Church & Dwight Co. Inc (CHD) — Q1 2021 Earnings Call Transcript

Okay. Thank you. Good morning, everyone. Thanks for joining us today. I'll begin with the review of the Q1 results, and then I'll turn the call over to Rick, our CFO. And when Rick is done, we'll open up the call for questions. Before we begin, I'd like to recognize all Church & Dwight employees around the world for their continued dedication to keeping our Company going during the pandemic, especially our supply chain and R&D teams as we overcame raw material shortages in Q1 as a result of the Texas freeze. Now, let's talk about the results. Q1 was another exceptional quarter. Reported sales growth was 6.3%, and adjusted EPS was $0.83, and that's $0.03 better than our outlook. Organic sales grew 4.9%, driven by higher consumption. E-commerce shows no signs of slowing. In Q1, our online sales increased by 54% year-over-year and as a percentage of total sales were 14.8% in Q1 compared to 10.2% in Q1 of 2020. We continue to expect online sales for the full year to be 15% as a percentage of total sales. Vaccinations will significantly influence consumer behavior. The U.S. is slowly opening up, which means consumers are more mobile. 60% of vaccinated consumers are optimistic that they will return to a normal or new normal as we are seeing the first signs that consumers are willing to spend more time in stores based on a study by IRI. In contrast, many countries outside the U.S. continue to experience lockdowns. As described in the release, we have been facing shortages of raw materials due to the Texas freeze. Raw material and transportation costs spiked higher in February and were exacerbated by the Texas freeze. We expect the tight supply and higher input cost to continue for the balance of the year. To mitigate the cost increases, we have announced price increases in laundry and across our international portfolio, and we have reduced couponing and promotional spending. Rick will discuss this further in a couple of minutes. At our Analyst Day in January, we outlined which categories and brands we expected to stay elevated throughout 2021, recover from COVID lows, decline from COVID highs and which ones would remain steady. Overall, our full-year thinking has not changed. To name a few categories, demand for vitamins, laundry additives and cat litter are expected to remain elevated in 2021. Condoms, dry shampoo, power flossers and women's grooming are expected to deliver year-over-year growth as society opens up and consumers have greater mobility. Baking soda, pregnancy test kits and oral analgesics are expected to decline from COVID highs. Of the 16 categories in which we compete, 8 grew consumption in Q1, in some cases, on top of big consumption gains in Q1 of 2020. Of those 8 categories, 5 saw double-digit growth: gummy vitamins, toothache, battery-powered toothbrush, pregnancy test kits and women's electric grooming. Household categories, such as laundry detergent and baking soda were down in the quarter and unable to compare with the huge COVID-19 sales spikes seen in Q1 2020. Looking at market shares in Q1, 8 out of our 13 power brands met or gained share within our U.S. Consumer Domestic business, which grew organic sales of 5.1%. I'll comment on a few of the brands right now. Consumers have made health and wellness a priority. VITAFUSION and L’IL CRITTERS gummy vitamins saw great consumption growth in Q1, up 24% with the help of the new launches described in the release. It appears that new consumers are coming into the category and they're staying. One survey showed that consumers who are new to the category had a 90% repeat rate. WATERPIK grew consumption 15% in Q1 as it continues to recover from COVID lows and benefit from the heightened consumer focus on health and wellness. WATERPIK is also benefiting from dental offices returning to pre-COVID patient levels. We expect the frequency of our lunch 'n learn program to return to normal levels in the second half of this year. Now, BATISTE. While BATISTE remains impacted by social distancing, consumption was up 6%, and we achieved a record high quarterly balance share of 39%, behind our International Women's Day campaign. Now, I want to talk about the International division. Despite European lockdowns, our International business came through with 3.2% organic growth in the quarter, primarily driven by strong growth in our Global Markets Group. Asia continues to be a strong growth engine for us. WATERPIK, FEMFRESH and ARM & HAMMER led the growth for the International division in the quarter. Our Specialty Products business delivered a positive quarter with 6% growth, primarily due to higher pricing. Milk prices were stable in Q1 and are projected to increase later in the year due to higher demand. Now, turning to New Products. Innovative new products will continue to attract consumers. In 2021, we have launched many new products, which are described in our press release. In the household products portfolio, we are introducing OXICLEAN Laundry and Home Sanitizer. It is the first and only sanitizing laundry additives that boost stain fighting and eliminates 99.9% of bacteria and viruses. The product is also designed for cleaning throughout the house and on a variety of surfaces. In the personal care portfolio, VITAFUSION launched Elderberry gummies, Super Immune gummies and POWER ZINC gummies to capitalize on increased consumer interest in immunity. WATERPIK launched WATERPIK ION, a water flosser which is 30% smaller and contains a long-lasting lithium-ion battery and is specifically designed for smaller bathroom spaces. To capitalize on its earlier success, WATERPIK SONIC-FUSION, the world's first flossing toothbrush, was upgraded to SONIC-FUSION 2.0 with two brush head sizes and two brush speeds. And finally, FLAWLESS is taking advantage of the at-home beauty and self-care trends with a facial cleanser system, a shower wand for a full-body spa-like experience and at-home manicure and pedicure solutions. Now, let's turn to the outlook. We're off to a good start in Q1. We continue to expect full-year adjusted EPS growth of 6% to 8%, which is in line with our Evergreen target, despite the heightened input cost. Given our expectations for consumer consumption, we have raised our full-year outlook for reported sales growth from 4.5% to now 5% to 6%. Organic sales growth expectations were raised from 3% to 4% to 5%. And if you look at consumption trends through the middle of April, 14 of our 16 categories were up in consumption year-over-year. Now, in conclusion, I'd like to remind everyone of the many reasons to have confidence in Church & Dwight. Our track record shows that we are positioned to do well in both good and bad times and in uncertain economic times such as now. Categories in which we play are essential to consumers. We have a balance sheet of value and premium products. Our power brands are number one or number two in their categories. And we have low exposure to private label. And with a strong balance sheet, we continue to be open to acquiring TSR-accretive businesses. Next up is Rick to give us details on Q1.

