Good morning ladies and gentlemen and welcome to the Church & 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 & Dwight. Please go ahead sir.

Good morning everyone. Thanks for joining us today. I'll start with a review of the Q1 results and then I'll hand it over to Rick Dierker, our CFO. After Rick finishes, we'll open the call for questions. Q1 was a solid quarter for us. Reported revenue increased by 4.7%, organic sales grew by 2.7%, surpassing our Q1 outlook of 1% to 2% for organic growth. Adjusted EPS was $0.83, which is $0.08 above our forecast. We experienced consumption growth in 11 out of 17 categories we compete in, even with low fill rates affecting our consumption. The positive news is that April fill rates for many categories are now in the mid to high 80s and improving. In terms of brand performance, several of our brands saw double-digit consumption growth in seven categories, including ARM & HAMMER Scent Boosters, ARM & HAMMER Baking Soda, ARM & HAMMER Clumping Litter, BATISTE dry shampoo, WATERPIK Water Flossers, ZICAM zinc supplements, and THERABREATH mouthwash. Online sales made up 16% of total sales in Q1, with an increase of 2.6% year-over-year. This follows a remarkable 53% growth in e-commerce during Q1 last year. We continue to anticipate online sales to be over 15% of total sales for the full year. Since early 2021, we have announced price increases to address inflation. By early 2022, we had covered 80% of our global portfolio with price increases. Since our last discussion in January, we now expect an additional $85 million in cost inflation. As a result, we announced another round of price increases on our Fabric Care and Litter products starting in July. In addition to price adjustments, we are exploring other strategies to mitigate unexpectedly high costs, such as enhancing productivity and adjusting pack sizes. In laundry, we have also concentrated our portfolio by about 10%. Now, moving to the Consumer business in the US. Our Consumer Domestic business saw organic sales growth of 2.7%, building on a 5.1% organic growth in Q1 2021. In Q1, seven of our 14 power brands gained market share. Our recent acquisitions are performing well, notably THERABREATH, which we acquired in December 2021, with an impressive 37% growth in consumption. THERABREATH increased its share by 3.6 points to 15% in the alcohol-free mouthwash segment, marking Q1 as its first full quarter surpassing ACT as the fourth largest mouthwash brand. THERABREATH remains the second-largest alcohol-free mouthwash brand, with total distribution points up by 20% year-over-year. ZICAM also reported strong results this quarter, noting a 56% increase in cold remedy consumption and a rise in market share to over 75%. Turning to Gummy Vitamins, total shipments for VITAFUSION and L'IL CRITTERS were relatively flat in the quarter. Although demand for gummies remained strong with category consumption growth of 11%, low case fill meant we missed out on potential revenue in Q1. The good news is that vitamin fill rates are finally beginning to improve. Moving to our International segment, despite facing significant challenges, we achieved some organic growth of 0.3% in Q1, primarily from STERIMAR, BATISTE, OXICLEAN, and VMS in the Global Markets Group. Lockdowns and transportation issues have impacted our results, but we do have the orders, and we anticipate resolving these issues in the second half for International. Next is Specialty Products. Our Specialty Products business excelled in Q1, delivering 9.2% organic growth driven by increased pricing and volume. Now, I want to discuss the state of the consumer, trends in private label, innovation, and our supply capabilities. As we know, inflation has reached a multi-decade high, and rising interest rates are attempting to curb it. While wages have increased, households are feeling the financial squeeze, prompting consumers to make choices to stretch their budgets. We've seen Netflix losing subscribers, and here are some indicators to note: first, consumption of value detergent was flat year-over-year in Q1, which follows several quarters of losing share to premium options. In Cat Litter, our traditional ARM & HAMMER orange box, a value product, outperformed our premium ARM & HAMMER offerings in Q1. In Personal Care, WATERPIK is seeing increased growth in lower-priced flosser models, while the showerhead category is experiencing a slowdown, potentially indicating reduced consumer spending on home improvement. We are monitoring these trends closely and are ready for possible promotional shifts in the second half. It's worth noting that 40% of our portfolio is value-oriented, which positions us well to perform in a challenging economic environment. Our largest businesses, including detergents and vitamins, are value products, and similarly, our orange box litter is positioned as a value offering. We feel well-equipped for potential changes ahead. Regarding private label, its share remains stable across the five categories where we have significant exposure to store brands. As detailed in our release, we have a robust lineup of innovation set to launch across our personal care and household categories, with many new products shipping in Q2. We believe consumers are always drawn to new and improved offerings. Concerning our supply capabilities, we hit a low point early in Q1 due to the Omicron surge, with fill rates dipping below 80%. However, as mentioned earlier, April fill rates are trending towards the mid-to-high 80s, and we aim to reach historical fill levels by the end of the year. We are confident in our full-year outlook for several reasons: improving fill rates, new product innovations launching by July 1, two-thirds of our marketing budget focused in the second half, the incremental effects of pricing, and the positive impact of concentrated consumption. In conclusion, we expect our brand portfolio to perform well in any economic climate, and we will continue to seek out new businesses that can enhance our total shareholder return. Now, I'll turn it over to Rick for more details on Q1.

