Church & Dwight Company, Inc.

Good morning, ladies and gentlemen, and welcome to the Church and Dwight First Quarter 2022 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 and Dwight. Please go ahead, sir.

Okay, 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 Durker, our CFO. And when Rick is done, we'll open the call for questions. Q1 was a solid quarter for us. Reported revenue was up 4.7%. Organic sales grew 2.7%, and we exceeded our 1% to 2% Q1 outlook for organic growth. The adjusted EPS was 83 cents, and that's 8 cents better than our outlook. We grew consumption in 11 of the 17 categories in which we compete, and in some cases on top of big consumption gains last year. This is remarkable as our low fill rates held back our consumption. The good news is April fill rates across many categories are now mid to high 80s and improving. Regarding brand performance, our brands saw a double-digit consumption growth in seven of those categories, and I'll name them for you. Arm & Hammer Scent Boosters, Arm & Hammer Baking Soda, Arm & Hammer Clumping Litter, Batiste Dry Shampoo, Waterpik, Water Flossers, Zycam Zinc Supplements, and TheraBreath Mouthwash. In Q1, online sales as percentage of total sales was 16%. Our online sales increased 2.6% year over year. Now, keep in mind, this is on top of 53% growth in e-commerce that we experienced last year in Q1 versus 2020. We continue to expect online sales for the full year to be above 15% as percentage of total sales. Now, since early 21, we have announced price increases to combat inflation. And through early 2022, we had already announced price increases covering 80% of our global portfolio. Since we spoke to you last in January, we are now expecting $85 million of new incremental cost inflation. And as a result, we recently announced another round of price increases on our fabric care and litter products, which will be effective in July of this year. In addition to pricing, we are pursuing additional measures to offset higher than expected costs, such as productivity and pack size changes. Also in laundry, you may know we have now concentrated our portfolio by approximately 10%. Now I'm going to talk about each business, and first up is the consumer business in the U.S. Consumer domestic business grew organic sales 2.7%, and this is on top of 5.1% organic growth in Q1 of 21. Looking at market shares in Q1, seven of our 14 power brands gained share. Our most recent acquisitions are performing well. TheraBreath, which we acquired in December of 21, had a great quarter with 37% consumption growth. TheraBreath grew share 3.6 points to 15% of the alcohol-free mouthwash category. And Q1 was the first full quarter in which TheraBreath surpassed ACT as the fourth largest mouthwash brand, and Thoroughbreath remains the number two alcohol-free mouthwash brand. Total distribution points, or TDPs as we call them, for the Thoroughbreath brand are up 20% versus a year ago. Zycam also delivered strong results this quarter. You may recall we acquired Zycam in December of 2020. We were hurt in year one of our ownership due to masking and social distancing. Zycam cold remedy consumption was up 56% in Q1, and we expanded our share of the cold shortening segment to a little over 75% share. Turning to gummy vitamins, total shipments of VitaFusion and Little Critters were relatively flat in the quarter. Demand for gummies remained high as the category consumption grew 11%, but our case fill was low. So we left money on the table. The good news is our fill rates, also in vitamins, are finally starting to improve. Next up is international. Despite significant disruptions, our international business did deliver some organic growth in Q1, 0.3%, primarily driven by Ceramar, Batiste, OxyClean, and VMS in the global markets group. Lockdowns and transportation issues hurt our results. We have the orders. We're just struggling to fill them. We expect our difficulties to abate in the second half in international. Next up is specialty products. Our specialty products business delivered a strong quarter, 9.2% organic growth driven by both higher pricing and volume. I want to spend a few minutes on the health of the consumer, private label trends, innovation, and our ability to supply. Now, we all know that inflation is at a multi-decade high. Interest rates are rising to tamp down inflation. And while wages have risen, households are getting squeezed, and we expect consumers will start to make choices to make their dollars go further. We have seen Netflix lose subscribers, but here are a few indicators that we're seeing. First, consumption of value detergent was flat year over year in Q1, and this is after losing share to premium detergent for several quarters. Over in cat litter, our traditional Arm & Hammer Orange Box cat litter, which is a value product, grew faster than our premium Arm & Hammer cat litter in Q1. Over in personal care, Waterpik is seeing faster growth of lower priced price point models in the foster business. And then in showerhead, showerhead category consumption is slowing, which may be an indicator that consumers may be spending less on home improvement. Now, we're keeping an eye on these trends, and we are prepared if categories become more promotional in the second half. It's important to point out that 40% of our portfolio is value, and we expect to perform well in a difficult economic environment. And just to remind everyone, our largest businesses, laundry detergent and vitamins, are value products. And in litter, our orange box is also value. So we feel well-positioned for what may be coming. Now, regarding private label, private label shares are stable in the five categories where we have meaningful exposure to store brands. As you saw in the release, we have a strong lineup of innovation across our personal care and household categories. Most of these new products are shipping in Q2, and we believe our consumer is always attracted to new and improved product offerings. Regarding our ability to supply, we hit bottom early in Q1 with the Omicron resurgence, and we saw our fill rates dip below 80%. As I mentioned earlier, April fill rates are trending toward the mid to high 80s, and we're on track to be at historical fill levels by the end of the year. So we have confidence in our full-year outlook for several reasons. We have improving fill rates. We have new product innovation hitting the shelves by July 1. Two-thirds of our marketing spend is concentrated in the second half. We have the incremental impact of pricing, and we have the positive effect of concentration on consumption. So in closing, we expect our portfolio of brands to do well both in good and bad times, and we continue to hunt for new TSR accretive businesses. And next up is Rick to give you more details on Q1.