Thank you, Matt, and good morning, everybody. We'll start with EPS. First quarter adjusted EPS, which excludes the positive earn-out adjustment, was $0.83, flat to prior year. And as we discussed in previous calls, the quarterly earn-out adjustment will continue until Q4, which is the conclusion of the earn-out period. $0.83 was better than our $0.80 outlook, primarily due to continued increase in consumer demand for many of our products. Reported revenue was up 6.3%. Organic sales were up 4.9%, driven by a volume increase of 3.1% and a positive price mix of 1.8%. Now, let's review the segments. First, Consumer Domestic. Organic sales increased by 5.1% due to the higher volume and positive price mix. Overall, growth was led by VITAFUSION, L’IL CRITTERS gummy vitamins, WATERPIK oral care products, FLAWLESS beauty products, ARM & HAMMER clumping cat litter and KABOOM bathroom cleaners as well as VIVISCAL hair thinning products. Consumer International delivered 3.2% organic growth due to higher volume, partially offset by lower price and product mix. This was a great result despite European write-downs. For our SPD business, organic sales increased 6% due to higher pricing, partially offset by lower volume. Milk prices have remained stable month-to-month and are projected to rise as 2021 moves forward. Now turning to gross margin. Our first quarter gross margin was 44.5%, a 120 basis-point decrease from a year ago. Gross margin drag was impacted by 350 basis points of higher manufacturing costs, primarily related to commodities, distribution, tariffs and COVID impacts. Commodities, which were exacerbated due to the Texas freeze were a 90 basis-point drag on margin. Tariff costs negatively impacted gross margin by 40 basis points. These costs were partially offset by a plus 190 basis points from price/volume mix and a positive 170 basis points from productivity programs as well as a 10 basis-point positive impact from favorable currency. As a reminder, our outlook for the quarter on gross margin was down 50 basis points. The entire variance was related to the spike in commodities and tight transportation market. The good news is for the back half of the year, we expect margin expansion behind the pricing and promotional actions we laid out in the release as well as we start to lap some of the higher inflation and tariffs that we experienced in the back half of 2020. Moving to marketing. Marketing was up $2.3 million year-over-year as we invested behind our brand. Marketing expense as a percentage of net sales decreased 30 basis points to 8%. For SG&A, Q1 adjusted SG&A increased 60 basis points year-over-year, primarily due to acquisition-related intangible amortization. We also had higher investments within IT and R&D as well as some transition costs from the ZICAM acquisition. Other expenses all-in was $11.6 million, a $3.6 million decline due to lower interest expense from lower interest rates. And for income tax, our effective rate for the quarter was 24.2% compared to 23.2% in 2020, an increase of 100 basis points, primarily driven by lower stock option exercises. And now to cash. For the first three months of 2021, cash from operating activities decreased 57% to $100 million due to higher cash earnings, which was offset by an increase in working capital. Inventory is higher to support an increase in sales as we continue to improve customer fill levels. Accounts payable and accrued expenses decreased due to the timing of payments. As of March 31st, cash on hand was $128 million. Our full-year CapEx plan continues to be approximately $180 million as we continue to expand manufacturing and distribution capacity, primarily focused on laundry, litter and vitamins. For Q2, we expect reported sales growth of approximately 4.5%, organic sales growth of approximately 4% and gross margin contraction of 350 basis points as higher input costs continue and we lap artificially low promotional levels from a year ago. Adjusted EPS is expected to be $0.69 per share, a 10% decrease from last year's adjusted Q2 EPS. As you read in the release, we did a voluntary recall of selected products within our vitamin business. We expect the EPS impact in Q2 to be approximately $0.04 for the quarter and we are seeking reimbursement by insurance. And now for the full-year outlook. We now expect full-year 2021 reported sales growth to be 5% to 6%, which is above our previous 4.5% outlook. We're also raising our full-year organic sales growth to approximately 4% to 5%, up from the previous outlook of 3%. Turning to gross margin. We now expect full-year gross margin to be flat for the year, primarily due to the impact of higher raw material and transportation costs and the Texas freeze in March. We had previously expected gross margin expansion of 50 basis points for the year. And recently, we have seen a large increase in raw materials and transportation costs. We're absorbing $90 million of incremental costs for the full year. Higher sales, reductions in promotions and price increases across all three of our divisions represented about one-third of our portfolio, offset a large part of the cost increases. As a reminder, we price to protect gross profit dollars, not necessarily margin. Our full-year tax rate expectations are now 22%, higher versus our last expectations due to lower stock option exercises. This is a $0.02 headwind versus our previous full-year outlook. Adjusted EPS expectations continue to be in the range of $3.03 to $3.06, a 6% to 8% increase year-over-year. Our cash from operations outlook continues to be $1 billion while we continue to pursue accretive acquisitions. As you heard from Matt, the Company is off to a great start, and we expect 2021 to be another strong year. And with that, Matt and I would be happy to take any questions.

