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Church & Dwight Q2 2022 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-K Filing View Latest SEC 10-Q Filing

Participants

Presentation

Operator

Good morning ladies and gentlemen and welcome to the Church & Dwight Second Quarter 2022 Earnings Conference Call. Before we begin, I have been asked to remind you that this call -- 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 Financial Officer of Church & Dwight. Please go ahead, sir.

Matt Farrell
Chief Executive Officer at Church & Dwight

Actually, I got promoted as CEO about seven years ago. But anyway, good morning, everyone. Thanks for joining us today. We got a lot to talk about. I'll begin with a review of the Q2 results. And then I'll turn the call over to Rick darker, our CFO and when Rick Stein is done we'll open the call for questions.

So Q2 was a solid quarter for us reported revenue was up 4.2% organic sales grew 3.4% and this was in line with our three to 4% outlook. The adjusted EPS was $0.76. Now this was $0.06 higher than our outlook, but that was due to lower marketing. We grew consumption in 11 of our 17 categories in which we compete, and in some cases on top of big consumption gains last year. Fill rates have improved to 90% in June, and we expect to get back to historical levels by the end of the year. Regarding brand performance, we experienced double-digit consumption growth in 6 of our 17 categories and I'll name them for you. ARM & HAMMER Scent Boosters, ARM & HAMMER Baking Soda, ARM & HAMMER Clumping Litter, BATISTE dry shampoo, ZICAM zinc supplements, and THERABREATH mouthwash. And we gained a share on 8 of our 14 power brands. So that's a good story our shares are healthy.

In Q2 online sales as a percentage of total sales was 16%. Our online sales increased 15% year-over-year, and we continue to expect online sales for the full year to be up above 15% as a percentage of sales. Since early '21, we have announced price increases to combat inflation. And through mid-2022, we have already announced price increases covering 80% of our global portfolio. And we did a second round of price increases in laundry and litter that just hit the shelves. But at the same time cost inflation continues to climb. So since we spoke to you in April, we are now expecting $50 million of new incremental costs inflation. So the cumulative incremental cost inflation is $135 million since we gave our initial full-year outlook, way back in February. Now the incremental $50 million of inflation combined with currency headwinds caused us to lower our full-year EPS outlook. We now expect 6% operating income growth offset by a much higher year-over-year tax rate.

Now I'm going to comment on each business. First up is U.S. consumer business, which grew organic sales by 2.4%. Looking at market shares as I said before, we had good numbers as 8 of our 14 power brands gained share. Looking ahead, we expect even further improvement in our market share positions by year-end, as our fill rates will improve and promotional and marketing spend increases in the back half. Let's look at a few of the important categories. Let's start with laundry. The trade down to value detergent has begun. Give you some numbers, for example, during Q2 the liquid laundry category grew 7%, but value laundry detergent grew 11%, while premium laundry grew 4%.

In litter the category grew 12%, both our black box, which is premium and our yellow box which is value had double-digit consumption growth in Q2. The dry shampoo category was up 18% in Q2, while BATISTE consumption was up 43%. Our growth would have been higher if not for our difficulty in securing aerosol cans and actuators. Over in gummy vitamins, the sequential quarterly growth of the category is slowing down. For the last three quarters, the category growth rate has been 16%, 10% and most recently 5%. We expect the category growth to turn negative in Q3, simply because we are lapping the consumption spike from the delta variant in last year's Q3. And we continue to struggle with fill rates which is hampering our ability to grow.

Our most recent acquisitions are performing well THERABREATH, which we acquired in December of 2021 had a great quarter with 33% consumption growth THERABREATH grew share 3.1 points to 16.4% of the alcohol-free mouthwash category. THERABREATH is the number two non-alcohol mouthwash, and is solidly the number four brand in total mouthwash. ZICAM is our other recent acquisition. ZICAM also delivered strong results this quarter. You may recall we acquired ZICAM in December of 2020. We were hurt in year one of our ownership due to masking and social distancing. ZICAM cold remedy consumption was up 55% in Q2 and is the number one brand in the cold shortening segment with a 75% share. Now looking ahead to the rest of the year. The regular flu season in the U.S. is projected to be more severe than recent years based on what the southern hemisphere is experiencing right now.

Next up is International despite significant disruptions, our International business delivered organic growth of 6.5% in Q2, primarily driven by BATISTE in Europe, vitamins and BATISTE in Canada and growth across the GMG business, which is our export business. In April when we spoke to you we expected flattish growth in Q2 and a continuation of the supply chain woes, we experienced in Q1, such as fill level issues and delivery issues. Those actually prove to be less disruptive in the quarter than we anticipated. However, fill levels and delivery issues will continue to weigh on our global markets group in the near-term.

Next up is specialty products, specialty products business delivered a strong quarter with 6.3% organic growth, driven by both higher price and volume. And I want to spend a couple of minutes discussed discussing our more discretionary brands, since they are having an impact on our full year revenue outlook. We see lower consumption for Water Flossers in the U.S. as consumers trade down to lower price Water Flossers. Also the WATERPIK Asia Pacific flosser consumption has and is expected to decline as a result of lockdowns. Similarly, there is a lower demand for WATERPIK showerhead, and this is due to less do-it-yourself projects, a lot of those got completed during COVID times. WATERPIK is a discretionary purchase and we continue to invest in demand driving activities such as lunch and learns to drive household penetration flossers.