Thank you, Matt, and good morning, everybody. We'll start with EPS. First quarter adjusted EPS was 83 cents, flat to prior year. The 83 cents was better than our 75-cent outlook, primarily due to continued strong consumer demand, driving higher than expected sales, as well as better gross margin than expected. Reported revenue was up 4.7%, and organic sales were up 2.7%. Now let's review the segments. First, consumer domestic organic sales increased by 2.7% due to positive price mix offset by lower volume. As anticipated, the discontinuation of Waterpik Shower Club programs was a drag to organic growth. We also experienced some bumpiness in the month of March and continued into April due to the laundry concentration transition. Good news is we are through that now. Consumer International had flat organic sales in Q1 due to broad supply chain disruption and laundry portfolio decisions in Canada. And for our SBD business, organic sales increased 9.2% due to higher price mix and volume. Milk prices have increased throughout Q1 and are projected to level out as 2022 moves forward. Our first quarter gross margin was 42.6%, 190 basis point decrease from a year ago. Let me walk you through the Q2 bridge. Gross margin was impacted by 550 basis points of higher manufacturing costs, primarily related to commodity inflation, distribution, and labor, as well as a 10 basis point drag from currency. These costs were offset by a positive 270 basis point impact from price volume mix, positive 30 basis points from acquisitions, and a positive 70 basis point from productivity. Moving to marketing, marketing was up 3 million year over year. Marketing expense as a percentage of net sales was 7.9%. For SG&A, Q1 adjusted SG&A decreased 50 basis points year over year. Other expense all in was $14.5 million, a $2.9 million increase resulting from higher average debt outstanding. And for income tax, our effective rate for the quarter was 23.2% compared to 24.2% a year ago, a decrease of 100 basis points. We continue to expect the full year rate to be 23%. And now to cash. For the first three months of 2022, cash from operating activities increased 53% to $153 million due to improvements in working capital, partially offset by lower cash earnings. We continue to expect cash from operations to be approximately $920 million for the full year, and as of March 31st, cash on hand was $174 million. Our full-year CapEx plan continues to be approximately $200 million as we continue to expand manufacturing capacity focused on laundry, litter, and vitamins. For Q2, we expect reported sales growth of approximately 5 to 6 percent and organic sales growth of approximately 3 to 4 percent. This is sequentially higher from Q1 as we expect an improvement in case fill levels after seeing April trend up into the mid to high 80s. We expect Q2 gross margin to contract 200 basis points as we continue to experience higher inflation ahead of the latest round of price increases. Adjusted EPS is expected to be 70 cents per share. An 8 percent decrease from last year's adjusted Q2 EPS. This means our first half earnings will be down approximately 4%, consistent with what our outlook was in January. And now for the full year outlook. We continue to expect the full year reported sales growth to be approximately 5% to 8%, and organic sales growth to be approximately 3% to 6%. As you read in the release, we now expect an incremental $85 million of cost inflation compared to our original outlook. We're planning on incremental pricing, laundry compaction, and productivity to help offset We continue to expect 10% plus operating income growth to offset a 320 basis point increase in the effective tax rate. We continue to expect full-year EPS in the range of 4% to 8%. However, we now expect to be at the low end of the range. And with that, Matt and I would be happy to take any questions.

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. Your first question comes from the line of Kevin Grundy of Jefferies. Your line is open.

Great, Kevin. Thanks. Good morning, guys. Hey, Matt, maybe just start on international. You talked a little bit about some of the supply chain issues you guys are contending with, and you sound pretty optimistic that they'll recover in the back gap. The business has been so good now for a number of years. We just haven't been accustomed to Just seeing that. Maybe just walk through the issues in a little bit more detail. I think you mentioned lockdown. You know, we haven't talked about China in a while, but I think that's a smaller part of your international business. Maybe just get a little bit more granularity on the international business in the quarter and your confidence for the balance of the year.

Yeah. So we had a 0.3% organic growth in Q1. It won't be much better. by the way, in Q2. So expect it's going to be back and loaded starting in Q3. And, yeah, we said in our remarks that we have lockdowns we're dealing with in international. And the bigger problem, actually, is deliveries, just getting product to deliveries. And this is especially prevalent in the GMG business, Global Markets Group. The Global Markets Group has grown significantly over the past five or six years, and now it's a third global. of international, and it has been the fastest growing. And that part of the business has been growing 15% annually. So when that one slows down, it affects the entire business. The important thing to keep in mind is we have the orders. We're just struggling to fill them, either due to production problems or transportation issues. But we do expect those to continue in Q2 but be behind us in the second half. Got it.

