Church & Dwight Company, Inc.

Good morning, ladies and gentlemen, and welcome to the Church and Dwight Second 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 risks and uncertainties 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.

Good morning, everyone. Thanks for joining us today. I'll begin with a review of the Q2 results, and then I'll turn the call over to Rick Durker, our CFO. And when Rick is done, we'll open up the call for questions. But 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 during this quarter the company faced the complexities of raw material shortages and labor shortages at our suppliers and third-party manufacturers. Now let's talk about the results. Q2 was another solid quarter for the company. Reported sales growth was 6.4%. Organic sales growth grew 4.5% and exceeded our 4% Q2 outlook. The 4.5% organic growth is impressive, considering Q2 2020 organic sales growth was 8.4%. Adjusted EPS was 76 cents, and that's 7 cents better than our outlook. The EPS beat is attributed to two things. One, a temporary reduction in marketing, and two, our revenue growth handily exceeded our outlook. Another item that is noteworthy is we overcame a tax rate, which was much, much higher than expected in Q2. We grew consumption in 13 of the 16 categories in which we compete, and in some cases, on top of big consumption gains last year. Another way to look at this is to compare our Q2 consumption on those 16 categories to 2019, a pre-COVID year. We have higher consumption in 14 of those 16 categories compared to Q2 2019. Regarding brand performance, nine of our 13 brands saw a double-digit consumption growth, and I'll name them for you. Gummy vitamins, stain fighters, cat litter, condoms, battery-powered toothbrushes, depilatories, dry shampoo, saline spray, and water flossers. Now, although many of our brands deliver double-digit consumption growth, it is not reflected in our 4.5% organic sales growth as shipments were constrained by supply issues, which we do expect to lessen by Q4. In Q2, online sales as a percentage of total sales was 14.2%. Our online sales increased by 7% year over year. But remember, this is on top of the 75% growth in e-commerce that we experienced in Q2 last 2020 versus 19. We continue to expect online sales for the full year to be 15% as a percentage of total sales. With 70% of American adults having at least one vaccine shot so far, the U.S. has been opening up with consumers becoming more mobile. In recent days, however, it appears that trend could slow down due to the Delta variant combined with many people still being unvaccinated. Outside the U.S., many countries continue to enforce periodic lockdowns and we expect that to continue. As described in the release, we face shortages of raw and packaging materials, labor shortages that suppliers and third-party manufacturers have reduced their ability to produce, and transportation challenges have further contributed to supply problems. Besides shortages, we are dealing with inflation. Significant inflation of material and component costs is affecting our gross margin expectations, which Rick will cover in his remarks. Due to a lower case fill rate, we pulled back on Q2 marketing, especially for household products. We expect the supply issues to begin to abate in Q4. The higher input costs and transportation costs are expected to continue, though, for the rest of the year. On past earnings calls, we described how we expected categories and brands to perform in 2021. Overall, our full-year thinking is generally consistent. To name a few categories, Demand for vitamins, laundry additives, and cat litter is expected to remain elevated in 2021. Condoms, dry shampoo, and water flosses are recovering and experiencing year-over-year growth as society opens up and consumers have greater mobility. Baking soda and oral analgesics are expected to decline from COVID highs. Now I'm going to talk about the divisions. Consumer domestic business grew organic sales 2.8%. This is on top of 10.7% organic growth in Q2 2020. Looking at market shares in Q2, five out of our 13 power brands met or gained share. Our share results are clearly impacted by our supply issues. I'll comment on a few of the brands right now. VitaFusion gummy vitamins saw great consumption growth in Q2, up 10%. Consumers have made health and wellness a priority. It appears that new consumers are coming into the category, and they're staying. So here's a supporting statistic. In the last year, VitaFusion household penetration is up 17%. That means the brand is now in one out of every 10 households. Next up is Waterpik. Waterpik grew consumption 72% in Q2 as it continues to recover from COVID lows and benefits 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. Batiste Dry Shampoo grew consumption 37%. Dry Shampoo is recovering as stores have reopened and consumers are becoming more mobile. Similarly, Trojan delivered 11% consumption growth. Society has been opening up. As restaurants, bars, and clubs have reopened, people are hooking up again. Here's a fun fact that might be a contributing factor. In Q2, Trojan launched on TikTok with an explosive uptake from consumers with over 47 million views. Next, I want to discuss international. Despite intermittent lockdowns in our markets, our international business came through with 10.4% organic growth in a quarter, primarily driven by our strong growth in our global markets group. Asia continues to be a strong growth engine for us. Waterpik, Batiste, and Arm & Hammer led the growth for the international division in the quarter. Our specialty products business delivered a positive quarter with 11.8% organic growth. This was driven by higher pricing and volume. Milk prices remained stable, and demand is high for our nutritional supplements. The prior year quarterly organic growth for specialty products was 3%, so 11.8% is an impressive result. 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 introduced OxiClean laundry and home sanitizer. It's the first and only sanitizing laundry additive that boosts stain fighting and eliminates 99.9% of bacteria and viruses. In the personal care portfolio, VitaFusion launched elderberry gummies, triple immune gummies, and power sink gummies to capitalize on increased consumer interest in immunity. Waterpik launched Waterpik Ion, a water flosser which is 30% smaller with a long-lasting lithium ion battery. It is specifically designed for smaller bathroom spaces. To capitalize on its earlier success, Waterpik Sonic Fusion, the world's first flossing toothbrush, was upgraded to Sonic Fusion 2.0, with two brush head sizes and two brush speeds, and that's doing extremely well. And finally, Flawless is taking advantage of the at-home beauty and self-care trends with at-home manicure and pedicure solutions. Now let's turn to the outlook. Since we last spoke to you in April, unplanned cost inflation has grown by another $35 million. In addition to the price increases on 33% of our portfolio that we announced in April, We have just announced price increases on other categories, which means we have now priced up 50% of our portfolio. Of course, there is a lag on the positive impact of these increases, which impacts our earnings outlook. We now expect to be at the lower end of our range of adjusted EPS growth of 68% as a result of heightened input costs. Although we expect to be at the low end of the range, It's really important to remember that we are comping 15% EPS growth in 2020. We expect full-year reported sales growth of 5% with 4% full-year organic sales growth. It's also important to call out that we are committed to maintaining the long-term health of our brands by ensuring sustained high levels of marketing investment in the second half. In conclusion, July consumption continues to be strong. We are navigating through significant supply challenges and cost inflation. We believe we are well positioned for 2022 with the pricing actions we have taken. We expect our portfolio brands to do well, both in good and bad times, and in uncertain economic times such as now. We have a strong balance sheet, and we continue to hunt for TSR-accretive businesses. Next up is Rick to give us details on Q2.