Thank you, Matt, and good morning everybody. We'll start with EPS. First quarter adjusted EPS was $0.83, flat to prior year. The $0.83 was better than our $0.75 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 SPD 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%, a 190 basis point decrease from a year ago. Let me walk you through the Q2 bridge. Gross margin was impacted by 550 basis points to 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 points 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 expenses 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 31, 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% and organic sales growth of approximately 3% to 4%. 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 $0.70 per share, an 8% 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 announced back 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.

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

Great. 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 that will recover in the back half. We haven't been – the business has been so good now for a number of years. We just haven't been accustomed to seeing that. Maybe just walk through the issues in a little bit more detail. I think you mentioned lockdown. 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?

Yes. So we had a 0.3% organic growth in Q1. It won't be much better by the way in Q2. So we expect it's going to be back-end loaded starting in Q3. And yes, 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 to six years and now it's one-third 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 are 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 – yes go ahead I'm sorry.

One thing to add to that. That business is really supplies from different countries exported from the US for example. And as our fill rates in the US improve that's going to of course improve the fill rates internationally.

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 staple 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 sort of worry around the state of the consumer. And I'll pass it on. Thanks, guys.

Yes. I'll take the first one Kevin and Matt can take the second. Really on pricing, we've seen and this is what I said last quarter about a 20% to 30% impact 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 the consumer and the health of the consumer. And as Matt laid out in his prepared remarks, we've – 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 concentration hitting shelves now and will be there in the back half. And so there's a lot of things as tailwinds for the back half of our staples. But I'll let Matt talk more about the consumer.

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

Yes – 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 related to that and sorry for being a bit propose, the inflationary environment start to give you any cause to push hard you announced additional pricing in some of your categories. Any more reluctant to do that now than you were even six to nine months ago?

Monthly savings rates have returned to levels seen before the pandemic. We acknowledge there's considerable inflation, and wage increases haven't quite matched it. Filling a tank of gas now costs $80. Although household balance sheets appear strong due to accumulated savings, there are signs that consumers are becoming more cautious. If a downturn occurs, we believe we are well-prepared thanks to our value products. Additionally, we have leading brands. For context on pricing, we increased prices on laundry detergent in mid-2021 by high single digits, and other companies like Henkel have also raised prices in the high single digits to mid-teens range. Procter & Gamble has seen increases of 6% to 10% on brands like Tide. In light of the latest inflation trends, we are planning another price increase, which we'll detail in July. In laundry and litter, we initially raised prices by high single digits and are currently implementing another increase. Nestlé’s Tidy Cat has experienced two price hikes, totaling around 20%, while Clorox recently raised Fresh Step prices by high single digits. In vitamins, we have raised prices in the low teens and are positioned as a value player, with competitors also increasing prices by 6% to 10%. We are closely monitoring competitors, and as mentioned, elasticities have not been too concerning. However, we believe we've reached a point where we won’t implement further pricing changes for now, having already raised prices in laundry, litter, and vitamins, as well as making targeted adjustments across other categories. With a 60-40 split between premium and value products, we feel confident about our positioning regardless of future developments.