Yeah, go ahead, Rick. I'm sorry. One thing to add to that, that business is really supplies from different countries exported from the U.S., for example. And as our fill rates in the U.S. improve, that's going to, of course, improve the fill rates internationally.

Got it. Got it. Thanks, Rick. Just one more follow-up for both of you. Just on the elasticities, I think broadly it's not lost on you guys for a moment what we're seeing in the data and what we're hearing from others in Staples so far. maybe just comment on what you're seeing there and what's embedded really in the balance of your guidance for the remainder of the year. And then, Matt, just broadly, any hesitancy to take further pricing in your categories, just, you know, sort of worry around the state of the consumer. And I'll pass it on. Thanks, guys.

Yeah, I'll take the first one, Kevin, and Matt can take the second. You know, really – you know, on pricing, we've seen, and this is what I said last quarter, about a 20% to 30% impact, you know, better than we expected on elasticities for volume. We've continued to see that overall, I would say. And as we transition to the year, of course, now everyone talks about consumer and the health of the consumer. And as Matt laid out in his prepared remarks, we have assumptions as our fill levels get back to normal, our trade spending gets back to normal, our marketing is two-thirds, one-third loaded in the back half. We have you know, concentration hidden shelves now and will be there in the back half. And so there's a lot of things, you know, as tailwinds for the back half for us. But I'll let Matt talk more about the consumer.

Yeah, as far as pricing goes, Kevin, your question is, do we see further pricing in the future? Is that right?

Yeah, it's twofold. It's sort of state of the consumer, demand elasticity in general, what you guys are seeing, Matt, and what you're embedding. And then You know, related to that, and sorry for being a bit verbose, you know, does the inflationary environment start to give you any cause to push harder? You announced additional pricing in some of your categories. You know, are you any more reluctant to do that now than you were even six to nine months ago?

Yeah, well, look, monthly savings rates are back to pre-pandemic levels. We know there's significant inflation, and the wage increases haven't necessarily caught up with inflation. You know, it's $80 to get a tank of gas. The household balance sheets are thought to be strong because of accumulated savings. But, you know, as I said in my prepared remarks, there are definitely indicators that would suggest the consumer is becoming more cautious right now. So if there is a downturn, we think we're well positioned because of our value products. Of course, the other thing we have going for us is we have number one and number two brands. To give you some color on price, you know, we did take price on laundry detergent in mid-21, and those were high single digits. And we've seen others take price as well in laundry. Henkel, for example, across all Sun and Purex, they've taken price increases of high single digits in mid-teens. And P&G for Tide Gain and Tide Simply is up 6% to 10%. You know, we're a value product, so we've given the most recent tranche of inflation, and we're taking another step up, which we will quantify that until we see you again in July. So that's the story on laundry and litter. You know, our first round we took a high single digit, and we're taking another round right now. Nestle with Tidy Cat, they've already taken two rounds of price increases, and that's amounted to about 20% up. And Clorox recently bumped up, freshened up by a high single digit. And then if you went over to Vitamins, we raise prices low teens, and we're value in Vitamins. So we have more room because we're historically the value gummy. But You know, competitors going up right now as well, 6% to 10%. So it's happening broadly. So we do watch what the competitors are doing. As Rick said, you know, the elasticities haven't been too bad. But, you know, we think we're done for now with respect to pricing. You know, we've had a couple rounds in orange green litter. We've done something in vitamins. And we've made, you know, surgical strikes and all the other categories that And, you know, because we have this split between premium and value, 60-40, we think we're in good shape, whatever comes.

Got it. Thanks for all the color, guys. Good luck. All right.

Your next question comes from the line of Bill Chappell with Crescent Securities. Your line is open.

Hey, Bill. Thanks. Hey, good morning. I guess first on back on kind of the guidance, I guess the surprise is just that you're tempering the EPS. this early in the year when most of your peers reporting are, I guess, maybe you would view as the hope trade that everything will recover in the second half. Kind of just help us understand, like, what were the major drivers of that thought process? Was it the recession? Was it international? Was it just want to be conservative and without knowing all the details yet? I'm just trying to understand because where you see you kind of guiding down the second quarter, which is not always guiding down for the full year.

Is that a multiple choice question, Bill?

Yes, take C. Well, hey, Bill, it's Rick. You know, I'll take C. We think it's relatively straightforward, right? We didn't change our revenue outlook range at all. So we still feel like overall net, the health of the underlying consumption is strong. And as we improve our supply chain, we have the ability to land anywhere within that range. So from a revenue perspective, that's true. International, that's true. you know, order will get better and international will get better as well. So the top line, I would put that on the side of the page, but the primary reason we adjusted the EPS outlook was because of inflation, $85 million of inflation. And whereas before, a quarter ago, I said, hey, you know, there's new online, the back half for resin, ethylene, and we think that it's going to be down anywhere between 9 to 10%. We just said, you know what, we just saw the biggest spike in one month in our full-year forecast that we've probably seen in the last couple of years. And we're now assuming spot rates at the end of March all the way through the end of the year. Now, could that come down because demand comes down because of other macro things? Yes, but that's what we're assuming now.