Thank you, Matt, and good morning, everybody. We'll start with EPS. Second quarter adjusted EPS, which excludes the positive earn-out adjustment, was $0.76, down 1.3% to prior year. And as we discussed in previous calls, the quarterly earn-out adjustment will continue until Q4, which is the conclusion of the earn-out period. $0.76 was better than our $0.59 outlook, primarily due to continued strong consumer demand for many of our products, as well as a temporary reduction in marketing spend as supply chain shortages were impacting customer fill rates. which we expect to recover in Q4. The $0.76 includes a $0.04 drag from a higher tax rate and a $0.04 drag from the VMS recall costs. Reported revenue was up 6.4%. Organic sales were up 4.5%, driven by a volume increase of 4.3%. Matt covered the top line, and I'll jump right into gross margin. Our second quarter gross margin was 43.4%, a 340 basis point decrease from a year ago. This was right in line with our outlook for down 350 basis points for the quarter. Gross margin was impacted by 480 basis points of higher manufacturing costs, primarily related to commodities, distribution, and labor costs. Tariff costs negatively impacted gross margin by an additional 50 basis points. These costs were partially offset by a positive 40 basis point impact from price volume mix and a positive 140 basis point impact from productivity programs. as well as a 10 basis point positive impact from currency. Moving to marketing, marketing was down 5.3 million year-over-year as we lowered spend to reduce demand until fill rates could recover. Marketing expense as a percentage of net sales decreased 100 basis points to 9.2%. We continue to expect full-year marketing expense as a percentage of net sales to be approximately 11.5% in line with historical averages. For SG&A, Q2 adjusted SG&A decreased 140 basis points year-over-year with lower legal costs and lower incentive comp. Other expense all-in was $11.4 million, a $3.3 million decline due to lower interest expense from lower interest rates. And for income tax, our effective rate for the quarter was 24% compared to 19.6% in 2020, an increase of 440 basis points primarily driven by lower stock action exercises. You will hear in a minute this also impacts for full-year tax rates. And now to cash. For the first six months of 2021, cash from operating activities decreased 42% to $344 million due to higher cash earnings being offset by an increase in working capital. Accounts payable and accrued expenses decreased due to the timing of payments. As a reminder, in the year-ago numbers, there was an $80 million benefit in Q2 related to the timing of U.S. federal income tax payments shifting from the second to the third quarter in the prior year. We expect cash from operations to be approximately $950 million for the full year. As of June 30th, cash on hand was $149.8 million. Our full-year CapEx plan is now $140 million as we continue to expand manufacturing and distribution capacity, primarily focused on laundry, litter, and vitamins. The decrease from our previous $180 million is project timing related. For Q3, we expect reported sales growth of approximately 3%, organic sales growth of approximately 1.5%, entirely due to supply chain constraints. We expect gross margin expansion in the quarter. led by our price increases. Adjusted EPS is expected to be 70 cents per share, flat from the last year's adjusted EPS, as strong operating performance is offset by a higher tax rate. And now for the full-year outlook. We now expect full-year 2021 reported sales growth to be approximately 5%, organic sales growth to be approximately 4%. Our consumption is strong and outpacing shipments. We expect our customer fill levels to improve by Q4. Turning to gross margin, we now expect full-year gross margin to be down 75 basis points. This represents an incremental impact from our last guidance due to broad-based inflation on raw materials and transportation costs. Our April outlook expected gross margin to be flat for the year and 90 million of inflation from our original guidance. Now we're absorbing 125 million of incremental costs for the full year. This additional 35 million of inflation drives the change in our gross margin outlook. We've taken another round of pricing actions with over 50% of our global brands having announced price increase. While some of this benefit helps the second half of 2021, most of the benefit is in 2022. As a reminder, we price to protect gross profit dollars, not necessarily margin. The $35 million movement versus our previous outlook is primarily non-commodity related. Transportation, labor, third-party manufacturers, and other raw material price increases make up the majority. Commodities are also up. And while we have 80% of our commodities hedged, let me give you a sense of what's going on with major commodities. Over the past few months, second half expectations for resins have moved up considerably. For example, previously in our forecast, it was based on HDPE being up 30% in the second half of the year. Now it's up 60%. PolyPro has moved from being up 40% to now 90%. In addition, transportation costs, such as diesel, have continued to rise. We previously expected second-half diesel to be up 18%. Now it's up 27%. Cartons and corrugate previously were single-digit. Now they're low double-digit. So that's the latest thinking on commodities, and now we'll move to tax. Our full-year tax rate expectations are now 23%, higher versus our last expectations due to lower stock option exercises. This is a 4-cent drag versus our previous outlook. We now expect adjusted EPS to be the lower end of our previous range of 6% to 8%. Our brands continue to go from strength to strength as strong consumption and organic sales growth lapsed almost 10% organic growth a year ago. While inflation is broad-based, we have taken pricing actions to mitigate, which gives us confidence in margin expansion in the back half. And with that, Matt and I would be happy to take any questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Camille with Credit Suisse. Your line is open.

