Church & Dwight Q1 2022 Earnings Call Transcript

Participants

Corporate Executives

• Matthew T. Farrell, President and Chief Executive Officer
• Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations

Analysts

• Kevin Grundy, Jefferies Financial Group Inc.
• Bill Chappell, Truist Securities
• Dara Mohsenian, Morgan Stanley
• Rupesh Parikh, Oppenheimer Holdings Inc.
• Jason English, The Goldman Sachs Group, Inc.
• Chris Carey, Wells Fargo & Company
• Olivia Tong, Raymond James
• Andrea Teixeira, JPMorgan Chase & Co.
• Lauren Lieberman, Barclays PLC
• Steve Powers, Deutsche Bank Aktiengesellschaft
• Peter Grom, UBS Group AG
• Wendy Nicholson, Smith Barney Citigroup

Presentation

[Operator]

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.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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 Dierker 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 $0.83 and that's $0.08 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, ZICAM zinc supplements, and THERABREATH mouthwash. In Q1 online sales as a 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 a percentage of total sales.

Now, since early 2021 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 US. Consumer Domestic business grew organic sales 2.7% and this is on top of 5.1% organic growth in Q1 of 2021. 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 2021, had a great quarter with 37% consumption growth. THERABREATH grew share of 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 THERABREATH remains the number two alcohol-free mouthwash brand. Total distribution points or TDPs as we call them for the THERABREATH brand are up 20% versus a year ago. ZICAM also delivered strong results this quarter. You may recall we acquired ZICAM at December of 2020. We were hurt in year one of our ownership due to masking and social distancing. ZICAM 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 L'IL 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 in Q1. 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 STERIMAR, BATISTE, OXICLEAN, 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 with 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 flosser 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 valued and we expect to perform well in a difficult economic environment. And just to remind everyone, our largest businesses -- larger detergent and vitamins are value products. And in litter, our orange box is also valued. 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 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.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

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 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 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 rate -- 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.

Questions and Answers

[Operator]

[Operator Instructions] Your first question comes from the line of Kevin Grundy of Jefferies. Your line is open.

[Kevin Grundy, Analyst at Jefferies Financial Group]

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?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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.

[Kevin Grundy, Analyst at Jefferies Financial Group]

Got it yes go ahead I'm sorry.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

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.

[Kevin Grundy, Analyst at Jefferies Financial Group]

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 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.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

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 gets 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 staple. But I'll let Matt talk more about the consumer.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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

[Kevin Grundy, Analyst at Jefferies Financial Group]

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?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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. It's $80 to get a tank of gas. The household balance sheets are thought to be strong because of accumulated savings. But 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 we did take price on laundry detergent in mid-2021 and those were high single-digits. And we've seen others take price as well in large Henkel for example, across all Sun and Purex, they've taken price increases of high single-digits to mid-teens. And even P&G for Tide Gain and Tide Simply is up 6% to 10%.

And we're a value product. So given the most recent tranche of inflation, we're taking another step-up, which we will quantify that until we see again in July. So that's the story on laundry and litter. 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 Fresh Step by high single digits. So -- and then if you went over to vitamins, we raised prices low teens and we're valued in vitamins. So we have more room because we're historically the value gummy but 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 the elasticities have been too bad. But we think we're done for now with respect to pricing. We've had a couple of rounds in laundry and litter. We've done something in vitamins and we've done -- made surgical strikes in all the other categories. And because we have our -- the split between premium and value 60-40, we think we're in good shape whatever comes.

[Kevin Grundy, Analyst at Jefferies Financial Group]

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

[Operator]

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

[Bill Chappell, Analyst at Truist Securities]

Thanks Hi, 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 without knowing all the details, yet? I'm just trying to understand -- because where you see you kind of guiding down in the second quarter, which is not always guiding down for the full year.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Is that a multiple choice question Bill?

[Bill Chappell, Analyst at Truist Securities]

Yes. Take C.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Well. Hi, Bill, it's Rick. I'll take a -- it's relatively straightforward, right? We didn't change our revenue outlook range at all. So we still feel like overall net health of the annual consumption is strong. And as we improve our pricing, we have the ability to land anywhere within that range. So from a revenue perspective that's true international that's true. Orders fill will get better and international will get better as well. So the top line I would put that in a sound space but primary reason we adjusted the EPS outlook was because of inflation $85 million of inflation. And whereas before a quarter ago I said, hey -- online in the back half for resin ethylene and we think that it's going to be down anywhere between nine 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.

[Bill Chappell, Analyst at Truist Securities]

Okay. Now that helps for the color. Just one more on that like 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 is there -- it's not that scientific?

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

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.

[Bill Chappell, Analyst at Truist Securities]

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.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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.