Let's start, I guess, on pricing and commodities. Rick, if you can just spend a moment on how much of your commodity exposure you have hedged for the year, I think that would be helpful. And then, shifting to pricing. Matt, you mentioned laundry and your international portfolio. I think typically, the Company will lead in baking soda, contraceptives in OXI. What percentage of your portfolio do you expect to take pricing? How much is in your outlook? I know pricing is a sensitive topic, but maybe just sort of triangulate between how much is in your outlook? And then what are you seeing from competition, specifically in your bigger categories, like laundry and litter and vitamins on the pricing front?

Yes. Okay. Kevin, it’s Rick. I'll take the commodity piece really quick. Maybe two-part, maybe to give you comfort on the back half gross margin expansion as well. But, we're about 80% hedged from a commodity perspective. And remember, we said if we could hedge those, whatever key 6 or 7 commodities that a lot of the volatility does go away. We do have a lot of confidence in gross margin expansion in the back half as we are lapping some of those higher commodity costs in the back half of 2020. Just as an indication, ethylene, for example, in the first half of 2021, is up 70%. If we keep that current spot rate for the remainder of the year, the back half would be up 30% versus the second half of 2020. So, like I said, we are confident in some that. And that's why we think we have confidence in the back half gross margin expansion as well as the price/volume mix.