Hi, thank you. Good afternoon or morning or whatever it is. A couple questions on the supply constraints, which is, are you running into constraints because perhaps demand is better than you thought and you can't keep up? Is it that there are certain pieces within the supply chain that just tightened up, maybe a particular bottleneck that's isolated? Can you just maybe just give us a bit of maybe more detail into exactly what's going on there?

Yeah, the issue is not that we're capacity constrained. We have capacity. The issue is getting components. That could be raw ore packaging materials, chemicals, et cetera. And, you know, the reason there are shortages is because our suppliers are having trouble getting labor into their plants to actually make their raw packaging materials. And then that's exacerbated by the fact that sometimes you can't get the product delivered, particularly if you're sourcing components or ingredients from Asia and you're dealing with containers. So not a capacity issue. It's entirely due to the ability to get labor. And in some cases, it's because of the freeze. We had force majeure for half a dozen years. of our suppliers, chemicals. If you recall earlier in the year, the Texas freeze. So we're not quite out of the woods on that one yet either.

Yeah, the only thing I would add to that is the force majeure comment, like we said publicly back in Q1, we had around six of them. We had 10 or 11 this quarter. So it's just pure disruptions in the supply chain.

Okay, got it. Maybe just your best guess on is the labor issue abating at all? Are these comments related to 2Q and maybe you're seeing it abate or does it seem, is your view that it's likely to be an ongoing thing?

Well, we think it's starting to abate. We're seeing that from some of our suppliers and co-packers. You'd have to say that the weekly unemployment supplement is contributing to the labor shortages. And, of course, that's going to roll off in September, so you'd think that things would loosen up a bit come the fourth quarter.

Yeah, and we look at demand planning all the way back to the entire supply chain, and all of our independent forecasts say that the raw material input costs and whatnot were at recovery late Q3, early Q4. Okay, great. Thank you.

All right.

Thank you. Our next question comes from Rupesh Parikh with Oppenheimer. Your line is open.