Okay, now that helps for the color. Just one more on that question. With that, on the top line is you've added price increases, so presumably that would raise your top line outlook. Are you expecting some more elasticity that kind of brings it back to maintain, or it's not that scientific?

Well, two things. One, we continue to be conservative. Just because we've seen 20% to 30% improvements doesn't mean that's how we're necessarily going to forecast on a go-forward basis, especially with everything happening with the macro. And we have a big range in revenue, really. But for the easy way to think of it right now is, yep, pricing went up by, you know, a couple points, and then volume would come down by a couple points. And that's why we stay in that range we had before.

Got it. Last one for me. TheraBreath, would you expect TDPs to go up again further in 2Q as the resets happen? I mean, it seems to be pretty widely distributed over the past three months, but I assume there's still some resets to go.

We got a lot of them behind us already. They were a little bit better than we actually expected, but we do think that this brand is going to be a big grower for us in the 23, 24, 25 bill with additional distribution over time.

Great. Thanks so much.

All right.

Your next question comes from the line of Dara Mosenian with Morgan Stanley. Your line is open.

Hello, Dara.

Hey, guys. So just to follow up a bit on Kevin and Bill's question, you know, the volume was a bit weaker than we expect in the quarter, and I think consensus also. So just wanted to get your perspective on that, particularly the 6% decline in the U.S. in consumer domestic, because you sounded still pretty enthusiastic about the retail takeaway. Is that more sort of supply chain related? Are you seeing any more consumer demand elasticity as you move through the quarter in March or maybe so far in April? I just love a bit of perspective there on sort of the supply chain and availability issues relative to any elasticity you're seeing and thoughts on that front.

Yeah, hey, Derek. It's Rick. I think that the easy one is in Q1 we expected volume to be down about 4%, and it came down minus 5%. And that was all due – to our laundry transition, right? We compacted our laundry business about 10%. And what does that mean? It means we had to replace all 150-plus SKUs of one size to another size. And when you have tight inventory, there was some bumpiness in March, and so we had less than optimal fill levels for a period of March and April. And the good news is we've recovered on that now. But that's what you're seeing in terms of the expectation. That's why we were slightly worse on volume.

Yeah, and you may remember, Darren, my prepared remarks. We hit rock bottom in Q1 with fill rates with the Omicron research. We had more people calling out for COVID in one month than we had the last two years.

Okay, that's helpful. And then just on retailer relationships in the U.S., you guys have done a great job over time expanding shelf space, You're putting through a second round of increases now in a couple categories this summer. You've had supply chain issues. So, any issues in terms of retailer relationships and how that impacts shelf space going forward? Obviously, it's sort of a unique environment and a lot of competitors are taking a lot of pricing, but just curious for your perspective there. And just any thoughts beyond the categories you announced today for the summer? on the rest of the portfolio if there could be pricing at some point and just how you guys think about that. Thanks.

Yeah, as far as retailers go, from the beginning of the pandemic, we've been palms up and very transparent with the retailers with respect to all of our difficulties category by category. So I would say our relationship with our retailers is good right now. And the price increases have not tarnished or impaired that relationship. Like I said, our most recent one is being sold through right now for laundry and litter. We expect that to go well. But I would say, you know, our commercial team would say we're in good shape as far as the relationships with the retailers.

And then with your pricing question, right after this next tranche that Matt just alluded to that's going to be really effective in July or so. You'll probably see more to the pack sizes versus pure price increases from us, but we'll see and we'll adapt to the environment.

Okay, great. And then any thoughts on shell space and the balance of the year and where you stand in the U.S., how we should think about that?

Yeah, no. I mean, I talked to our head of... sales this morning, and we've got a lot of new distribution coming in in 22, notably in laundry detergent. That baby product that we just launched is incremental, so we're spreading out on shelf. So, yeah, it's one of the reasons why we feel confident about the year. Okay. Thanks, guys.

Your next question comes from the line of Rajesh Parikh with Oppenheimer. Your line is open.

Good morning. Thanks for taking my question. So I guess just on the gross margin line, Rick, any more specificity you can provide in the magnitude of the gross margin decline you're expecting for the full year? And then do you still expect to exit the year with positive gross margins?

Yeah, no, great question, Rupesh. So we just said we are in our original outlook contract, and that's kind of what we reemphasized today, contract. So I'm not going to give you an order of magnitude. I would just say that Yes, we expect improvement. Q1 and Q2 are going to look similar, but then we're going to expect improvement as we go through the entire year, and we expect to be positive as we exit the year in Q4, largely because of pricing, concentration, supply chains back in stock, right? When supply chains back in stock and fill levels, we have fewer trucks. We're very inefficient still in Q1. And then productivity builds throughout the year as well. So that's why we think we're going to be in a good spot as we exit the year.