It's fair to say gum health is not gone away and still only 16% of the U.S. population flossers every day. Now this is a business that has average high single-digit growth top-line since we acquired them in 2017. And we're confident that the long-term growth prospects for WATERPIK are sound. The other discretionary brand we have is FLAWLESS, we're experiencing lower consumption, but that is largely due to the absence of our new products in this fast-moving beauty category. China lockdowns have impacted our manufacturing and the new product launches that were planned for the first half have been delayed until the end of '22.

Now I want to spend a few minutes on the health of the consumer, private label trends, innovation and our ability to supply. Our innovation is at a multi-decade high and interest rates are rising to tamp down inflation. And while wages have risen households are getting squeezed and the consumers are making choices to make their dollars go further. And I think back to April during our Q1 call, we called out the strengthening value detergent segment, in the latest four weeks ended July 17th value liquid laundry detergent category is up 8%, deep value is up 1% and premium is down 1%. So we think the trade-down is happening. Here is an early indicator of trade down this time in oral care, we had one major retailer point to the strength of manual toothbrush which is held up well for them in contrast to declines in rechargeable and power toothbrushes. This trend impacts both WATERPIK and SPINBRUSH and here are a few numbers to illustrate the trend. The Flowserve [Phonetic] category was down 7% in Q2 and battery operated toothbrushes the category was down 4%, also in Q2. So, we're keeping an eye on these and other trends. It's important to point out that 40% of our portfolio is value, and we expect to perform well in a difficult economic environment.

Our largest businesses detergent environments are value products and in litter our orange box is also value. So we feel well positioned for what may be coming. Now regarding private label, private label shares are stable in the five categories where we have meaningful exposure to store brands. As you saw in the release, we have a strong lineup of innovation across our personal care and household categories. I want to highlight the early success of ARM & HAMMER Baby laundry detergent, which has already achieved a 10% share of the baby launch of category at Walmart. The other product like to highlight is TROJAN raw, which is the finish condom now in the market, which is already the number 6 out of 400 SKUs sold on Amazon.

Also want to mention our recent launch of a new lightweight litter that we call Hardball, we expect over time this will enable us to get our fair share of the lightweight litter category. For the cat owners on the call today, we named it Hardball because of the hard ultra-compact clumps it's quite a unique consumer experience. Now regarding ability to supply. You may recall we hit bottom in Q1 with the Omicron resurgence when we saw our fill rates dip below 80%. The overall Q2 fill rates improved to 89%. Although recovery in our high margin personal care side of the business is still lagging. We're on track to be near historical fill levels by the end of the year. And the good news is July continues to show improvement.

We have confidence in our revised full-year outlook for several reasons, improving fill rates, trade down to value, healthy new product innovation, and consumption strength in our recent acquisitions. Regarding support, we have key promotional events lined up in the second half and two-third of our full year advertising spend is concentrated in the second half. 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 acquisitions.

Next up is Rick to give you more details on Q2.

Rick Dierker
Chief Financial Officer at Church & Dwight

Thank you, Matt, and good morning, everybody. We'll start with EPS. Second quarter adjusted EPS was $0.76 flat to prior year, the $0.76 was better than our $0.70 outlook, primarily due to continued strong consumer demand and lower marketing spend due to below normal fill rates in our personal care business. The marketing impact was about $0.04 in the quarter. Good news is our overall fill rate continue to show improvement and hit 89% for Q2. Reported revenue was up 4.2%, reflecting a 1% drag from currency, organic sales were up 3.4% in line with our outlook. Matt reviewed the top line for the segments, so I'll go right to gross margin for the company.

Our second quarter gross margin was 41.2%, a 220 basis point decrease from a year ago. Let me walk you through the Q2 bridge, gross margin was impacted by 600 basis points of higher manufacturing costs, primarily related to commodity inflation, distribution and labor as well as a 10 basis point drag from currency. These costs were offset by a positive 270 basis point impact from price volume mix, positive 20 basis points from acquisitions and a positive 100 basis points from productivity. Moving to marketing, marketing was down $14 million year-over-year, marketing expense as a percentage of net sales to 7.8% and we expect two-thirds of the advertising to be concentrated in the second half as case fill improves.

For SG&A, Q2 adjusted SG&A decreased 10 basis points year-over-year. Other expense all in was $15.1 million, a $3.7 million increase resulting from higher average debt outstanding. And for income tax, our effective rate for the quarter was 24.1% compared to 24% a year ago. And now of cash for the first six months of '22, cash from operating activities decreased 10% to $310 million due to lower cash earnings and higher working capital, driven by higher inventory levels. We expect inventory to get back in line by year-end. And as of June 30th cash on hand was $640 million. Looking ahead to Q3, we expect reported sales growth of approximately 2% to 4%, organic sales growth of approximately 1% to 3% and gross margin contraction.