Good morning, and thanks for taking my question. So I also have a few questions on the supply chain disruptions. Any more color you can provide in terms of what categories are impacted? And as you think about the adjustment to your organic sales growth guidance for the year, is it fair to say that, you know, maybe you could have even raised it if you didn't have these supply chain disruptions?

Yeah, that's a fair question, Rupesh. I think, you know, coulda, woulda, shoulda, but consumption is really strong. You know, Matt said it in his prepared comments, and I did as well. And so if you look at consumption, it's really high single digits in the quarter, and we were closer to, you know, 2.8% organic. So definitely we are constrained, and if you roll that forward to the full year, then We likely would have been at the top of the range on revenue, if not for supply chain disruptions.

Yeah, Rupesh, to answer the other half of your question, if you pick up the release and you look at the schedules in the back, and I'm sure you have, you'll see that household products is down year over year. And so that's where it's most acute. So fabric care shipments are constrained. by supply shortages. We've got plenty of demand out there, but the shortages are affecting the household side of the business, which would include both the laundry detergent, stain fighters, and litter. So we do expect they'll be out of the woods by the end of the third quarter.

Okay, great. And then I guess from a retail perspective, as you go to – I know you look at your leading retails, Walmart, and some of the other players – Are there starting to be out-of-stocks out there, or do you expect to see out-of-stocks, I guess, sometime this quarter within some of those categories?

No, I think we kind of live in hand-to-mouth right now. If we were to get worse than what we have today, I think we would have out-of-stocks. I think our most acute area for out-of-stocks would be on oxy-clean sprays right now, the triggers.

Okay, that's really helpful. Thank you very much. Okay.

Thank you. Our next question comes from Kevin Grundy with Jefferies. Your line is open.

Hey, good morning, guys. Hey, Kevin. A question for both of you on pricing. Matt, I think the comment was that you now will price over 50% of the portfolio. A couple questions related to that, because it would certainly seem like there's a cost justification across the board. Have you led where you can lead at this point? Is there an expectation then that the competition will ultimately move and that's not in the guidance? Maybe just some parameters a little bit around what has not been priced and why not at this point. And then, Rick, maybe just later on there, what portion of the commodity cost exposure over the next 12 months do you think you have captured here with current pricing?

Yeah, well, you hit the nail on the head, Kevin. Price increases do need cost specification. They're greater in some categories. but you also have to keep an eye on the competitive set. So we are looking at the rest of the portfolio now to see whether it makes sense to have a 2022 price increase. And the other thing we're going to do is we're going to review the price increases that we've already taken on the first 50% and ask ourselves if those need to be revisited. As far as the price increases go, we announced in April for – Those are taking effect now in July. We know at least one other competitor has said publicly that their prices are going up in Q4. So we may have some temporary price gaps in Q3. And then on the litter side, we've raised price there. That pricing has shelved mid-October, and we know that one major competitor has already raised price as well. So we've seen that. And I think Rick mentioned on the earlier call in April that when we were planning this, we were not assuming that competitors would follow. So the fact that since then in the laundry and litter, we've heard and seen that from a couple of competitors, that's a good indication for us. Rick, anything to add?

Yeah, the only thing I'd add is on your first question, Kevin, you just asked for kind of a roll forward for 2022. And the simple way to think about it is, When we gave our April outlook, inflation was a minus 300 basis points, and that was what was included in our flat guidance. Now our inflation number is closer to minus 375. That's kind of the entire change from going flat to minus 75. And that minus 375 for the full year is kind of an indication of the inflation that we've seen for the whole year. inclusive of the first 90, inclusive of the new 35 million that we're talking about. As we exit the year, we think price-volume mix will be a tailwind of like 285 basis points. So that's probably a good way to gauge it is we're not quite recovering all of our inflation yet, but we've only priced half the portfolio.

Got it. Thanks. If I did just squeeze in one more, guys, maybe just on M&A, the pipeline, and if any of the volatility, which certainly I think we would say would be transitory over the next, call it, you know, two to four quarters here, supply chain, working through some of the COVID volatility, et cetera, at least certainly that would be the hope. Does any of that give you pause with transacting from an M&A perspective until things kind of settle a bit? And I'll pass it on. Thank you.

Yeah, is your question, Kevin, would we be reluctant to buy a business that had a COVID bump?

Just in general, Matt, just in terms of, you know, even buying off, putting multiples on NTM sort of earnings and, right, just given some of the volatility around supply chain, does COVID flare up here a little bit? You guys have done a fantastic job over the years from an M&A perspective, but even that being said, does any of that give you some pause here given some volatility over the next 12 months?