Got it thanks for the color, guys. Good luck.

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

Good morning. I'm curious about the guidance you provided, specifically why you're lowering the EPS this early in the year when many of your peers seem optimistic about a recovery in the second half. Can you explain the main factors influencing this decision? Is it due to concerns about a recession, challenges in international markets, or a desire to be cautious without having all the information yet? I'm trying to understand why you are guiding down for the second quarter, which typically isn’t the case for the full year.

Is that a multiple choice question Bill?

Hi Bill, it's Rick. It's relatively straightforward. We didn't change our revenue outlook range at all, and we still feel that the overall net health of annual consumption is strong. As we improve our pricing, we can land anywhere within that range. This applies to both domestic and international markets, and we expect orders to improve as well. Regarding the top line, I consider it stable, but the primary reason we adjusted the EPS outlook was due to $85 million in inflation. Previously, I mentioned that in the back half we anticipated a decrease of 9% to 10% for resin ethylene. However, we've recently observed the largest spike in a month in our full year forecast that we've seen in the last couple of years. We are currently assuming spot rates from the end of March through the end of the year. While it's possible that rates could drop due to declining demand from other macro factors, that's our current assumption.

Okay. That provides some clarity. Just one more question on this topic: you've implemented price increases, which should presumably boost your top line outlook. Are you anticipating some elasticity that would help keep it balanced, or is it not a precise science?

Well two things. One, we continue to be conservative just because we've seen 20% to 30% improvement it 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 yes pricing went up by a couple of points and then volume would come down by a couple of 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 2023 2024 2025 Bill with additional distribution over time.

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

Hi, guys. So just to follow up a bit on Kevin and Bill's question. The volume was a bit weaker than we expected in the quarter and I think consensus also. So just wanted to get your perspective on that particularly the 6% decline in the US and 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?

Hi, Dara, it's Rick. In Q1, we anticipated a volume decrease of about 4%, but it actually fell by 5%. This decline was primarily due to our transition in the laundry segment, where we compressed our laundry business by around 10%. This meant we had to change over all 150-plus SKUs to a different size. With limited inventory, there were some fluctuations in March, resulting in suboptimal fill levels for March and April. The good news is that we've recovered from that now. So, that's the reason for the slightly worse volume than we expected.

Yeah. And you may remember Dara in my prepared remarks we hit rock bottom in Q1 with fill rates with the Omicron resurge. And we had more people calling out for COVID in one month than we had the prior two years.

Okay. That's helpful. And then just on retailer relationships in the US. 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 of 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.

Yes. 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 in the 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 laundry and litter we expect that to go well. But I would say 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 shelf space in the balance of the year and where you stand in the US, how we should think about that?

I spoke with our Head of Sales this morning, and we're expecting a significant amount of new distribution this year, especially in laundry detergent with the recent launch of our baby product. We plan to increase its presence on shelves. This is one of the reasons we are optimistic about the year ahead.

Okay. Thanks guys.

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

Good morning. Thanks for taking the 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?

That's a great question, Rupesh. We have reiterated our original outlook for the contract today. While I won't provide specific figures, I can say that we do expect improvement. The first and second quarters will likely show similar results, but we anticipate better performance as the year progresses and expect to end positively in the fourth quarter. This improvement will be driven by better pricing, supply chains returning to normal stock levels, and our current inefficiencies in the first quarter due to fewer trucks. Productivity is expected to increase throughout the year, which is why we believe we'll be in a strong position by year-end.

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 of your brands? Like I guess what headwinds do you still expect to have later in this year entering 2023?

No, that's just a wording in the release; we expect to be at pre-COVID levels by the end of the year.