Okay. Regarding your question about pricing, let's start with laundry. Over the past 18 months, our competitors have adjusted their prices primarily through changes in product sizes, leading to an estimated price increase of about 8% to 12%. In early April, we announced that we would be raising our prices and are currently in discussions with retailers about this. However, we believe our pricing will remain competitive in the laundry category. In terms of the products affected by the price changes, approximately one-third of our portfolio is included, which encompasses domestic, international, and also special projects division (SPD). In the U.S., this primarily involves ARM & HAMMER and XTRA, along with our sheets and scent boosters, focusing on laundry. A few other categories will see price increases as well, including specific variants in the TROJAN line. Internationally, we are mainly seeing these increases in the personal care segment, while in SPD, certain products are being influenced by palm fatty acid distillate (PFAD), impacting inputs for our MEGALAC product. Consequently, we've been implementing monthly price increases for MEGALAC and will do the same for some other products. As for the promotional landscape, the household side of our business is currently quite promotional. The laundry category is down by 300 basis points year-over-year in promotional sales, and similarly, the litter category decreased by 500 basis points in Q1. We anticipate a reversal in Q2 because last year promotions were pulled in these categories during the same period. For instance, in Q2 last year, laundry promotions were down 1,700 basis points compared to 2019, creating a different comparison for Q2 this year, which may indicate an increase. Does that answer your question, Kevin?

Yes, that's helpful, Matt. I have a quick follow-up regarding the pricing comment and a broader question, if that's alright. You mentioned that one-third of the portfolio is experiencing price increases. Does that imply that the remaining two-thirds have potential for price adjustments as well? It seems like you might be waiting for the competition to take the lead, as it’s challenging to find many categories where a price increase isn't justified by costs. Could you please confirm if that's the case and if this suggests there could be additional relief from the commodity cost pressures you’ve been facing?

Yes, that's the right way to think about it. The price increases were necessary due to significant input costs in the laundry category. That's where we believed action was required. However, we won't comment on any other category or our future plans.

Got it. Just one more quick. I apologize if I'm monopolizing time here. But sort of like $1 million question, Matt. Long-term implications from COVID, understanding still a lot of volatility, a lot of uncertainty in the environment, it would seem like at a minimum, the Company's view would be expect higher consumption in vitamins even as we sort of get through this and looking out to next year. How are you thinking and planning internally? And what could the potential implications be broadly for Church's portfolio? And I'll pass it on. Thank you.

Hang on, Kevin, is your question in the next six months, what our expectations with this…

No, the question's longer term, Matt. The question is, so relative to the 3% organic sales guidance which you guys have pretty consistently beaten for some time now, at a minimum, it would seem like household penetration has and will, to some degree, sustain a higher degree in vitamins at a minimum within the portfolio. How are you thinking broadly about Church's portfolio in terms of shifts in consumer behavior as a consequence of the pandemic, focus on health and wellness, et cetera?

Well, certainly, the focus on health and wellness is going to benefit not just our gummy vitamin business, but our WATERPIK business, which has been just a high single-digit grower perennially since we acquired the business. I think what you're going to find is that 2021 is going to be kind of a reset, that as we live with COVID this year, we'll be able to grow from there. But, we have such a broad portfolio, both in household and personal care. We do think that we're well-positioned, frankly, for '22 and beyond.

I want to revisit the categories that are more affected by mobility. What are your current observations? Additionally, regarding the recall, I understand there is an estimated impact of $0.04 and that you are seeking insurance reimbursement. Are there any other potential expenses? Have you encountered any issues with shelf space or anything else for the remainder of the year regarding vitamins? Any insights on potential production changes or disruptions we should be aware of? Thank you.

Yes. So, I'll let Matt take the categories and mobility, and I'll just talk about the insurance and the recall. So, trying to be very clear that the potential impact is up to $0.04. We think it's relatively limited to that. To our knowledge, there has been no additional shelf reset issues. This was a small window of production. We've been very clear in the release that we've talked about. And that's kind of the extent of it.

In Q1, the gummy category experienced a 19% increase, while depilatories rose by 9%. Many consumers who started using depilatories last year are moving away from at-home solutions. These are just a couple of categories we anticipate will remain strong this year. The litter category also benefits from a 6% rise in the number of households with cats. Additionally, we observed a significant growth in water flossers, which increased by 29% in Q1. Electric grooming products recorded a 3% increase as well. On the other hand, dry shampoo saw a slight decline of 1% in Q1, but it showed improvement compared to previous quarters, and we achieved record market share and year-over-year sales growth in this category. Meanwhile, baking soda has already begun to decline in Q1, and toothache products were down 3% in Q1. The ZICAM category also faced challenges, decreasing by 70% in Q1. This provides an overview of the trends in various categories.