Yeah. Well, look, we are wary of businesses that had a big COVID bump. Remember, we bought one in December. We bought Zycam. They were number one in cold shortening, 73% market share. And we bought that for the future because we know that's going to be a strong contributor to sales and profits, not only in 22, but years ahead. So So, yeah, we will have a degree of skepticism, but I can tell you there are things for sale right now that we are looking at. It's a question of whether they're going to meet our criteria. Got it. Good luck, guys. Thank you. Okay. Thanks, Kevin.

Thank you. Our next question comes from Olivia Tong with Raymond James. Your line is open.

Great. Thanks. Good morning. I wanted to ask you a little bit about your view on trade promotion and the levels of trade promotion right now, particularly as you put in the pricing. If you could just talk to the first few weeks of impact of that. I know it's very early days with respect to laundry, but any retail response, consumer response so far that you can see. And then for the second tranche of pricing, if you could just talk to the magnitude of change that you're looking for there. That would be great. Thank you.

Yeah, thanks, Olivia. So your second question first is we won't really get into the magnitude of change, right? We'll be very clear next quarter after it's in market, and we'll disclose some of what we did for laundry. You know, laundry was high single digits, and so we'll do the same thing for litter and some of the other items in three months. We'll go through that detail.

On your first question. Yeah, with respect to what sold on deal, it's a little early to draw any conclusions about what's going on at shelf. I think It's important to have the backdrop of Q2 for both laundry and litter. You know, take litter, for example. Year over year, sold on deal for litter was actually down 80 basis points. The categories right now, promotion in the second quarter, around 13% sold on deal. Historically, it's around 19% to 20%. And so it's pretty off its normal sold on deal percentages. But we do know that one major competitor besides Arm & Hammer has had supply issues as well in the second quarter, which I'm not going to name. So that may have contributed to the fact that litter sold on deal was down in Q2 for just about all competitors. For laundry, Q2 was up almost 1,200 basis points to about 32% sold on deal for a liquid laundry detergent. Remember, last year promotions were pulled, so it's not surprising that there would be a rebound this year. We actually had the lowest increase in sold-on deal, up 700 basis points in Q2, and our lower promotions made sense in the context of supply shortages. And obviously, going forward, we want the price to stick, so the promotions would also be limited as well.

And as to the price increase, again, it was early July, so it's only been a few weeks, so we're reluctant to comment. I would just tell you that it's as we expected to date.

Got it. Thanks. If I could just ask two more questions. First, in terms of your sales guide, the change of the sales guide, obviously some supply chain and disruptions. but specialty was actually quite a bit better. I know it's a lot smaller, but just thinking about your view in terms of the mix of contribution to the top line for the full year and then a follow up on the margins. Just kind of curious how you're thinking about operating margin expansion long term and the leverage you can pull in order to get back on track with respect to margin expansion, because obviously pricing is a piece of that, but Mix is not as big of a factor for you guys relative to some of your peers, and then you're already so good at overhead control, so just wondering how much you can push on the G&A or the S&A as an offset. Thanks so much. Appreciate it.

Olivia, you squeezed in a multi-part, half a dozen questions there as you're walking off the stage. I'll start with the SBD. As far as the SBD business goes, yeah, it had a really good Last year, the quarter was up 3%. This year, up 10%. But if you look in the release, you'll see that price was half of that growth. So we have been raising prices in SBD. We probably were the earliest of all three divisions of raising price, especially products. And that's both on the animal side and also on the bulk sodium or carbonate side. Volkswagen by Carbon is oftentimes a contracted business, but the non-contracted volume, we've been raising price. So that's a steady business, a good quarter. It'll have a good third quarter as well.

Yeah, the only thing I would add to that, Olivia, is our outlook for the divisions. We told you last quarter was domestic was 4%, international was 6%, and SPD was 6%. I think if we had to rejigger that today, it would be more like 3, 6, 9%. So domestic at 3%. largely because of the supply constraints. International consistently at six, and then SPD now is at nine. As far as your gross margin question, look, I think you're right. Pricing over the long term recovers the inflation, and so that is a good guy and a bad guy, and they kind of wash over time. Look, we have a lot of confidence in our evergreen model, and it's only 25 basis points of expansion. So we're going to get that over the long term through productivity, through innovation, and through MIX. And we're doing a lot of work internally on MIX, actually, and using technology to trade optimize and product optimize across retailers. And so that work is ongoing. But those are three levers that we have.

Thank you. Thank you. Our next question comes from Steve Powers with Deutsche Bank. Your line is open.