Okay, great. And then maybe kind of the last question. Just on organic growth. Do you have updated organic growth expectations by segment?

No change. Since our outlook in January, our company outlook is the same and there's no change to the three pieces.

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

Hey, good morning folks. Thanks for letting 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 sequentially improved through the quarter. But when we look at the Nielsen data, it's almost the inverse. Like as the quarters progressed your volume trends eroded and the most recent data point is 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 the volume trends erode later when your narrative in terms of supply constraints suggests that it should actually be going the other way?

Yeah, sure. Hi, 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%. 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 against 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. When you think of a new product and you're slotting in two or three SKUs and typically a retailer that's no problem with 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 supply is recovering. And we're fully recovered we're at 90% fill levels on laundry for example this week. But as we went through 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 is the rest of the category compacted a comparable magnitude at the same time?

Yeah. No 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 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 that 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?

I think the way to think about it, is 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 called out 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 consumers' 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.

I have a question regarding price versus volume. Based on the pricing you have already announced, and the new pricing expected, it seems like you might be in the 5% pricing range for Q2, considering volume elasticity. Would that be accurate? Also, for the full year, it appears pricing could settle around the 6% range, again factoring in volume elasticity. Is that a fair assessment? Additionally, how much of this is purely elasticity due to the recovery in the supply chain, as the laundry sector is still catching up? I'm trying to understand these competing dynamics.

Sure, Chris. This is Rick. Let me remind you of what we discussed earlier. I won’t focus on the quarter but rather on the entire year. Previously, we estimated a volume decrease of about one percent and a price increase of roughly five and a half percent, which led us to a revenue midpoint of 4.5 percent organically. Now, I would say we’re looking at a volume decline closer to three percent and a price increase of around seven percent. The volume decline reflects the new pricing impacts and elasticities for Fabric Care and Litter. Additionally, as Matt mentioned, foot traffic from DIY shoppers in some hardware stores has decreased by about 10 to 12 percent. This suggests that our Shower Heads business and WATERPIK will also see a downturn, contributing to the three percent volume decline. The price increase comes from the initiatives we've implemented and a favorable product mix. Our personal care segment, especially THERABREATH and several other brands in that category, is performing 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, 500 basis points for the full year and gross margin is 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 the tight supply chain environment is that just going to be a more difficult thing to accomplish this year? Thanks a lot.

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 the plants to run some of these productivity projects. And as our capacity increases because our throughput is improved and our case members 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 Olivia Tong with Raymond James. Your line is open.

Thank you. I would like to follow up on a couple of points. First, regarding the supply chain constraints you mentioned about incremental pricing in laundry and litter, how much of the cost inflation you referred to does that pricing cover on an annualized basis? Additionally, considering these were among the first categories to see price changes last year, should we expect you to follow a similar strategy as last year at current levels, as various pricing strategies evolve? Or is this pricing you are considering implementing now, rather than in response to the inflation you anticipate, alongside the productivity initiatives you updated us on?

Yes. 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 took a big step back and we've looked at really the two years of inflation since COVID started. And the good news is, this next price increase the 80% that we did 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?

Yes, considering the possibility of more price increases since laundry and litter were the first categories affected last year, should we expect that as the year goes on, you will continue to assess pricing for the other categories that were impacted?

Yes. 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 at different pack sizes and other forms and move 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 8% pricing in total 9% in consumer that's obviously pretty unprecedented as far back as my model goes. So, realize of course that we're also experiencing unprecedented levels of inflation. Those numbers are pretty big. And given that you were able to achieve that, I'm kind of curious how that might influence your future plans on pricing. 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 tight capacity all these things that are playing a part?

Yes. 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 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. 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 and all competitors everywhere and every category are taking price.

Got it. Lastly, regarding the international supply chain issues, what is happening with the business you lost? Is it going to other players, or are consumers simply reducing their inventory levels or pulling back on consumption? I'm curious about the status of that lost sale. Thank you.