Sequentially, we are decelerating from Q2 as our VMS business comps to COVID surge from a year ago and we see a tightening in the consumer for our discretionary products, such as WATERPIK and FLAWLESS. Those two reasons coupled with the inventory issues, we've all heard from retailers compressed Q3 growth. Adjusted EPS is expected to be $0.65 per share, a 19% decrease from last year's adjusted Q3 EPS. This is largely due to higher SG&A, which is normalized levels of incentive comp versus year ago plus higher marketing and promotional support. We expect higher EPS in Q4 to us at the Q3 declines, driven by acceleration of organic growth in the absence of prior year one-time investments.

And now to the full year. We now expect the full-year outlook for reported sales growth to be approximately 46%, reflecting an incremental drag from currency of 1%. We now expect organic sales growth to be approximately 3% to 4% as you read in the release we now expect an incremental $135 million of cost inflation for the year, which is $50 million higher than our April outlook. On a longer time horizon, we continue to plan on offsetting inflation with incremental pricing, laundry compaction, and productivity. We continue to anticipate full year reported gross margin to be down versus 2021 as inflation is partially offset by pricing and productivity. We continue to expect gross margin to improve sequentially in Q3 and increase year-over-year in Q4. Marketing spend is now expected to be lower in 2022, driven by the lower spend in the first half of the year.

We now expect full year adjusted EPS to be flat to 2021 due to incremental inflation and currency headwinds. We continue to expect the full year tax rate to be 23%. We expect cash from operations for the full year to be approximately $900 million, down from $920 million and our full year capex plan is now approximately $180 million as we continue to expand manufacturing capacity.

In closing, we continue to perform in a volatile environment, our share performance improved again in Q2, and we expect further market share gains in the second half as we invest in our brands and supply chain fill levels improve.

And with that, Matt And I would be happy to take any questions.


Questions and Answers

Operator

[Operator Instructions] And our first question comes from the line of Kevin Grundy from Jefferies. Your question please.

Kevin Grundy
Analyst at Jefferies Financial Group

Great, thanks. Good morning, everyone. Two from me if I could, Matt. So I think you probably been a little bit more cautious on the consumer probably earlier than maybe some of your peers. I think everyone got off Procter's call this morning. They're calling for a category slow down as well. So, without asking you to be redundant, Matt, you called out some of your more discretionary categories, you're also calling it out in laundry, maybe you could just talk about the scope and the exposure within your product portfolio in terms of where you expect to see further trade down and outside of what you called out maybe talk about the change in category growth rates underlying your guidance for the year? And then I have a follow-up next.

Matt Farrell
Chief Executive Officer at Church & Dwight

It's a pretty broad question, Kevin. Yes, as far as the categories go let's start with some discretionary. So I did mention that both the Water Flossers and FLAWLESS were both struggling due to trade down. Trade down for WATERPIK but also the absence of new products for flawless. But if you think about our portfolio and 90% of our portfolio just our everyday essentials only 10% that's related to discretionary products. So although we spent a lot of time talking about the discretionary products and because they do have have had an impact on our full year call, it's not the whole story. You have -- I mentioned that we had growth in 11 out of our 17 categories that we're in and we do expect that to continue in the second half. There are few categories I called out besides that WATERPIK and FLAWLESS like SPINBRUSH for example battery-operated was down a little bit. As far as others, NAIR is another one that was soft in the quarter, depositories and also Oragel. But everywhere else those categories you saw growth.

Kevin Grundy
Analyst at Jefferies Financial Group

Okay. Yes, my follow-up is probably for Rick just in terms of the EPS outlook, the environment is clearly challenging, costs have gotten worse, FX not as big a headwind for you guys, but nevertheless still a headwind. Talk about the constraints on the pricing front? And then historically Church is well thought of and run pretty lean but other levers to pull here in terms of productivity to offset some of the cost headwinds? And then I can pass it on. Thank you.

Rick Dierker
Chief Financial Officer at Church & Dwight

Yes, sure, Kevin. So from an EPS perspective, we've announced our second round of pricing as an example for laundry and litter that'll be a tailwind. Our personal care fill levels returning from low 60s back to normal will be a tailwind. Promotional support, because we didn't have the fill levels in the first half of the year to do promotions like we normally would do is in the back half, that's a tailwind. We think trade down is a tailwind in general, laundry, Matt quoted some numbers on there about how well the value category is starting to grow in just that segment. So we think we're well positioned that for all those reasons for EPS, we also mentioned. Q3 is down big but Q4 is up big and Q4 is also lapping some of those investments and one timers that we had talked about previously. So that's on the EPS side.

On productivity, now we talked last quarter I think Lauren asked a question about productivity phasing and that's so true because early on in this year and even late last year, hard to break into to get line time to go do qualification to do any productivity type efforts. And so, we said it last quarter is still true, it's going to continue to build through the year and as we have back at the right capacity and fill levels, then we'll have more and more time to devote to productivity at our plants.

Kevin Grundy
Analyst at Jefferies Financial Group

Okay, very good. Thank you, guys. Good luck.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Rupesh Parikh from Oppenheimer. Your question please.