Hey, guys. Thanks. You gave good comments on the supply constraints and the solar rate issues, but two questions to follow up. First, you talked about this a bit on litter, but is there a way you can frame or clarify the issues relative to competition and whether you're, you know, are you saying you're disadvantaged on this front? And so if that's a concern or not really, number one. And then number two, if these constraints, you know, endure longer than you expect, is the playbook to pull back on marketing for longer? And at what point would that become a concern? Not saying that it is now, but just at what point do you get concerned on that front? Thanks.

What was the first one?

Competition.

Yeah, you had a question about litter.

No, it wasn't really about litter. I think you mentioned that you share the same issues on litter as your competition, but just generally, is it you or is it everybody?

I think we have different issues. We don't have the same issues as our competitor. We just happen to know that there are some supply constraints that they're dealing with that are affecting their ability to ship. That's all. I think everybody's got different types of issues.

Yeah, and in other categories, is it, again, is it everybody or is it you even if the issues differ?

Well, you know, the Texas freeze isn't just us. Those chemicals affect lots and lots of companies and lots of competitors. So I would say on the chemical side, And transportation side, it's very similar between us and competitors. And, you know, labor shortages as well. If you have suppliers or co-packers, that's universal. So I don't know that there's anything that's unique to Church and Dwight. Okay, great.

Maybe Rick on marketing?

Yeah, you know, on marketing, I think we've been very clear. You know, when we look at all of our forecasts and all of our internal information, we think we're going to be recovered by late Q3, early Q4. We think the marketing is good, you know, demand-driving activity and kind of healthy. You know, we have put price increases out there for the back half, so we want to make sure we're supporting our brands in a healthy way. You know, five of 13 brands gained share, and part of that is lower than normal, and part of that's because there's supply constraints. So we want to make sure that once that's not a factor, that we're supporting the brands like we should, and that's the plan. If, for some reason, supply constraints last longer, then, of course, we would adjust as necessary.

Okay, okay. And then just real quick on the tax rate, is the expectation that we revert back lower beyond 21, or is the higher tax rate to be extrapolated?

Yeah, you know, the core issue with the tax rate is really it all comes down to stock options exercised, and typically we've had around 2 million stock options exercised every year if you go back and look for many years. In 2020, it was 3 million, and our forecast this year is a little less than a million now. And so we think – You know, perhaps due to the run-up in the share price last year, that was really maybe a pull forward of a year worth of stock options potentially. So we think that it will normalize back to 2019 levels is the quick answer.

Okay, great. Thank you.

Thank you. Our next question comes from Bill Chappell with Truist Securities. Your line is open.

Thanks. Good morning. Hey, Bill. To maybe oversimplify, but I need that because I'm a fairly simple person. Is it safe to say just commodities and input costs were kind of moving higher when you last reported in late April? You were kind of taking a best guess of where they would play out for this year. They kept moving throughout the quarter but did peak at some point in the quarter. So now you have a lot more confidence there. you know, kind of where pricing and costs are for the remainder of the year? Is that the right way to look at it?

I think that's one aspect of it, Bill. I think that's a good way to say it. And then also we've had more broad-based inflation beyond commodities than we expected, right? I used the example at our board meeting, how we've never talked about pallets in the history of me being here for cost impacts. And our pallets went up by $2 million in the back half. So it's just really broad-based inflation. All the third-party manufacturers are passing on the 2%, the 3%, the 4% issues that we've been talking about. So I think we have a great handle on it now. And meanwhile, what are we doing about it? We're qualifying a lot more suppliers just to have backup redundancies and flexibility.

And on the cost side, do you feel like there's any disadvantage, I mean, in terms of your scale? And I see that you're a $5 billion business, but really you're 15, 3 to $500 million businesses. And so I just didn't know if the suppliers are treating you differently versus maybe a billion-dollar competitor or if it's kind of across the board fairly similar.

Yeah, I think this is across the board. It's pretty broad-based. I think if you look at – and you have, but other peers in the industry right now, even some of our European partners – peers, then it's really broad-based and it's across the spectrum. It doesn't really matter if you're a $2 billion, a $5 billion, or a $50 billion company.

Got it. And then one last one to kind of follow up. I don't typically ask about the M&A pipeline, but with the sheer number of SPACs and consumer-focused SPACs, with the IPO market being fairly prolific, I mean, is it Kind of safe to say that some of the traditional $200 to $500 million revenue businesses that you would target are less likely over the foreseeable future just because they have other options. I imagine most of these companies are getting an offer a day to go public one way or the other. So just any thoughts there?

Yeah, there's a lot of logic in that, Bill. There's no question that there are other destinations available. like SPACs that companies looking to monetize their investment can take. But, you know, based on what we're looking at right now about what's coming to market and what will be at auction, we think we'll have plenty to look at at least in the next six months.