Yes, there have been some lost sales and in some instances, we may lose shelf space. In our Global Markets Group, we rely on distributors to connect with retailers. However, we have very strong distributors in many countries. Therefore, we believe that once we restore our supply, these two quarters will not negatively impact us in the long run.

Got it. Thank you so much.

Okay.

Your next question comes from the line of Andrea Teixeira with JPMorgan. Your line is open.

Thank you. Good morning. Following up on inflation, I thought you were 60% hedged heading into the quarter. It seems that the additional $85 million in inflation impacts your 40%. As you roll the hedges, how should we consider the long-term implications? Does this mean you need to adjust pricing for the remaining 60% that was hedged as you move into 2023? Additionally, could you clarify the pricing in the laundry and litter segments? You mentioned high single digits for laundry around mid last year; should we expect a similar increase now in June, or is it primarily due to the concentration of compaction? Also, can you provide an update on the litter segment? Thank you.

Yes. I'll address your second question first. We're currently only informing the retailers about the price increase, so that process is not yet complete. We won't be sharing the details of the price increase for laundry and litter until we speak to you in July.

Yes, regarding your comment on the hedge, you are correct that we were 60% hedged within the year. A significant portion of this relates to diesel costs and oil-based inputs that impact other raw materials. We do hedge diesel at times, but we haven't hedged much diesel in 2022. This has affected diesel prices quickly, along with all the oil derivatives that pass through the supply chain. That is essentially the basis of the situation.

As a follow-up, does the third-party manufacturing have a trickle-down and pass-through effect? Additionally, regarding the service levels, I understand that you had to shift all 150 SKUs. Has the service level improved as you exit the quarter? Can you update us on the service levels as expected, and how does that contribute to your confidence in maintaining and potentially increasing your top line?

Yes, those costs would also encompass third-party manufacturing expenses related to the raw materials required. That's our best estimate for the overall annual impact. Regarding fill levels, as Matt mentioned, Q2 was the lowest quarter we've experienced in nearly eight quarters, falling below 80%. This was a challenging transition for laundry, compounded by significant labor issues in one month that surpassed those we faced in many quarters last year. However, to end on a positive note, we achieved mid to high 80s for April, and in some key brands, we're already seeing levels in the 90s. This gives us a lot of optimism, and we can see progress on the horizon, which is why we anticipate recovery in the second half from a supply chain standpoint.

Thank you. I will pass it on.

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 any other household product companies just given the inflationary environment, of course. So I was curious on your perspective on that point. Thank you.

Sure, I'll address the promotional environment first. Currently, we should focus on household products since personal care items are typically not under heavy promotion. Looking at laundry detergent, particularly liquid laundry detergent, the sold-on deal is about 31% to 32%, which is below the historical average of the mid-30s. On a brand level, the value brands like Arm & Hammer, Purex, and Tide Simply are all around 24% to 26% sold on deal. Tide stands out with over 42% sold on deal. Promotions have been lower for some time due to supply shortages and price increases. As you mentioned, it may not revert to historical levels this year, but if it does, we're ready for it. Rick, do you have anything to add regarding that first question?

No, nothing else to add on that one. But on the volume question you had Lauren, I think it's just a combination. And, of course there's always volume implications to rise in 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 Lauren, I can provide some additional information about household litter. Currently, litter sold on promotion is around 10%, whereas it usually falls in the high teens. Many companies, including Clorox, Nestle, and Church & Dwight, experienced supply issues in Q1, leading to intermittent out of stocks and low promotions. Therefore, it may take some time for this to recover for the rest of the year, but as I mentioned earlier, we will be ready if it does.

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

Everywhere we raise prices, we have observed negative impacts on volume due to elasticity. Historically, we noted these negative elasticities. For example, if we increase the price of laundry by 1%, we anticipate a 1% decline in volume. However, we have found that our elasticities are 20% to 30% better than we initially expected. This means that if the price goes up by 1%, our volume would only decrease by about 0.8%. In every instance where we have raised prices, we have experienced negative volume elasticity, but it has been more favorable than anticipated.