Rupesh Parikh
Analyst at Oppenheimer

Good morning, thanks for taking my question. So I guess I just wanted to go back to the gummy vitamin category. So you guys talked about slowing category growth. So I was curious what's driving that lower category growth? And then secondarily, you mentioned that your fill rate is still being challenged when do you expect your fill rates to get back to where you'd like it to be?

Matt Farrell
Chief Executive Officer at Church & Dwight

We expect the fill rates to be back to where it should be, which is in the mid to high 90s by the end of the year, Rupesh. Household is ahead of personal care right now, of course, personal care is our higher margin stuff. That's the one we're focused on the most right now.

Rick Dierker
Chief Financial Officer at Church & Dwight

Yes, just to give an example, on that, Rupesh, we were in the low 60s on fill rate for personal care within the portfolio in Q2. We had 74% in the month of July. So we have visibility into rapidly improving that number.

Matt Farrell
Chief Executive Officer at Church & Dwight

Yes. And as far as vitamins go if you keep in mind you're growning off a really gigantic base the last couple of years with growth in '20 and '21. So although the growth rate is slowing down, it's because of the comps year-over-year. But last year Q3 was just a huge spike for the -- in the quarter because of the delta variant Q3 of last year. So consequently, I think that's a really tough comp and so consequently, we expect it to go negative year-over-year.

Rick Dierker
Chief Financial Officer at Church & Dwight

As an example, Rupesh Q3 last year the category grew 3% the rest of the quarters grew 19% Q1, Q2 and Q4. So it's just -- it's more of a comp issue than anything.

Matt Farrell
Chief Executive Officer at Church & Dwight

Yeah.

Rupesh Parikh
Analyst at Oppenheimer

Okay, that's helpful. And then just on the cost side obviously cost pressures continue just based on your visibility right now like any sense the cost pressures could be peaking and maybe as you look forward to next year some of these pressures could rollover? And then just more color the risk that you see to your cost outlook for the balance of the year?

Rick Dierker
Chief Financial Officer at Church & Dwight

Yeah, I'll leave you with two thoughts really. On the cost side, we do think there'll be inflation next year. We think that inflation will only come down as demand comes down. And so if we enter into a recession. We think that demand will start to slow in general for the macro economy. So we're -- now usually we would be, I don't know, 50% hedged from a commodity perspective for next year by now, we're not hedging at all as an example, hopefully, that gives you some context.

Rupesh Parikh
Analyst at Oppenheimer

Okay, great. Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Chris Carey from Wells Fargo. Your question please.

Chris Carey
Analyst at Wells Fargo & Company

Hi. Good morning, everyone.

Matt Farrell
Chief Executive Officer at Church & Dwight

Hello, Chris.

Chris Carey
Analyst at Wells Fargo & Company

Hi. I'm just -- maybe we could talk a bit more about the phasing for the year Q3 versus Q4 I'm specifically trying to understand really the snapback that you're expecting in Q4 and what's driving that? And perhaps within that you can comment on whether there are specific volume headwinds you expect to improve in Q4 versus Q3? Do you have specific promotional plans in Q3 which will not reoccur in Q4? Is this really a call on the consumer trading down and that benefit accruing to you? So just trying to get some incremental context there really confident on that recovery that you're expecting now in the Q4 relative to the Q3? And I have a follow-up.

Matt Farrell
Chief Executive Officer at Church & Dwight

Yes, okay. Well, there are a lot of factors influencing this. So, for example, the fill level improvement we're leaving money on the table in several categories. So we do think that once that gets fixed, particularly in the personal care side that we're going to benefit from that and it's more back-end loaded Q4 than Q3. It is true that we've got both trade and advertising in place for Q3 and Q4. We do think as the economy, the recession or some people call a recession deepens that the trade down will continue and accelerate, so that's an element of it as well. So, I mean, you're calling out the right levers with respect to the second half.

Rick Dierker
Chief Financial Officer at Church & Dwight

Let me give you some numbers to go with that. So our guide for Q3 organically is 1% to 3% which implies a 5% plus number in Q4. And so, as Matt said, personal care fill levels are fully back, promotional supports there we think trade down is accelerating as well in Q4. So all those reasons, we think, organically we're doing better. That helps EPS as well of course, but we also have some higher inflation expectations in Q3, higher SG&A as we had some one-time catch up a year ago for incentive comp was a lot lower a year ago. And then we have higher tax in Q3 as well. So we believe both organically and from an EPS perspective, we have an inflection going from Q3 to Q4.

Chris Carey
Analyst at Wells Fargo & Company

Okay, thank you. And the quick follow-up would just be in Q2 price mix was below our expectations perhaps a bit below your expectations going into the quarter. I'd be curious your thoughts there. Despite what we're seeing as pretty strong pricing in consumption data. And so can you maybe provide some context on why that's happening? Did promotional activity accelerate heavier than you were expecting in the quarter and now that's flowing into the back half of the year and perhaps that's why the organics getting pulled down in addition to volume? Were there specific mix impacts that were a bit worse than you had been expecting? So really what I'm trying to get a sense of is the Q2 price mix key drivers and just how that's really informing your back half expectations? Thanks.