Okay, great. And then I guess my second question, so I think in your press release, you guys expect supply chain issues to be in the back half of 2022 for most of your brands. Why wouldn't it be for all your brands? I guess what headwinds do you still expect to have later in this year entering 2023?

No, I mean, that's just wording in the release. We expect to really kind of be at pre-COVID type levels by the end of the year.

Okay, great. And then maybe my last question, just on organic growth, Do you have updated organic growth expectations by segment?

No change. You know, since our outlook in January, our company outlook's the same, and there's no change to the three pieces.

Okay, great. Thank you.

Your next question comes from the line of Jason English with Goldman Sachs. Your line is open.

Hey, Jason. Hey, good morning, folks. Thanks for stopping me in. So, you mentioned that you're off the bottom in terms of supply chain constraints. It sounds like you kind of worked through a lot of that earlier in the quarter, and it's sequentially improved through the quarter. But when we look at the Nielsen data, it's almost the inverse. As the quarters progressed, your volume trends eroded, and the most recent data points are probably the weakest we've seen in a very long time. Can you unpack that a little bit? Like, what's the difference of why we're seeing volume trends erode later when your narrative in terms of supply constraints suggests that it should actually be going the other way?

Yeah, sure. Hey, Jason, it's Rick. I don't know if I answered it for Dara or not, but it really has to do with laundry, right? Our volume guide for the quarter was down 4%, and we really came in down 5%, and I would have said we would have beat our volume guide. We had the orders for it, but as we go through this transition of 10% compacted for laundry, all these new bottles, and, again, it's 150 SKUs. As that goes up and the other 150 has to come out, then the execution was not flawless because there's a lot of complexity. Think of a new product and you're slotting in two or three SKUs, and typically a retailer, that's no problem. They do that every day. But when you're talking about 150 SKUs, we couldn't build the inventory that we wanted. And so we had hard cutoff dates. And so we were out of stock more than we would want in our laundry business in March and even in some in April. And so that's why you see that kind of nuance that as supplies, you know, recovering and we're fully recovered, we're at 90% fill levels on laundry, for example, you know, this week. But as we went to that bumpiness, that's why you have out of stocks at laundry, one of our biggest businesses for a period of, I don't know, three or four weeks.

And did you go in isolation, or has the rest of the category compacted a comparable magnitude at the same time?

Yeah, now we mentioned maybe six months ago that a lot of the competitors had moved previously already, anywhere between 9% and, I don't know, 13%. And so we lagged that move, but we've moved, and this is a big step for us, 10%, and we may do more in the future.

So you've had a relative price value advantage over them for the last number of months. And now the advantage is fading. And there's always been a concern, like if you go in isolation, you shrink your bottle same price. Like it's a perception, a price perception. Given that you're going out of sequence now, how are you assessing the risk that the consumers now perceive you to be a less attractive value and you lose volume or market share as a result?

The way I think about it is, yeah, maybe there was an advantage, but we've turned to historical gaps as a result of our concentration. So we don't think that's going to be an issue. Keep in mind that I call that some of the price increases that the competitors have taken, like Henkel has gone up high single digits to mid-teens. So there's a lot of movement in the category right now, so I don't think it's going to change the relationships or the consumer's perception of value.

Got it. Understood. Thanks a lot, guys. I'll pass it on. Okay.

Your next question comes from the line of Chris Carey with Wells Fargo. Your line is open.

Hi, guys. How are you? Hey. So just one question just around price versus volume, just being a bit more specific. I guess if I just think about the pricing that you've already announced and some of the new pricing coming through, it would suggest that maybe you're in, you know, 5% pricing range in Q2, and so embedding volume elasticity, is that fair? And then, you know, similarly for the full year, it seems pricing is going to shake out at least in that 6% range. So, again, embedding volume elasticity or otherwise, and I guess is that a fair characterization? And then secondly is just, you know, how much of this, Is pure elasticity, is the recovery in the supply chain, is laundry still catching up? And so I'm just trying to frame those competing dynamics.

Yeah, no problem, Chris. This is Rick. I'll just refresh your memory on what we said previously. I won't get into the quarter, but I'll talk about the full year. I had said previously we thought volume was minus one and price was plus five and a half, and that's how we got to the midpoint of our revenue. range of four and a half organically. And now I would probably say it's closer to minus three on volume and plus seven or so on price. And the volume piece is, of course, the new pricing, the elasticity for fabric care and litter. And then also, Matt alluded to it in his comments, the DIY piece, You know, foot traffic, some of those hardware stores are down by about 10% or 12%. So we think that the showerhead business and Waterpik will be down as well. So that's how we get to the volume of minus three. And then on the price, of course, the pricing is up because of those actions we've taken. And also favorable mix, our personal care portfolio, TheraBreath is a lot of the brands in the portfolio for personal care are doing well.