Yeah, keep in mind, similar to private equity, Bill, I mean, SPACs are the same. We have an ability to pay more typically because of the synergies that we can generate. So that's always important. Now, when it's a data middle acquisition, that's always a great benefit.

Got it. Thanks so much for the color.

Okay.

Thank you. Our next question comes from Andrea Taxera with J.P. Morgan. Your line is open.

Thanks, guys. So first on international and then a clarification on the cost outlook. On the international side, I know it's a smaller portion, but we dedicate most of the time for U.S., SOC. I wanted to just see, like the U.S., the 6% growth that you just reiterated for international, because obviously that's the long-term algorithm. But given that you had a very strong start of the year, and how are you seeing, given that you've got this more conservative guidance for top line in the back half, And you're obviously up against a meeting's comp for the balance of the year. Are you assuming that it goes negative in the back half? So I want to clarify that. And also in the new guidance, Rick, you're expecting commodities. Are you betting that commodities and transportation will ease, or are you assuming that they will stay as we see on spots on your head?

Yeah, let's talk about international, for starters. Yeah, we've had a good second quarter. We're saying 6% for the full year. But we are cognizant of the fact that we see intermittent shutdowns in many of the markets where we have businesses. So we have to keep that in mind. And we get this Delta variant as well, which could result in even further, more expansive shutdowns. lockdowns and effect on consumer mobility in international markets. So that's what tempers our enthusiasm.

And in terms of comps, Andrea, you do have to be mindful of our growth rates a year ago, international, right? In Q2 a year ago, we were flat. We were 0.6% on organic growth. And so the 10.4% this year, it's very impressive. It's off a flat prior year. Q3 and Q4, Last year, the back half was mid-teens, so 13% growth. And so if you look at our guidance, it implies, I don't know, 5% or 6% growth in the back half. But when you do the stack, it actually looks like the international business is very, very strong. Okay. And then your second question was really on the On the commodity outlook, well, as of right now, I kind of just went through some of the numbers with the latest expectations on resins, as an example, and paper and diesel. Right now, our outlook implies that the commodities stay where they're at today. We're not banking on a decline or a movement down on commodities for the balance of the year.

Okay, that's great. Thank you, Professor.

Okay.

Thank you. Our next question comes from Lauren Lieberman with Barclays. Your line is open.

Great. Thanks. Good morning. I know we've talked a lot about supply chain, but I had to just follow up, I think, in the line of questioning that Bill Chappell embarked upon. I mean, my question looking at what happened this quarter and what you're talking about is just if there isn't something to consider in terms of you guys just running too lean, right? I mean, that's been a hallmark of the way that you operate the business, but what When you look at this quarter and the conversation on supply and so on, it feels like you've exposed yourselves to business risk that other companies are, frankly, finding the way to manage through. So maybe it's too early to talk about, but just thoughts about how, looking forward, you might want to set up differently so that you can better weather these sorts of storms.

Yeah, well, I'm surprised that would be your conclusions. considering that we're saying that our full-year organic is going to be up 4%. It's going to be the fourth year in a row that we have organic sales of 4% or better. And in spite of the fact that we have $125 million in unplanned incremental costs, that our full-year range of 6% to 8%, you know, we found our way to 6%. So I would say that the company has proven that it's resilient, actually, faced with those kind of cost increases. And, you know, I think it's temporary with respect to the supply issues. We will get – that will be behind us at some point. But, yeah, go ahead, Jim.

Well, the only thing I would add is, look, some of our competition is vertically integrated in some aspects of their supply chain. And some of these examples were not vertically integrated. We've chosen not to do that. We don't think it makes much sense. And in times like this, it might hurt a little bit. But overall, we're doing the best we can to move our, whatever it is, 300 to 400 suppliers and add 90 more, right? Add the flexibility, add the capacity there. So our flex capacity as we exit this COVID-type environment is going to be greater than it's ever been before.

Yeah, that's a good point. And, Lauren, that's not a throwaway comment. Over the past 18 months, we've qualified 90 suppliers. additional suppliers and co-packers so that as we come out of this, we're going to be far more resilient. And that started last year when we saw how COVID exposed some of the weak links in our supply chain.

Okay. Thanks, Rick. That's exactly what I was asking and looking for. Okay. Next question was just on gross margin. I'm actually having a little bit of trouble as I play around with numbers and the sequential improvement that you're talking about. Because volume, I would think, I know you get pricing coming in, but volume will be a little bit challenging on that price-volume mix line. I guess the implied sequential improvement and then also, I guess, the commodity headwind. I don't know if the best way to attack it, it might be offline, but kind of the big sequential changes in the gross margin bridge that help you get to, I think you said modest expansion in 3Q. That would just be helpful.