Matt Farrell
Chief Executive Officer at Church & Dwight

Yes, it's pretty straightforward, Chris. No change relates to our pricing aspect of it. That's all going well. We threw out another round of laundry and litter that's going well early days. We'll continue to evaluate whether we need to do incremental pricing as cost inflation happens, but Q1 to Q2 we decelerated from a price volume -- price mix perspective from 7.8% in Q1 to 6.2% that entire deceleration is negative mix from WATERPIK and what do I mean by that. I mean, consumers trading down from a higher price unit to a lower priced unit. So that's the entire delta right there it inflects positively again in Q3 and Q4 for the company because of the next round of laundry and litter price increases.

Chris Carey
Analyst at Wells Fargo & Company

Okay, thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Olivia Tong from Raymond James, your question please.

Olivia Tong
Analyst at Raymond James

Great, thanks. First, I just want to follow up on that and ask you to talk a little bit about your price mix expectations from here given that you called out your two highest price per unit categories as sort of seeing the deceleration, how you think about that going just -- overall for this slowdown period the macro slow down I'm curious how you're thinking about price mix? And then just broadly, if you could just comment about what you're seeing in terms of elasticities of demand, private label, as private labels starts coming back, how that's impacting your view on trade down? It sounds like you're expecting some benefit from trade down, but do you see any risk that the lower end of your consumer base could potentially trade down as well? Thanks.

Rick Dierker
Chief Financial Officer at Church & Dwight

Yes, I'll take the price mix question, so first half volume would be down 4% and price mix was up 7% and that's how we got to first half result around 3%. We think the second half is down 3% on volume. That's really a slowdown down on the discretionary stuff like WATERPIK, Showerheads for example or FLAWLESS and offset by the value trade down and whatnot. Price mix on other hand is pretty consistent 7% in the first half, 7% in the second half and that's what I said before to Chris was really lower mix on WATERPIK as the trade down happens therefore is a negative, but in the positive is higher price on laundry and litter.

Matt Farrell
Chief Executive Officer at Church & Dwight

Yes. And your question about the private label as I said in my opening remarks, there is 5 categories where we compete with private label and those private label shares have been largely stable, only one has moved up a little bit is litter it's moved up about 1%, it's now 11.9%, but we haven't been interacting with private label in that category as opposed to some of our competitors. So that's why we feel confident that the private label is at least in the near term next six months we don't expect that it's going to be a big issue for us. Does that help you Olivia?

Olivia Tong
Analyst at Raymond James

Yeah. That's perfect. Thanks.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Bill Chappell from Truist. Your question please.

Bill Chappell
Analyst at Truist Financial

Thanks, good morning. Couple just specific I guess housekeeping type things, one on kind of the cost environment, your hedges, historically, I thought you did some hedging on diesel costs. So didn't know with the run-off of energy prices, the potential kind of come back of energy prices, if you are locked in more or have some of it potential where there could be a relief in the back half? And then the second one just on currency and FX exposure, can you just remind us versus the euro, the peso, etc., kind of what your exposure is and what we should be looking for? Thanks.

Rick Dierker
Chief Financial Officer at Church & Dwight

Yes. So I'll take the commodity one first. I think I said earlier, we have very limited hedges out for 2023. We enter this year and I'd say, we're about 80% hedged most of the cost inflation that we're talking about is primarily raw material and pack and that's coming through incremental discussions with third-party manufacturers and it just takes a while for us to go through the supply chain. Our outlook this time versus last time is minimal on commodities, I would say. Of course yes, diesel is up and -- but that is hedged to some degree and ethylene is up and that is hedged to some degree. So that's on the commodity side. On currency a couple of comments on currency, for us we're not that exposed to currency, we just called out a 1% drag on the top-line, 1% drag on the bottom-line. We don't, of course, hedges anything translational transactionally we hedge about 80% of our transactional exposures, whether that's the euro or Canadian dollar.

Bill Chappell
Analyst at Truist Financial

Great, thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Andrea Teixeira from JP Morgan. Your question please.

Andrea Teixeira
Analyst at J.P. Morgan

Good morning. Thank you. I was hoping if you can comment on the mix impact on gross margin, you may see with VMS going negative in Q3 and possibly Q4. I'm assuming that's a headwind, I just want to confirm. And also are you seeing a down trade of that category from your brands into private label? And I do remember you got away from some of the contracts in private label so I was just double checking if it happens this down trade as you mentioned in some categories like laundry that helps you in this case, you may not be helped if you are no longer making private label for some of these customers? Just want to clarify.

Matt Farrell
Chief Executive Officer at Church & Dwight

Andrea, this is Matt. Just with respect to private label, private label shares in vitamins are stable. So we're not seeing the growth in private label. Only of the five categories we compete it's only litter that had an uptick.

Rick Dierker
Chief Financial Officer at Church & Dwight

And you're right, we walked away from the private label manufacturer for vitamins a couple of years ago and we have no plans to get back into that. On gross margin mix there is not much of a mix impact on vitamins whether it grows or it declines from a revenue perspective. Just to talk about gross margin in aggregate in Q1 we were down 190, in Q2 we said it was a lot like Q1 and it did down 220. Q3, we're going to improve from -- a little bit from Q2, but it's not going to be the same improvement that we had thought previously. And then in Q4, we think we're going to inflect positive and it's the same reasons why we talked about last time personal care fill levels, productivity builds, around to a pricing and gross margin in Q4 last year was one of our lower quarters. So I know you didn't asked the detail gross margin, Andrea, but I thought that would be helpful context.