That's very helpful. Then just one follow-up on the prior line of questioning just around gross margins. Clearly, inflation tracking worse, maybe 400 or 500 basis points for the full year, and gross margins expected to rebound in Q4. I think that all makes sense. How does productivity factor into the equation this year, and are there opportunities to perhaps accelerate the amount of savings that you're getting, or just given, you know, the tight supply chain environment, is that just going to be a more difficult thing to accomplish this year? Thanks so much.

Yeah, I would just say on the productivity front, it builds throughout the year. And the reason it builds is because, remember, during all those key COVID times and just really tight capacity times, we were unable to get line trials at plants to run some of these productivity projects. And as our capacity increases because our throughput is improved and our case numbers rise, we'll have more time to do some of those qualifications. And that's why it builds throughout the year.

Okay, thanks so much.

Your next question comes from the line of Leda Tong with Raymond James. Your line is open.

Great, thank you. I just want to follow up on a couple of things. First, you know, in terms of the supply chain, constraints, you know, you talked about incremental pricing in laundry and litter. On an annualized basis, how much of the cost inflation that you mentioned does it get covered by that pricing? And then since those were some of the first categories to go last year, you know, should we be thinking that at current levels you'll be evaluating sort of the same playbook as last year, you know, as different pricing maneuvers lapse? Or is this pricing that you're planning to take right now enough for the inflation forecast that you already see combined with the productivity initiatives that you updated us on?

Yeah, so let me try to answer both of those. So first of all, your first question was really how does our litter and laundry pricing recover versus inflation? And I would just say we take a big step back and we've looked at really the two years of inflation since COVID started. And the good news is that this next price increase, you know, the 80% plus this next tranche, as we exit the year, we will have recovered through pricing and productivity all the cost inflation largely. So that's good news. What was your second question, Olivia?

Yeah, just around the cadence of potentially more price increases because laundry and litter were the first to go last year. Should we assume that as the year progresses, then you'll continue to evaluate more pricing with respect to the categories, you know, the rest of the categories that went as the year progressed?

Yeah, that all depends on the consumer and the macro environment as well. But I think what we both said earlier was these two price increases are underway, and then we're also going to look different pack sizes and other forms in lieu of just list price increases, unless there's another shoe that drops on inflation again.

Got it. That's helpful. And then just in terms of this quarter, you know, 8% pricing in total, 9% in consumer, that's obviously pretty unprecedented as far back as my model goes. So, you know, realize, of course, that we're also experiencing unprecedented levels of inflation. You know, those numbers are pretty big. And given that you were able to achieve that, like, I'm kind of curious how that might influence your future plans on pricing. You know, does it make you more optimistic about your price elasticities longer term? Or do you just kind of talk this up more to the macros of a still relatively healthy consumer environment, you know, tight capacity, all these things that are playing a part?

Yeah, you're talking about 9% price increases on average, but you're also talking about 9% of COGS inflation a year ago, and that's our new outlook for this year as well. So, you know, big, big numbers of price because there's unprecedented levels of inflation. I don't think it would give us any more confidence in the future. You know, it's great that when we price and our brands are number one or two, we've been able to do that and it's been relatively straightforward, but the entire ocean has kind of risen because of this global macro inflation. All competitors everywhere in every category are taking price.

Got it. And then just lastly, in terms of some of the international supply chain issues. Like what's happening to the business that you lost? Is it going to other players or just consumers sort of, you know, more depleted in terms of their inventory or, you know, are they just pulling consumption? Just kind of curious what's happening to that lost sale. Thank you.

Yeah. No, there's definitely some lost sales in some cases here. You can lose shelf space. Remember, particularly in our global markets group, we're dependent upon distributors to interface with the retailers. But we have very strong distributors in many countries. So we think once we get back in supply, these two quarters are not going to hurt us long term.

Got it. Thank you so much. Okay.

Your next question comes from the line of Andrea Dixiera with JP Morgan. Your line is open.

Thank you. Good morning. So following up on inflation, I thought you were 60% hedged heading into the quarter. And I believe, obviously, it makes us think like the $85 million additional inflation hits your 40%. As you roll the hedges, how we should be thinking longer term. So that means that you have to take additional pricing for the remainder 60% that was hedged as you go into 2023. And then just as a fine point on clarification on the pricing in laundry and also in the litter side, so I think you said high single digits at the time mid-last year in laundry, and then would we expect a similar magnitude early now in June? or you're just using the concentration and compaction to help you most of that, or it's both? And then can you also update on the litter side, please? Thank you.

Yeah, I'll take your second question first. Andrew, we're only communicating that price increase right now. to the retailers. So that exercise is not complete, so we won't be updating everybody on the magnitude of the price increase for laundry and litter until we talk to you in July.

Yeah, and then on your comment on the hedge, yep, you're right. We were 60% hedges within the year. You know, a lot of this is diesel and diesel costs and oil-based inputs that we have that flow through other raw materials, as an example. So, those specific, you know, we do at times have hedged diesel. We just have not hedged a lot of diesel in 2022. So, a lot of that is diesel very quickly, and then all the derivative products of oil that go through the supply chains. So, that's really the basis of that.