Okay. All right. Thank you for the clarification.

Yes. 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 in place in different parts of the business and the world and everybody 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 round about a year. And to some extent, I think the impact at least my perspective is they've been a little bit more severe. You've been talking about leaving money on the table for multiple quarters now. So I guess just the question is acknowledging your optimism over the balance of the year just, has it caused you to rethink at all the balance of in-house versus third parties, or just your diversification of suppliers and force to contemplate any change as you go forward, or are you kind of holding path on the supply chain structure as it exists?

No, yes, that's a good question, Steve. We have implemented significant changes in our supply chain to create a shorter and more resilient system. Our supply chain team has qualified many new co-packers and suppliers to ensure that we are prepared for any future uncertainties, such as another pandemic or unexpected events. This has resulted in a lot of work for our teams over the past couple of years, but we believe that once we emerge from this situation, we will be more resilient than before. The challenges we faced have highlighted some weaknesses in our structure, which we have now addressed over the last 18 months.

To add to that, the majority of the issues we encounter are not due to outsourcing a large portion of our finished goods to third-party manufacturers. Instead, they stem from having one or two key raw material suppliers or not being fully vertically integrated. The positive aspect is that these decisions were made a year ago to make adjustments and improvements. We are now witnessing more of these improvements coming online each month. This is why our fill rates saw significant improvement in April and why we anticipate this trend to continue.

Okay, that's great. The overall supply chain has been strengthened with redundancy built in as we address current issues. Once everything is back online, this redundancy will be operational again, and the entire system should be more resilient heading into 2023. I believe that's a fair takeaway.

Yes. That was the goal when we started and that's where we're going to land, Steve.

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

Hey, good morning. Hey, good morning everyone. Hope you are 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 Matt, I know you discussed some of the recent trends in value detergent, cat litter, shower heads, et cetera, that I guess led to some of the comments in the release around the portfolio's performance during 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 our remarks about what we're seeing are important to note. Value detergent has been losing ground to premium for many quarters, but in the first quarter, it has stabilized. The trends we noticed in the first quarter with our orange box in litter show that value is now gaining momentum faster than our black box, which is premium, marking a reversal of earlier trends. So yes, the observations are recent, and we're generally very open about what we see during these calls, which influences our outlook for the future. It's possible that the situation could be due to a few months where people are traveling more and spending on experiences rather than products. Yes, that could be a factor, but we wanted to make everyone aware of what we are observing.

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 around 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 that last 80% tranche of pricing is actually a full quarter effect. So it will be at or above Q1. Okay. Thank you, so much.

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

Hi. I know the call has gone on for a while, but I have a brief question about the VMS business. I recall you mentioned earlier that you were seeing double-digit or mid-teens pricing in that area. This surprised me because I thought it would have a higher gross margin, possibly due to lower ingredient costs. So, firstly, why is the price increase so significant? Secondly, I understand it's a smaller part of the business, but I’m curious about it. Since it's more of a discretionary product, unlike laundry detergent, do you expect greater elasticity of demand in the VMS market? Thank you.

VMS is performing well, with high demand still. We have raised prices in the low teens, and competitors are also increasing theirs by 6% to 10%. Historically, our products have been positioned as the value option among gummies, and we will continue to maintain that with the price hikes. We have some flexibility to raise prices further. Factors like ingredient costs, inputs, and transportation are affecting the vitamin business, much like in other sectors. The category remains healthy, with strong demand; the gummy category saw an 11% increase in consumption in Q1, and our household penetration appears to be stable. Additionally, the wellness trend continues to provide support. We have also seen growth in the nasal hygiene business, which was once sluggish but is much more developed internationally with products like STERIMAR. The private label share of gummies has decreased from 24% to 22%, representing a 200 basis point drop. Overall, the category appears strong, although we are currently facing supply challenges.

Got it. That’s very helpful color. Thanks so much.

Okay.

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