[Bill Chappell, Analyst at Truist Securities]

Thanks so much

[Operator]

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

[Dara Mohsenian, Analyst at Morgan Stanley]

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?

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Hi, Dara, it's Rick. I think 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 the period of March and April. And the good news is we've recovered on that now. So -- but that's what you're seeing in terms of the expectation is that's why we're slightly worse on volume.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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.

[Dara Mohsenian, Analyst at Morgan Stanley]

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.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

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.

[Dara Mohsenian, Analyst at Morgan Stanley]

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?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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 2022 notably in laundry detergent with the baby product that we just launched is incremental. So we're going to spreading that on shelf. So, yeah, we -- it's one of the reasons why we feel confident about the year.

[Dara Mohsenian, Analyst at Morgan Stanley]

Okay. Thanks guys.

[Operator]

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

[Rupesh Parikh, Analyst at Oppenheimer]

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?

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Yeah. No great question Rupesh. So we just said we are -- and in our original outlook contract and that's kind of what we reemphasize 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 an 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 -- supply chains back in stock and fill levels we have fewer trucks. We're very inefficient still in Q1. And then productivity build 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.

[Rupesh Parikh, Analyst at Oppenheimer]

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 the 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?

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

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

[Rupesh Parikh, Analyst at Oppenheimer]

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

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

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

[Rupesh Parikh, Analyst at Oppenheimer]

Okay, great. Thank you.

[Operator]

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

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Hey Jason.

[Jason English, Analyst at The Goldman Sachs Group]

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 you're narrative in terms of supply constraints suggests that it should actually be going the other way?

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

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.

[Jason English, Analyst at The Goldman Sachs Group]

And did you go in isolation? Or is the rest of the category compacted a comparable magnitude at the same time?

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

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.

[Jason English, Analyst at The Goldman Sachs Group]

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?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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.

[Jason English, Analyst at The Goldman Sachs Group]

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

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Okay.

[Operator]

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

[Chris Carey, Analyst at Wells Fargo & Company]

Hi guys. How are you?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Hey.

[Chris Carey, Analyst at Wells Fargo & Company]

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 from the new pricing coming through it would suggest that maybe you're in the 5% pricing range in Q2 and so embedding volume elasticity is that fair? And then, 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 how much of this is pure elasticity as the recovery in the supply chain as laundry is still catching up? And so I'm just trying to frame those competing dynamics.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

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. We had said -- I had said previously we thought volume was minus one and price was plus 5.5 and that's how we got to the midpoint of our revenue range of 4.5 organically. And now I would probably say, it's closer to minus three on volume and plus seven or so on price. And it's -- the volume piece is of course the new pricing the elasticities for Fabric Care and Litter. And then, also Matt alluded to it in his comments, the DIY shopper foot traffic some of those hardware stores are down by about 10% or 12%. So we think that the Shower Heads 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 the THERABREATH a lot of the brands in the portfolio for personal care are doing well.

[Chris Carey, Analyst at Wells Fargo & Company]

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.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

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.

[Chris Carey, Analyst at Wells Fargo & Company]

Okay. Thanks so much.

[Operator]

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

[Olivia Tong, Analyst at Raymond James]

Great, thank you. I just want to follow-up on a couple of things. First in terms of the supply chain constraints you talked about incremental pricing in laundry and litter. On an annualized basis is that -- how much of the cost inflation that you mentioned, does it, gets covered by that pricing? And then since those were some of the first categories to go last year should we be thinking that at current levels, you'll be evaluating sort of the same playbook as last year, as different pricing maneuvers lap? Or is this pricing that you're planning to take right now and not for the inflation forecast that you already see combined with the productivity initiatives that you updated us on?

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

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?

[Olivia Tong, Analyst at Raymond James]

Yes, 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 -- the rest of the categories that went as the year progressed?

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

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.

[Olivia Tong, Analyst at Raymond James]

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?

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

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.

[Olivia Tong, Analyst at Raymond James]

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 less -- more depleted in terms of their inventory or are they just pulling consumption? Just kind of curious what's happening to that lost sale? Thank you.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Yes. No there's definitely some lost sales and in some cases, you can lose shelf space. Remember and particularly in our Global Markets Group we're dependent upon distributors to interface with the retailers. But it's -- 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.

[Olivia Tong, Analyst at Raymond James]

Got it. Thank you so much.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Okay.

[Operator]

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

[Andrea Teixeira, Analyst at JPMorgan Chase & Co.]

Thank you. Good morning. So following up on inflation, I thought you were 60% hedged heading into the quarter. And I believe you obviously, it makes us saying 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 '23? And then just as a fine point on clarification on the pricing in laundry and also in the litter side. So, you said -- 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 of compaction to help you most of that? Or it's both? And then can you also update on the litter side please? Thank you.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Yes. I'll take the -- your second question first. We're only Andrea, 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.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Yes. And then on your comment on the hedge, yes you're right we were 60% hedged within the year. 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 -- we do at times have hedged diesel. We just have not hedged a lot of diesel in 2022. So a lot of that diesel -- very quickly and then all the derivative products of oil that go through the supply chain. So that's really the basis of that.