And just as a follow-up, is that also the third-party manufacturing that obviously has a trickle-down and a pass-through process? And to that end, the service levels, I understand obviously you had to shift all these 150 SKUs. Is that the service level as you exit the quarter improved? So can you update us on the service levels as you exit and then how you should be feeling? And that's the reason why you're probably feeling confident that you can keep that top line and obviously increase the top line range.

Yeah, you're right. Those costs would also include third-party manufacturing costs that are – especially for the raw materials and components that they would have to have. So that's our best guess of the full year impact of that. And then fill levels, Matt said in his remarks that in Q2 was our bottom quarter for the last seven or eight quarters. So we hit below 80%. And – And that was a bumpy transition for laundry, but it was also, as Matt said, in one month we had more labor issues than we had in many quarters last year. So the net of it, though, is I think to end on a positive is we are hitting mid to high 80s for the month of April. And some key brands were hitting the 90s again already. We have a lot of optimism. We can see the light at the end of the tunnel, and that's why we're calling the back half of being recovered from the supply chain perspective.

Thank you, Pastor.

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

Great. Thanks. Good morning. One question was a clarifying question because in the release, it pretty explicitly says that the volume performance was a combination of supply chain effects and also elasticity. But then I feel like in your commentary, there's a lot less around elasticity, at least in the current quarter. So I was just hoping to get some clarification on that point. And then secondly, expectation that promotional levels normalize in the back half of the year. I'm just curious why. Are you thinking about that in terms of frequency, depth, both? Because I don't feel like that's something we're hearing from many other household product companies, just given the inflationary environment, of course. So I was curious on your perspective on that point. Thank you.

Okay. I'll take the promotional environment first. Right now, Lauren, we should really be talking about household products because personal care products are generally not heavily promoted. So when I look at laundry detergent, where it is right now, if you look at, say, liquid laundry detergent, the sold-on deal is around 31%, 32%. Normally, it's in the mid-30s, so it's off the historical levels. And if you look at them on a brand basis, the value brands are sort of tightly bunched, Arm & Hammer, Purex, Tide Simply. They're all 24%, 25%, 26% sold on deal. So the big promoter is just tied. It's 42%, actually. And there were lower promotions, frankly, for a while now, primarily due to supply shortages and, as you point out, introduction of price increases. You're right, it may not return to historical levels this year, but if it does, we're prepared for it. Ricky, anything to take on that first question?

No, nothing else to add on that one. On the volume question you had, Lauren, I think it's just a combination. Of course, there's always volume implications to raising price and harder to measure these days with all the different attributes going on with supply, demand, competition, lags on when pricing happens, all those things. But we think there are two contributors to the quarter. We think it was the pricing elasticities, and we think supply chain. And I walked through some of the laundry bumpiness as well. So the good news is as we go through the year, we hope that the supply chain stuff is improving, and then we're left with really just purely some of the price elasticity on the volume side.

And, you know, Lauren, I can give you a little more color, too, on the household, just talking about litter. So if you look at litter sold on deal right now, it's around 10%, and it's typically in the high teens. And, well, everybody had problems in Q1, Clorox, Nestle, Church & Dwight, as far as supply, sort of intermittent outer stocks. So, again, low promotion, so. So, yeah, it'll probably be a slow roll for that to come back for the remainder of the year. But as I said before, if it does, you know, we'll be prepared.

Okay, great. So just again to clarify, in the quarter itself, not the forward look, but, you know, in Q1, in what businesses have you already seen elasticity?

Everywhere we've raised price, we have seen elasticity negative impacts on volume Our comment has been those negative elasticities that were historical. I'm going to make it up for a second. If laundry, we say we raise price by 1%, we expect volume to decline by 1%. In context to that, we've said our elasticities have been 20% to 30% better than we expected. So that would mean that if price was up by 1%, our volume would be down by 0.8%. All right. So I would just say in every case we've raised price, we have seen negative volume elasticities, but they've been better than we expected.

Okay. All right. Thank you for the clarification. Yep.

All right.

Your next question comes from the line of Steve Powers with Deutsche Bank. Your line is open.

Hey, guys. Good morning. Just on the supply, from just a bigger picture perspective – Obviously, multiple factors have placed in different parts of the business and the world, and everybody's had production, transportation issues. But it just feels like you guys were early in terms of calling out the materiality of supply issues going back, you know, around about a year. And to some extent, I think the impact, my perspective, has been a little bit more severe. You've been talking about leaving money on the table for multiple quarters now. So I guess the question is, acknowledging your optimism over the balance of the year, has it caused you to rethink at all the balance of in-house versus third parties or just your diversification of suppliers and forced you to contemplate any change as you go forward? Or are you kind of holding pat on the supply chain structure as it exists?