Andrea Teixeira
Analyst at J.P. Morgan

Super helpful. Thank you. I'll pass it on.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Kaumil Gajrawala from Credit Suisse. Your question please.

Kaumil Gajrawala
Analyst at Credit Suisse Group

Hi, guys. Quick question on inventory, just to make sure we heard it -- I heard it correctly. So inventories are -- I guess inventories, you need to work through a little bit. So should we assume that your results are going to lag what we see in terms of consumption for a little while? And then can you also maybe talk about what inventories look like at retail, particularly for WATERPIK in some of the discretionary items as discretionary items at retail series of other categories seem to be quite high?

Matt Farrell
Chief Executive Officer at Church & Dwight

Yes, I think you saw in the release we said we had to get back in line by year-end and really WATERPIK wasn't really because of consumption per se. It was more because we were trying to get ahead of the Chinese lockdown that happened. So we've built up supply so yep it takes a couple of quarters to work through that, especially as consumption comes in a little bit, but we think we'll be in a good spot by end of the year on that one. Similar answer on FLAWLESS, we think we're going to be in a good spot there as well. And then at retail, I think in stock levels are good, especially for our household business. So I think where we're still struggling is our personal care as our fill levels are lower than we like, but we think that we're going to recover pretty quick in the back half.

Rick Dierker
Chief Financial Officer at Church & Dwight

Yes, and you asked about WATERPIK as well and inventory at the on-shelf or at the retailers. I think kind of remind everybody is that WATERPIK about half to half that Flowserve business is online. And so there is a lot inventory that's really carried by the online class of trade. So we don't see it as an issue there with respect to WATERPIK inventories are or softness in sales because of high inventories in the channel.

Kaumil Gajrawala
Analyst at Credit Suisse Group

Okay, got it. And then following up on Olivia's question a little bit, I know you mentioned many, many times private label share has been flat, but if we can maybe just talk about that consumer and the value part of your portfolio and just from a consumption perspective not trading down or trading up, I know you look to benefit from trading down, but are you seeing anything just in terms of consumption. Just with that consumer isolating it to that consumer.

Matt Farrell
Chief Executive Officer at Church & Dwight

Are you specifically talking about vitamins?

Kaumil Gajrawala
Analyst at Credit Suisse Group

No, no, no, I'm sorry, I'm talking about the 40% of your portfolio that would be considered value. I'm just curious what you're seeing in terms of that consumer? I know you're not seeing trading down but maybe they're consuming less buying, less clearing their pantries just curious what you're seeing.

Matt Farrell
Chief Executive Officer at Church & Dwight

Well, if you think about value detergent some of the numbers that I quoted just like in the last four-week period ended July 17. The value laundry detergent is up 11% and deep value is up 1% and premium is a minus 1%. So that's -- so we would say -- and by the way, there isn't a lot of private label in the laundry category liquid laundry detergent it's generally mid-tier. So it's higher priced than our brands. So that's not an issue when it comes to that category. In litter the category grew I think like 11%, 12% in the quarter, we grew even faster, and it wasn't just our premium brands. Our black box comp and fill, but our yellow box, which is the value grew double-digit as well. There is litter private label. But as I said earlier, it's ticked up 1% to 11.9%. But we haven't interacted as much with the private label as some of our peers. The other big category would be vitamins where it's stable. And just a few other ones just to mention you got baking soda and also oral analgesics, which is Oralgel and again the private label shares are pretty stable right now.

Kaumil Gajrawala
Analyst at Credit Suisse Group

Thank you.

Matt Farrell
Chief Executive Officer at Church & Dwight

Okay.

Operator

One moment for our next question. And our next question comes from the line of Stephen Powers from Deutsche Bank. Your question please.

Stephen Powers
Analyst at Deutsche Bank Aktiengesellschaft

Hey, guys. Good morning. I just wanted to start going back to vitamins. I think your call on the third quarter is pretty clear, but what do you think that category goes your business goes beyond 3Q? Number one. And then as you think about the fill rate improving in vitamins, is that more to be a function of your capacity improving or is it actually the category kind of comes back to you and alleviates the pressure through declines?

Rick Dierker
Chief Financial Officer at Church & Dwight

Yes. Hey, Steve. It's. Rick. I think, the back half the category will be under pressure as it was elevated and really all of Q3 for the Delta spike last year and a little bit in Q4. So that's our view. Now remember, if you take a big step back the category has more than doubled over the last two or three years. So again we're really happy with the vitamin category. In terms of fill levels for vitamins, they get better every single day that we really having two issues on two SKUs and that's really driving the issue right now and it's ingredient related. And we finally worked through alternates in the next 30 days or so we should be back on vitamin fill.