Yes. Andrea, I think Matt's commented in his prepared remarks, about 13 of 16 categories being positive in April, and that's pretty broad-based across household and personal care. So, all those social distance impacts are starting to mitigate.

I have a couple of questions. First, regarding the expected gross margin in the second half, it seems like there's an average midpoint expansion of around 225 basis points compared to 2020. I appreciate your comparisons and your lower promotions and pricing. However, this also suggests a gross margin level that might be slightly higher than in 2019, even with the current inflation pressures. Can you confirm if that's an accurate perspective? Additionally, could you elaborate on this? Specifically, how much of the change is due to lower promotions, the business mix compared to 2019, and higher pricing? Any insights you can share to help clarify this would be appreciated. I also have a follow-up question.

Yes, certainly. I will explain this in two parts. First, I will provide you with some details about our full-year outlook. As you may recall, during our annual meeting in New York, we shared our full-year expectations for gross margin, outlining its components, so I will repeat that. The full-year outlook for the margin shows an increase of 200 basis points from price and volume mix and 120 basis points from productivity, which are the two main positive factors. For instance, the price and volume mix has improved significantly, as we anticipate reduced promotional spending alongside higher pricing, and baseline volume is performing better than we had anticipated. Additionally, inflation is down by 300 basis points, and tariffs have decreased by 40. Mergers and acquisitions have contributed an increase of 20 basis points. This leads us to a net margin of zero. Looking at the first half of the year, we expect a decline of approximately 235 basis points, followed by an increase of roughly 235 basis points in the second half. This represents a total change of about 470 basis points. We are confident in our ability to transition from a decrease in the first half to an increase in the second half. The price and volume mix accounts for 200 basis points of that change, which stem from our previously discussed actions. The remaining 300 basis points are related to costs. For example, ethylene prices rose by 70% in the first half of 2021, while HDPE increased by 85%. In contrast, in the second half, ethylene is only projected to rise by 30% at current spot levels, and HDPE is expected to increase by 50% under the same conditions. Additionally, we are no longer facing tariffs that affected the previous year’s numbers in the second half, and there were some elevated COVID-related costs back in 2020. That provides some further context, and I wanted to share this information with you.

I appreciate that. I have a follow-up regarding the vitamin category. This has been looked at from various angles in terms of category growth and increased per capita consumption. However, it's more than that. You outperformed the category by about 50 points, or perhaps slightly less, in 2020, at least according to scanner data. This relative outperformance has continued, albeit not at such a high level, but has been maintained on a year-to-date basis. There is clearly a significant share gain story here, which has been addressed in different ways previously. Could you provide some insight into why you believe this is happening? Is it due to the additional capacity you've invested in, or do you think your product SKUs, price tiers, or specific subcategories are particularly relevant in the current market? Overall, what do you think is driving the relative success in a category that is performing well?

Okay. Well, remember, in the gummy category, we have number one brand. So, let's start right there. We know the transition from pills and capsules continues to gummies. I mentioned earlier that household penetration is up. So, the households that were already buying VITAFUSION L’IL CRITTERS gummies are taking more, and where new consumers are being attracted to the categories. So, we stand to benefit from that being the number one brand. We've had a lot of success with new products over the last couple of years. So, we're able to spread out on shelf. And something else, too, is you may recall from earlier calls that we had third-party production come on line late in 2020. So, our end stocks are way better right now. So, a combination of all those is what's going to sustain the elevated consumption in 2021.

So, I wanted to go to the International segment. So clearly, Q1 was impacted by some of the European lockdowns. I was curious how you guys are thinking about it for the balance of the year. And do you still think a 6% type growth rate is achievable for that segment?