No, yeah, that's a good question, Steve. We've made major changes in our supply chain. And, you know, what we're trying to do right now is have a shorter, more resilient supply chain. And, you know, if you talk to our folks in supply chain, you'll hear that we've qualified dozens and dozens of new co-packers and suppliers so that we have redundancy across the system. Because there's no telling whether or not someday there's going to be another pandemic or another black swan event. So we said, you know, we've got to be prepared for that. And, you know, it's created just a ton of work for our teams over the past couple of years. But when we come out of this, we're going to feel like we're even more resilient than we were going in. So it did definitely expose some of the weaknesses in our structure, which we've now cured successfully. in the last 18 months.

And just to add to that, most of these issues that we have isn't because we outsource a lot of our finished good third-party manufacturers. Most of this is because we've had one or two key raw material supplier or we haven't been fully vertically integrated, for example. But the good news is all those choices and decisions were made 12 months ago to adjust and improve. And so we're seeing every month now more and more of these coming online. So again, that's why our fill rates are improving so rapidly in April and that's why we expect it to continue.

Okay. That's, that's great. Yeah. So, so the changes, you know, the kind of the strengthening of the overall supply chain, that redundancy has been built kind of in real time as you correct the here and now issues. And so when, when, When things are back online, you should also have that redundancy back online, and the whole system should be stronger into 23. I think that's my takeaway. Is that fair? Yeah.

That was the goal when we started, and that's where we're going to land, Steve. Okay. Perfect. Thank you. Thank you both.

Your next question comes from the line of Peter Grom with UBS. Your line is open.

Hi, Peter. Hey, good morning. Hey, good morning, everyone. Hope you're doing well. So I just wanted to ask specifically about the 2Q organic revenue guidance. And maybe I missed this, but did you discuss volume versus price mix in that outlook? And then, you know, Matt, I know you discussed some of the recent trends in value detergent, you know, cat litter, showerheads, et cetera, that I guess led to some of the comments in the release around the portfolio's performance during, you know, a recession, I guess. But Just wondering if you could comment as to whether you saw an acceleration of these trends as you exited the quarter and through April that is giving you a bit more concern versus maybe earlier in the year, or has it been largely stable throughout the quarter?

No, I would say, you know, our remarks about, you know, what we're seeing with, you know, just to remind you, we saw value detergent had been losing ground to the premium for many quarters. And then in Q1, so this is recent, it's now kind of flattish. And, you know, the trends we saw are Q1 trends, you know, with our orange box in litter, which is value, is now moving faster than our black box, which is premium. And that's a reversal of prior trends. So, yeah, I mean, the commentary is recent. And, you know, we're generally very transparent on these calls. We'll tell you what we're seeing. And that does influence our thinking with respect to what may be ahead. Now, could it be just we're going to have a few months where people are now traveling more and spending more money on experiences versus products? Yeah, that could be part of it. But we do want to alert everybody to what we're seeing.

And then in terms of volume price in Q2, I would say it's going to look a lot like the mix we saw in Q1, right? The midpoint of organic growth in Q2 I think is going to be about 3.5%. I would say volume is still going to be down around 5% because we saw some of that laundry, again, concentration bumpiness in early April because some retailers were not all the way full on shelf. And then from a price perspective, you know, that last 80% tranche of pricing is actually a full quarter effect. So it'll be at or above Q1. Okay.

Thank you so much. Best of luck. Okay. Thanks.

Our last question comes from Wendy Nicholson with Citi. Your line is open.

Hi, I appreciate, I know the call has gone on a long time. I just had a small question really about the VMS business. I think you said earlier on that you were taking a double digit or mid-teens pricing on that business. And that surprised me because I would have thought that's a higher gross margin business. Maybe the cost of ingredients wasn't as large. So number one, was I right that the price increase was that high? And then secondarily, just, and I know it's a small business, but still interested in it. You know, given that it's kind of more of a discretionary product, you know, I don't need it maybe as much as I – I don't eat vitamins as much as I need, you know, laundry detergent. Do you expect to see more elasticity of demand in the VMS space? Thanks so much.

VMS is actually holding up well. So demand is still high. As far as the price goes, what I said was we've raised prices low teens. And the competitors are going up as well, 6% to 10%. And the historic have been the value gummy, and we still will be with these price increases. So we've had more room to move up. And, yeah, ingredients and inputs and obviously transportation, COGS, are all impacting the vitamin business. So it's no different than the other businesses as far as our logic for raising price. The category is healthy. Demand is still strong. The gummy category was up. Consumption was up 11% in Q1. And household penetration is up, appears to be sticking. And, you know, you always have the tailwinds of, you know, the wellness trend. And not just vitamins. We also have a business for nasal hygiene. And that's a pretty sleepy category once upon a time. It's much, much bigger outside the U.S. where we have product like SteroMarbets. You know, nasal hygiene category has been picking up. And, you know, I guess the other comment on the category is private label share of gummies has declined. You know, last year, first quarter, it was 24%, and right now it's 22%, so it's down 200 basis points. So, yeah, I think the category is as strong. Our issues are supply issues, frankly, right now.

Got it. That's very helpful, Culler. Thanks so much.

Okay.

Thank you. This concludes today's conference call.

Thank you for participating.