence of higher COVID costs. And in theory, COVID costs actually help us in the back half. We don't have the same extent. And all those things help. But then we're going to get the positive price mix that's new to the portfolio that is incremental inflation. pricing on those brands that Matt talked about, and then the incremental productivity program that we always talk about as well, and the M&A tailwind. So those are kind of the things that are structurally higher.

Okay. Okay. Thank you.

And there are no further questions in queue.

Okay. Hey, thank you, everybody, for joining us today. Obviously, we're always available for follow-up questions, and we'll talk to you again in July.

thank you for participating in today's conference call you may now disconnect