Yes. So, on a full-year basis, we're still expecting 6% from International. The engine for International growth in the last few years has been the Global Markets Group. So, that does spread your risk quite broadly across many regions around the world. So, we're not wholly dependent upon the countries where we have operations. And you may recall that the Global Markets Group is about a third of our business, and it's been growing at 15% or better for the last 4, 5 years. So, we think that will be sustained in the 2021, Rupesh.

Yes. And just to give you a little bit more color, Rupesh, our outlook in February for organic was 3%, and that was 2% domestically, 6% internationally and 5% SPD. Now, we're thinking it's closer to 4%, and that's 6% internationally and 6% rest.

Okay, great. I have a follow-up question. Regarding ZICAM, it appears that you have lowered your expectations for this year. Clearly, there are challenges with cough and cold. As you look ahead to this year and next year, do you believe the business will be back on track by next fiscal year?

In 2021? Yes, absolutely. It's well known that the incidence of flu, cold, and cough has significantly decreased, which has impacted many brands in the category. We remain focused on the fact that we have the leading market share, holding a 73% share in cold shortening, which is a strong brand. We acquired it for the long term and anticipate it will contribute to organic growth, especially in 2022 and beyond.

I have a question about stimulus and its impact on demand. Specifically, you noted the strong performance of water flossers, and we've also seen solid device sales at Procter & Gamble and Keurig Dr Pepper this morning. Do you believe that some of the strong figures we are observing might be less sustainable due to the effects of stimulus?

I wouldn't think that that would apply to water flossers just because of the growth rate that we saw beginning in 2017 when we first bought the business. So, it's a high single-digit growth for the past several years, and we have so much opportunity internationally. That's where all the growth is going to come from long term.

Yes. I believe we are comparing our current results to a year ago when retail was significantly impacted and fewer people were shopping for devices. So, I think that affects our comparisons.

Yes. It's a super easy comp year-over-year. So, I wouldn't be swayed by the fact that the category might have been up 29% in Q1. But long term, it's going to be a grower for Church & Dwight.

Outside of water flossers, any feel on impact to stimulus?

I believe this stimulus can influence nearly every category. The way we view the economy is that savings rates have increased, currently at 13% of disposable income compared to an average of 6% to 8% over the past five years. Stimulus checks are certainly assisting those in need. There are also labor shortages, which means more job opportunities and rising average hourly earnings. All of this indicates that consumer household balance sheets are healthier and improving, which benefits all of our categories.

Okay, great. And then, just a very quick one. Obviously, there's a lot of discussion about raw material prices and transportation pricing and stuff, but we're also hearing about kind of real supply issues that maybe just can't get what you need. Is that impacting your business anywhere at all?

It certainly does affect us. I mentioned to the Board recently that in a typical year, we might face one force majeure event with one of our suppliers. However, in this quarter, we encountered six. This indicates a tightness in supply. Our operations and R&D teams are effectively securing substitute suppliers and collaborating with our existing suppliers to navigate through this challenge. We have largely managed the situation, although there are always some immediate needs we address. Overall, we have communicated most of the important updates.

Just a follow-up on one of Kevin's questions, on pricing. In terms of timing, P&G had said that they were looking at pricing kind of in September, I think you're talking about a little bit sooner. So, do you think there's any risk of kind of price gaps being extended kind of over the summer before everybody kind of pushes it through?

The timing for our price increases is starting in July, Bill. Is that what you're trying to address?

And Bill, I think what Matt was trying to allude to before is, some of the compaction activities that happened with some of our competition kind of means that our price gaps aren't really that aligned versus historical levels.

So, do you see everyone in the competitive landscape adjusting their prices simultaneously?

No, our decision with respect to raising price in laundry was unilateral and was driven by the cost increases that we've been experiencing. My reference was just simply the fact that, hey, over the past 12 months or so, our competitors had raised their prices by reduction in ounces and things like that in their products. So, consequently, we didn't see that raising prices on our part was going to create a difficult gap for us in pricing.

Got it. And then, just, can you give a little bit more of an update on where you see the FLAWLESS franchise? I mean, since you bought it, there hasn't been a normal environment from, bed bath issues to supply issues, to COVID, people staying at home, to somewhat kind of return to normal. I know, it seems like on shelf it's gotten better positioning at retail more with the shaving kind of category. It seems like you've expanded some SKUs. So, it's a bigger block when you walk through the retail orders. But kind of any thoughts ex kind of the COVID bounce back you see on that franchise?