Matt Farrell
Chief Executive Officer at Church & Dwight

Yes. And Steve and the other thing just to add to what Rick said, yes, we're super happy with the growth of the category over the last few years, but keep in mind that the other tailwind it's a transition from pills and capsules to gummies. That's going to sustain the growth of the gummy category in the future. And of course, our new ingredients new product offerings is the other catalyst.

Stephen Powers
Analyst at Deutsche Bank Aktiengesellschaft

Yes. And you guys are value-priced in the category too. Okay. So then I wanted to pivot also a month and a half ago, we talked a good deal about how your portfolio has evolved since 2009 and I thought you did a good job of underscoring how in fact, there are still a lot of similarities today versus 2009 and your resiliency in terms of the 40% value exposure. I was at least reassured. I guess, now I'm wondering if that was a bit of a false sense of security, just given the fact that you've added discretionary categories and I appreciate it's only 10% of the portfolio now, but it's obviously having an impact. So I'm curious, number one, just what your outlook is on those categories going forward and what kind of drag this may be if the economy evolves the way that it seems like you're positioning for in '23? Number one. And number two, I'm wondering if it changes at all how you approach incremental M&A because a good deal of your M&A with FLAWLESS and WATERPIK has skewed to these discretionary categories of late. And just wondering if this experience changes that at all?

Matt Farrell
Chief Executive Officer at Church & Dwight

Yeah well let's start with M&A. Our two most recent acquisitions were ZICAM in couple of years ago in 2020 which got us into cold shortening category and then THERABREATH, which got us into mouthwash. So we continue to seek out everyday essentials, we're very happy with the WATERPIK acquisition of course it's discretionary. It's a longer purchase cycle. But this business grew high single-digits since we bought it in 2017. And long-term it has terrific growth prospects.

So for the long-term investor this is a good brand to own. Got a lot of opportunity outside the U.S. And yes, okay, we're going sideways right now, but keep in mind that the change in EPS is driven by cost and currency and we've left money on the table in the first six months here because of our fill rates if not for that we'd be in far better shape but that's water under the bridge. We do think by the end of the year, we'll have our fill rates back in line we'll be growing from a smaller base with respect to WATERPIK, but we do think that once the economy settles down again that we will rekindle the growth of WATERPIK.

And as far as acquisitions go those acquisitions WATERPIK met all of our criteria. We don't have a criteria that it's going to be -- that it can't be discretionary, but certainly, we are oriented towards buying everyday essential brands and you can expect that from us in the future.

Stephen Powers
Analyst at Deutsche Bank Aktiengesellschaft

Okay, thank you very much.

Matt Farrell
Chief Executive Officer at Church & Dwight

Okay.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Lauren Lieberman from Barclays. Your question please.

Lauren Lieberman
Analyst at Barclays

Great, thanks. Just wanted to ask a little bit about pricing. So I think when you spoke at recent conferences and even last quarter you discussed that you thought should you need incremental pricing beyond the July increases that you've mentioned, they would come more likely in the form of packaged size adjustment. So, I was curious, A, if it's still the case? And then, B, I think you'd also mentioned that those -- that approach would require some capex investment and some lead time to deal with tooling and the CapEx guidance a little -- it's small, but a little bit lower for this year. So I was just curious how that kind of fits into pricing dynamics as you look ahead and anything you'd need on the capex side to implement those? Thanks.

Rick Dierker
Chief Financial Officer at Church & Dwight

Yes, okay. Hey, Lauren. Really from a pricing perspective, you're right. We said last quarter that primarily next year we're focused on pack size versus pure price increases. Now of course with new inflation and new news we will react accordingly. And we'll see if we have to do any incremental price changes as well. Right. So I'd say it's probably both. On capex, it's immaterial to capex outlook on changed parts for like a line, for a carton or for a new mold, for a a bottle. So it's a handful, $1 million or so. It's not that impactful.

Lauren Lieberman
Analyst at Barclays

Okay. So relative to the comments previously about the capex it was more about the time needed to implement rather than it being a cost?

Rick Dierker
Chief Financial Officer at Church & Dwight

Exactly right. It's more about 6 to 12 months in order to design a mold, cut a mold, to do change parts, order the change parts for a line to do different size carton. Those are the types of things that take time.

Lauren Lieberman
Analyst at Barclays

Okay, great, thanks a lot. I appreciate it.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Dara Mohsenian from Morgan Stanley. Your question please.

Dara Mohsenian
Analyst at Morgan Stanley

Hey, guys. So just a follow-up on that, on the incremental $50 million of cost pressure are there any plans to take incremental pricing or is it more productivity in the pack size changes? I guess, I just want to understand that incremental part obviously there is always some timing lag. But is there concrete plans to take incremental pricing? And if not, I guess why not?

Rick Dierker
Chief Financial Officer at Church & Dwight

Yeah, I think right now like we just said with, Lauren, we're really focused on pack size changes and adjustments that way, which is effectively a price increase. We just think not as severe for a consumer. And then if inflation continues to go and we continue to chase the ball downhill we'll evaluate doing incremental pricing.

Dara Mohsenian
Analyst at Morgan Stanley

Okay. And then on the demand elasticity front, the volumes appear to reacting more to pricing than some of your CPG peers, but obviously some of that may be more tied to supply. So, just as you guys sort of parse through the consumer demand elasticity so far in terms of what you're seeing at retail more than your shipments can you give us an update on where you are coming in versus what you expected and if you've seen any sequential change recently on that front?