Yeah. So maybe what I'll do for right now is just give you the second half kind of gross margin bridge. And of course, Q3 will be, you know, it will be positive. It'll be slightly positive, more of the margin benefits in Q4 as we fully lap or fully have the price benefit. But the second half gross margin outlook, right? The first half is down 230. The second half is up 80. And price volume mix is a tailwind of what we think is 285 basis points. Inflation is a headwind of around 285 basis points. We have incremental tariffs of the 35 basis points, which is a little bit better than it was in the first half because we had tariffs starting a year ago. We have productivity programs of around plus 85. The acquisition for largely Zycam helps on margin by about 40 basis points, and then currency is a little bit of a drag. So that's how we get to plus 80 in the back half.

Okay. That's super helpful. And then final thing, which is on the incentive compensation callout this quarter, I guess I was curious if that was at the outset of the year what you had anticipated or if that's something that was true this quarter and how to think about that in terms of S&A for the balance.

Yeah, no, it's an impact on the quarter. It's an impact on the full year. It's probably why our SG&A is down in both cases for the quarter and the full year. And that wasn't expected, but it's a reality now because we're one of only, you know, we're the exception in the industry that has gross margin tied to incentive comp. And right now our gross margin is down 75 basis points. That was not the plan. That was not the incentive plan. And so that has a favorable impact, unfortunately, on the SG&A numbers.

Okay, understood. Thank you so much, both of you.

Okay, Lauren.

Thank you. Our next question comes from Chris Carey with Wells Fargo Securities. Your line is open.

Hi, thank you. I just wanted to clarify a couple things around pricing. I think you said your main competitor or large competitor, Litter, has already priced Clearly there was some revenue growth management initiatives by competitors in laundry. You know, and so those are, you know, two categories where presumably it seems people, you know, companies have already moved and then you're moving. So is there a read there that you're comfortable following with pricing and so you want to see pricing happen in other categories first? I suppose just confirm whether, you know, I heard that right. And then just, you know, connected to that, It sounds like pricing and laundry is going okay early days, but you also have supply issues in households. And did it sound like it's mainly in, you know, areas where it's like components or, you know, could supply chain issues actually, you know, have an issue on, you know, getting pricing through in laundry if you start to experience amount of stocks? So just some clarification and further perspective on some of those line items would be helpful.

Yeah. Well, lastly, pricing has been accepted by the trade in laundry. So that's sort of behind us right now. Litter is ahead of us. That's going to be taking effect in Q4. But we think both for laundry and for litter by Q4, we'll be out of our supply issues. You had a question about raising price, not just in laundry and litter, but in other categories, which we have. So, for example, Nair, OxiClean Stain Fighters, baking soda. We announced one variant of Trojan condoms. Waterpik will be raising price as well. So we've been able to – we're announcing price increases in many categories. And keep in mind that we are the number one brand in stain fighters, depilatories, water flossers, baking soda, et cetera. So we do have some strength in the ability to lead there. And your other question with respect to what are the issues with respect to laundry, I mentioned earlier in my comments that because of the Texas freeze, there are issues with chemicals, and that affects both liquid laundry detergents and unit dose, and we expect that to be abating as well. I don't expect the shortages to impact our ability to succeed in pushing through price.

Okay, thanks so much. If I could just squeeze one in, and again, keep it quick. Your promo and coupon has been a relative lever for Church's White because of cutting it less than some of your competitors. Have you... exhausted that flexibility that you did have in the P&L in the back half in another way, taking your couponing and promo levels closer to peers, or does that remain a lever at your disposal as things get worse?

Yeah, I mentioned earlier on litter, the litter category sold on deal is around 12-13%, whereas historically it's around 19-20%. So We and competitors are all have a depressed sold-on deal. And with our announced price increase and another competitor has seen price increases as well, we don't expect that to change in the second half. And as far as laundry goes, we are up quite a bit. We're over your 700 basis points. We're not as high as our competitors are. Nor do we expect to be, at least for the next 90 days, because our price increase has to take hold, and we don't want to detract from that with promotions.

Okay. Thanks so much.

All right.

Thank you. And as the last question of the day, I would now like to turn the call back over to Matt Sparrow for closing remarks.

Okay. Well, thanks, everybody, for joining us today. We'll talk to everybody again in 90 days, and we'll see how the Q3 went. So talk to you end of October. So long.

This concludes today's conference call. Thank you for participating. You may now disconnect.