Yes, we have discussed this previously. You're correct that we've experienced a stagnation since acquiring the business for various reasons. When we purchased the business in 2018, it had net sales of $186 million. In 2019, it was $180 million, and last year, it dropped to $171 million. However, this year, we anticipate an increase of about 20%. We attribute this optimism to our diverse lineup of new products complementing our existing offerings, which include a body cleanser, face cleanser, and several manicure and pedicure items. Moreover, we are excited to have influencers like Ashley Graham and Dove Cameron endorsing our products, along with Halle Berry promoting FLAWLESS. All of this is set to launch in 2021, leading us to feel positive about the future of FLAWLESS.

I was hoping you guys could talk a little bit the two things. And the primary thing is the driver of the change in outlook for Consumer Domestic from 2% to 4% growth. I guess, one, to what degree is that greater optimism on how well the vitamin business holds in? And secondly, how does that relate to what we're starting to see in the Nielsen data, which is that market shares in laundry are down and softening and it's not multiple periods, but now we're talking about going into a pricing environment. So, just curious on your thoughts on laundry market share performance and how that ties in again with that change in outlook to a more optimistic view on Consumer Domestic. Thanks.

Certainly. I'll address the changes in our organic outlook and the brands contributing to it, and then Matt can provide additional insights. Lauren, there are two or three main factors boosting our confidence and strength in the outlook, which has shifted from 3% to 4.5% as the midpoint. The vitamin segment is a significant contributor. WATERPIK is performing exceptionally well, and our pregnancy test kit business, PTK, is also seeing positive results. Overall, these three areas are helping to enhance our outlook. Regarding the laundry segment, we consistently review our market share and data. There are a couple of key points to consider. The primary issue is with unit dose, which has seen a slight decline in share. This isn't due to a lack of consumer interest in our product, but rather because we are transitioning production from an external supplier to in-house manufacturing. Currently, outside supply is quite limited. However, the positive aspect is that we are in the process of ramping up our in-house production, so this is just a temporary setback.

Yes. As far as the laundry category, Lauren, if you look at Q1, ARM & HAMMER gained share; XTRA did not. We have been prioritizing ARM & HAMMER for quite a few quarters now, throughout the pandemic. We do expect that shares could be impacted certainly by our actions with respect to price. I mean, that's pretty normal. So, how competitors react to that is unknown. And certainly, if competitors were to raise price or reduce promotions, less sold on deal, obviously, that could affect our shares as well. But unpredictable right now. But, we're committed to raising price starting July 1.

Yes. I'll also give you an optimistic comment. All of our assumptions and our outlook include assumptions that our competition doesn't follow-up. So, we've taken down the volume on the elasticity and everything else. So, that's kind of a conservative way to do it.

Building on that last comment regarding elasticities, there is clear momentum in brand strength. It appears that you have taken a conservative approach compared to your competitors. However, with numerous consumer packaged goods companies discussing price increases, whether they have already occurred or are anticipated, it seems that a large portion of consumer spending is likely to rise. Can you elaborate on how this influences your thinking and the cross-category elasticity that might either benefit or complicate your scenario analysis?

Yes. Hi. It's sort of an umbrella statement, Steve. We've pointed out to investors for years that we have a balanced portfolio between premium value. And when you have number one brands, typically, you're going to fare better in difficult economic times than companies that do not have number one brands. So, we like where we are right now, going forward. We think we're in a good position.

Yes. And a lot of our brands are value brands, and even in the laundry example, despite any increase, the price gaps are in line with historical levels and are great values compared to competition.

There has been significant volatility in shipments and consumer buying patterns as inventories adjust, both at retail and likely in households. Given these dynamics, do you have an understanding of how actual consumer usage of your brands or categories is currently trending? I'm not sure what the best benchmark would be, whether it's compared to the previous quarter, the fourth quarter of last year, or 2019, but any insight into actual usage that could help us understand your confidence in raising the full-year outlook would be appreciated.

Just based on looking at consumption patterns in the categories and consumption equals usage. I wouldn't point to pantry loading or panic buying anymore. I think, it's a steady state now, Steve.