Matt Farrell
Chief Executive Officer at Church & Dwight

I think you hit it on the head there in general our comments wouldn't change from last quarter, we saw a 20% to 30% better than expected elasticities for volume. The new laundry and litter price increases just went to effect a few weeks ago. So it's kind of too early to comment, but if there is any noise it's usually because of fill levels not because of price volume sensitivities.

Dara Mohsenian
Analyst at Morgan Stanley

Okay. And then last, just in terms of price gaps, obviously with a lot of substantial pricing and then more in July, are there any categories where price gaps have either expanded where your premium or narrow where you value where you think they may have gotten out of whack with competitors. I'm just wondering if you can characterize the competitive environment on the pricing front relative to the pricing that you guys have realized?

Rick Dierker
Chief Financial Officer at Church & Dwight

Yes, well, what I would say there is through the end of June, we were pretty happy with the elasticities. Remember we have a new price increases that are just hitting shelves in July, that will be for both laundry and for litter. So that's the one we're going to watch now over the next quarter. And as far as the promotional environment goes, there was a pullback in Q2. If you look at liquid laundry, for example, the sold on deal was around 31% and that was down 60 or 70 basis points year-over-year. And there were some big pullback brand by brand so Purex was down 500 basis points year-over-year, we were down 340. So we pulled back because we were going through concentration now there's maybe pulling back as a way to modulate price. And also in litter, litter is also a category that promotions are down again year-over-year sold on deal is around 11% it's normally in the high teens. And then, back to liquid laundry are at 31% sold on deal that's normally in the mid-30s.

So the promotional environment has been pretty tepid so far year-to-date. And as for our most recent price increases we're going to kind of watch the third quarter and see how they react with our peers.

Matt Farrell
Chief Executive Officer at Church & Dwight

Dara, I will say that in general, we're happy with all of our price gaps and even when we've led in a category if you take a step back, then the category has also reacted. And so within a few months all the price gaps are back to normal.

Dara Mohsenian
Analyst at Morgan Stanley

Great, thanks, guys.

Operator

Thank you. One moment. And our final question for today comes from the line of Jason English from Goldman Sachs. Your question please.

Jason English
Analyst at The Goldman Sachs Group

Awesome, thanks folks. So I guess I'm the closing act they just got me in.

Matt Farrell
Chief Executive Officer at Church & Dwight

Hey, James.

Jason English
Analyst at The Goldman Sachs Group

I think -- hey, guys. I think I heard you in your prepared marks, that you expect maybe in the press release I know it's all jumbled in my head at this point in time. But you have an anticipation of accelerating trade down in the fourth quarter which categories do you expect to benefit the most from that?

Matt Farrell
Chief Executive Officer at Church & Dwight

Well, laundry is the big one where we expect trade down. I'd say that's the big swinger. We've already seen it, we started to see this. Remember in Q1 what we said was that the previous several quarters that value detergent have been losing share to premium that changed in Q1 and that held share versus premium. Q2 value starts grown faster than premium. And in the latest four weeks value detergent like I said, is up significantly, 11% versus the premium down 1%. So we do think that that's going to accelerate. Now that could be muted a bit with our most recent price increases and consequently, we have to see what happens with our competitors and where the timing of their price increases, but I think everything is going to be in place by the fourth quarter, many price increases that others have been contemplating.

And yes, we do have a fair amount of support both advertising and trade behind our detergent in the second half. So those are reasons you're going to context for why we think things are going to accelerate.

Jason English
Analyst at The Goldman Sachs Group

And P&G talked about laundry on its earnings call earlier and they did reference margin and the promotional activity taper it back, but not to get more price, but because they had a capacity ceiling that's now been resolved. And they suggested that they're going to start leaning back in now more advertising more retail merchandising if that transpires how much or how many that jeopardize your outlook and your expectations for the fourth quarter?

Matt Farrell
Chief Executive Officer at Church & Dwight

Yeah, you got to remember Tide premium is twice the price of ARM & HAMMER. So I don't think that that's as big a factor. Now, yes, it's true that Tide Simply is still -- is around that was not in place back in 2009 in the last recession, but up until our recent price increase we had a significant price gap with Tide Simply and we'll have to see what happens with their pricing in the second half, pricing and trade.

Jason English
Analyst at The Goldman Sachs Group

Yes, fair point on the spread there. Thanks a lot, guys. I'll pass it on.

Matt Farrell
Chief Executive Officer at Church & Dwight

Okay.

Operator

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Matthew Farrell for any further remarks.

Matt Farrell
Chief Executive Officer at Church & Dwight

Yeah, okay. Well, look it's a simple story our reported now for the full year is 4% to 5%, organic is 3% to 4%, and we did call down the EPS from 4% to flat why the 1% is currency and the rest of 3% are cost. Shares are healthy, fill rates are improving, trade down is happening and we got a big support in place for the second half. And we'll talk again with you at the end of October.

Operator

[Operator Closing Remarks]

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