[Andrea Teixeira, Analyst at JPMorgan Chase & Co.]

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

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Yes, you're right. Those costs would also include third-party manufacturing costs that are especially for the raw materials components that they would have to have. So that's our best guess for 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 that was a bumpy transition for laundry, but it was also as Matt said in one month we had more out of -- 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 in some key brands we're hitting in the 90s again already. So 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 a supply chain perspective.

[Andrea Teixeira, Analyst at JPMorgan Chase & Co.]

Thank you. I will pass it on.

[Operator]

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

[Lauren Lieberman, Analyst at Barclays]

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.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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 if we look at laundry detergent and where it is right now if you look at say liquid laundry detergent. The sold-on deal is around 31%, 32%. And normally it's in the mid-30s. So it's off the historical levels. And if you look at on a brand basis the kind of -- 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 promoters is Tide. It's over 42 - it's 42% actually. And there were lower promotions frankly for a while now primarily due to supply shortages. And as you point out the introduction of price increases. So you're right it may not return to historical levels this year. But if it does we're prepared for it. And Rick anything you want to add to take on that first question?

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

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.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

And 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 so intermittent out of stocks. So again low promotion. So yes it will probably be a slow roll for that to come back for the remainder of the year but as I said before if it does we'll be prepared.

[Lauren Lieberman, Analyst at Barclays]

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?

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Everywhere we raise price we have seen elasticity negative impacts on volume. We -- 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 raised price by 1% we expect volume to decline by 1%. In context of 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%. In context of 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% of it, okay? So I would just say in every case, we've raised price, we have seen negative volume elasticity, but they've been better than we expected.

[Lauren Lieberman, Analyst at Barclays]

Okay. All right. Thank you for the clarification.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Yes. All right.

[Operator]

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

[Steve Powers, Analyst at Deutsche Bank Aktiengesellschaft]

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?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

No, yes, that's a good question, Steve. We've made major changes in our supply chain. And what we're trying to do right now is have a shorter more resilient supply chain. And 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 -- across the system, because there's no telling whether or not there's -- someday there's going to be another pandemic or some other black swan event. So, we said we got to be prepared for that. And 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 in the last 18 months.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

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 raw -- 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.

[Steve Powers, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. That's great. Yes. So the changes -- 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 things are back online you should also have that redundancy back online and the business -- the whole system should be stronger into 2023. I think that's my takeaway. Is that fair?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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

[Steve Powers, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. Perfect. Thank you. Thank you both.

[Operator]

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

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Hi, Peter.

[Peter Grom, Analyst at UBS Group]

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, etc., 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?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

No. I would say, our remarks about what we're seeing with -- just to remind you, we still -- value detergent had been losing ground to premium for many quarters and then in Q1, so this is recent. It's now kind of flattish. And the trends we saw are Q1 trends 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 the prior trends. So, yes, I mean the commentary is recent and 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 went may be ahead. Now is it -- 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. Yes, that could be part of it, but we did want to alert everybody to what we're seeing.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

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.

[Peter Grom, Analyst at UBS Group]

Okay. Thank you, so much.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Okay. Thank.

[Operator]

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

[Wendy Nicholson, Analyst at Smith Barney Citigroup]

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 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 like why that the price increase is that high? And then secondarily, just -- and I know it's a small business, but still interested in it. Given that it's kind of more of a discretionary product, I don't need it may be as much as I don't need vitamins as much as I need laundry detergent. Do you expect to see more elasticity of demand in the VMS space? Thanks so much.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

VMS is actually holding up well. So demand is still high. As far as the price goes, the -- what I said, we've raised prices low-teens and that competitors are going up as well 6% to 10%. And historically, our -- have been the value gummy and still will be with these price increases. So we've had more room to move up. And yeah, ingredients and inputs and obviously transportation costs are all impacting the vitamin business. So it's no different than the other business as far as our logic for raising price. But the category is healthy. Demand is still strong. The gummy category was up, consumption was up 11% in Q1. And our household penetration is up appears to be sticking. And you always have the tailwinds of the wellness trend. Despite of this we also have a business for nasal hygiene and that was a pretty sleepy category once upon a time. It's much bigger outside the US, where we have a product like STERIMAR, but nasal hygiene category has been picking up. And I guess the other comment on the categories is private label share of gummies has declined. 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 strong. Our issues are supply issues frankly right now.

[Wendy Nicholson, Analyst at Smith Barney Citigroup]

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

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Okay.

[Operator]

[Operator Closing Remarks]