Yes. And just to add to that, we talked about in the release about personal care categories that are up double digits in consumption, but partly because there's low comps a year ago. But gummy vitamins, as an example, Matt referenced, it's growth on top of growth. And if you look at most of our categories and whatnot, it's growth on top of growth, because April last year, we grew, but April of this year, Matt just said, 13 of 16 categories are up. So again, growth on top of growth.

So, there's been a lot of talk about declining birth rates, and I noticed in the release and the commentary during the call, you called out positive pregnancy test kit trends. So, I'm just curious, is this a relation to just easy comparisons, or do you think there's something else going on that happened over the last 12 months as we're all locked up in our homes?

Yes. One way to view it is that if you consider the period of February, March, and April last year, it was lower compared to 2019. This gives us more favorable comparisons year-over-year. In the first quarter, we noted that the kits category is actually up about 23%. This is one area we anticipated would see a decline in 2021. So, in the best-case scenario, it may not decrease and could remain flat year-over-year. Additionally, Nik, typically during a recession, the birth rate tends to drop. Some may have thought differently recently, but that doesn't seem to be the case for us. Thus, the category could perform better than expected.

Great. And one other question, Matt. I was just thinking about how more and more of these kind of testing kits that you can do at home to diagnose a lot of things, like in terms of what you should be eating and what kind of vitamins you would need and things like that. And I'm just curious, now given that you're already in that business, have you ever thought about expanding the portfolio to deal with other types of diagnosis?

Nik, I think you have a future in new products. I think that's exactly the types of things that we'd be looking at. And of course, we have a great brand name at First Response that we certainly put in other categories, but yes.

I wanted to come back to the gross margin question. I think, it was asked earlier, because I don't think you fully answered it. Your guidance suggests that you're going to hit a pretty high gross margin in the back half. In fact, going back over the last 10 years, it will be the highest back half margin you've ever achieved, which in context of the environment, seems surprising. So, I was hoping you could explain, like why structurally you're going to be at a higher margin, even with these cost pressures? And then, the second related question is, gosh, if you can hit all-time high margins in the back half of this environment, what is the right margin for this portfolio? Street’s out there looking at fiscal '23, maybe you're 46, 46 Street. Do you think with the portfolio you have today, your normalized gross margin rate should be in the 47%, 48% type range?

Yes, hi, Jason. I provided some context earlier. I understand your concern regarding the absolute numbers. I’m trying to convey our strong confidence in the latter half of the year. This confidence is partly influenced by comparisons related to inflation, COVID, and tariffs. Additionally, all the aspects we discuss regarding our Evergreen model remain valid. Our productivity program has nearly doubled compared to five years ago, providing new capabilities that have been somewhat hidden due to inflation, tariff discussions, and COVID costs. This is starting to manifest positively. For instance, when we acquire businesses with higher gross margins, it adds value as well. Although ZICAM's revenue will be less than we anticipated due to the absence of a cold and flu season, the margin impact remains supportive. All these structural elements are indeed beneficial. Over the long term, we are quite confident in our Evergreen model, which aims for expanded gross margins. We just need to navigate these temporary issues, such as tariffs. I genuinely believe that we have significant potential for growth and expect to reach a gross margin in the higher 40s over the long term.

Okay. I appreciate all the year-on-year stuff you gave. But just sequentially, forget about year-on-year, you've got a cost structure in the first half. Do you expect it to be a lot lower in the back half?

Yes. So, not year-over-year, but just sequentially, do we be lower? Right now, like all of the inflation, as an example, we are assuming that it's kind of a spot pricing. We've locked in, like I said before, about 80% of the commodities. So, it's really the absence of higher inflation, the absence of higher tariffs, the absence of higher COVID costs, in theory COVID costs should actually help us in the back half. We don't have the same extent. And all those things help. But then, we're going to get the positive price/mix that's new to the portfolio. That is incremental pricing on those brands that Matt talked about. And then, the incremental productivity program that we always talk about as well in the M&A tailwind. So, those are the kind of the things that are structurally higher.

Okay. Hey, thank you, everybody, for joining us today. Obviously, we're always available for follow-up questions. And we'll talk to you again in July.