Clorox Company (CLX) — Q1 2022 Earnings Call Transcript

Thank you, Michelle. Good afternoon, and thank you for joining us. On the call today with me are Linda Rendle, our CEO; and Kevin Jacobsen, our CFO. I hope everyone has had a chance to review our earnings release and prepared remarks, both of which are available on our website. In just a moment, Linda will share a few opening comments, and then we'll take your questions. During this call, we may make forward-looking statements, including about our fiscal 2022 outlook and the potential impact of the COVID-19 pandemic on our business. These statements are based on management's current expectations but may differ from actual results or outcomes. In addition, we may refer to certain non-GAAP financial measures. Please refer to the forward-looking statements section, which identifies various factors that could affect such forward-looking statements and the non-GAAP financial information section, including the tables that reconcile non-GAAP financial measures to the most directly comparable GAAP measures, both of which are located at the end of today's earnings release, which also has been filed with the SEC. Now I'll turn it over to Linda.

Hello, everyone. Thank you for joining us. I hope you and your families are well. Hopefully, you found our prepared remarks and this new earnings format helpful. We're off to a solid start to fiscal 2022 with stronger-than-anticipated demand across our portfolio and focused execution in a challenging operating environment. We've made meaningful progress on our strategic priorities this quarter, including restoring supply across much of our portfolio, which has enabled us to hold or gain market share in the vast majority of our businesses. We are proactively addressing the inflationary and cost headwinds that are impacting our margins through pricing and cost reduction initiatives. And at the same time, we're making important investments in our business to strengthen our competitive advantages and position the company for long-term success, including advancing our innovation pipeline, deploying our targeted advertising and sales promotion strategy, and investing in critical digital capabilities. Given our Q1 performance and the actions we are taking, we are reiterating our fiscal '22 outlook. With that, Kevin and I would like to open the line for questions.

Thank you for the new format, Linda. I wanted to discuss your comments. Clearly, the results were better than your low double digits at the end of the last fiscal year. I would like to understand how much of this was influenced by the return of the Delta variant and how you foresee demand tracking in the second quarter. Additionally, could you explain the impact of the pricing changes you've implemented and how the price mix is evolving as things normalize? I also have a follow-up question regarding the cost of goods sold.

Okay. I'll start with the demand piece, and I'll get into pricing and Kevin can talk about mix. So on the demand side, as we articulated back in Q4, we definitely expected it to be bumpy this year when it came to consumer behavior, et cetera. But the good news is this quarter, given our strong position on supply, what we saw as a very successful return to merchandising with our back-to-school program and, of course, Delta impacts, demand was stronger than we anticipated across the vast majority of our portfolio. So that wasn't just in our cleaning businesses, but really across the board. We generally saw consumer mobility continue to be strong. So we haven't seen as big of an impact as people were in shelter-in-place before. Delta really didn't have that same impact, and yet we did continue to see strong demand as people chose to stay at home more, are self-continuing to work from home and are continuing to prioritize health and wellness habits, whether that be cleaning and disinfecting, taking vitamins, minerals, and supplements, or drinking water. We did see a little bit, Andrea, of timing shifts from Q2 when it comes to merch and a little bit of inventory, but that wasn't the majority of what we saw from an improvement perspective; it really was based on consumer demand. I'll switch to pricing now. As we spoke about in the release, we have announced pricing on 50% of our portfolio. That sell-in continues to go well, and we're seeing execution hit the market now in many of the businesses. Given the incremental costs that we're experiencing, we're taking additional action and now pricing a total of 70% of the portfolio this year. And we are beginning to implement many of those as we speak with additional actions that we're taking in the back half to be talked about at that time. And I would say, generally, given the environment that we're experiencing across the industry, the conversations are very productive. People understand the environment, and largely our peers are going as well for our categories, are increasing in pricing. But no surprises. Our brands are really strong. At this point, we have the strongest consumer value score that we've ever had since we began measuring it. Our household penetration continues to look strong. Increased repeat rates, increased buy rates. So our brands are healthy. Shares are growing as a result of that, and we feel really well positioned to execute pricing on 70% of the portfolio this year.

And Andrea, please go ahead.

Oh, sorry. I wanted to say just on that comment, Linda, thank you for explaining the pricing. So going to the 70%, is that related mostly for the resin or the chlorine that went up recently? So is that applied to mostly bags or that's for the disinfecting franchise?

Seventy percent of our portfolio will cover a broad range, and we are facing pressure on three key areas. One is commodities, particularly with increased pressure on resin. Hurricane Ida has extended the resin timeline by a month or two, leading to ongoing effects. Transportation is also a negative factor for us, and we expect that to continue for the rest of the fiscal year. While there hasn't been a significant direct impact from labor issues, we are closely monitoring the situation due to the pressures we are experiencing. We have not announced an additional price increase for Glad yet, but we have implemented increases in the high single digits and are considering another price hike for Glad in light of the resin situation. We closely monitor resin developments and can respond promptly regarding Glad, so this is something we are thinking about alongside the previously mentioned 70%.

And then, Andrea, you had asked a question about price mix, and maybe just a little background and I talked about this in August. We benefited from about 3 to 4 points of favorable price mix through the pandemic, and we know that was temporary, primarily driven by the rationalization of our product offerings. If you recall, to increase supply availability, we produced a lot less products. They tend to be smaller single accounts. And additionally, because of lack of merchandising activity because of the lack of supply, we were generating favorable price mix for about 4 straight quarters, pretty consistently about 3 to 4-point capability. We fully expect that to unwind as we get back to a more normalized level of supply and we get back to a more normalized level of promotional activity. That started in the fourth quarter. We had about 2 points of unfavorable price mix. It continued this quarter. We had 3 points of unfavorable price mix. I'd expect to see that for 2 more quarters. So we'll see it in the second quarter, third quarter. And then by the fourth quarter, I would expect to have lapped this temporary benefit. And you'll also see the full benefit of the pricing actions we're taking. So by the fourth quarter, I'd expect us to return to favorable price mix.

So I was just kind of hoping to get your updated view on margin progression from here. Clearly, the first quarter came in slightly better than you had anticipated from at least from a gross margin perspective, and you're expecting sequential improvement. But is there any way to help us maybe quantify that sequential improvement from here as pricing builds? And how much expansion you actually expect in the fourth quarter? I mean, I guess what I'm really trying to get at is how should we really think about the margin recovery, and frankly, how quickly can we get back to the mid-40% range?

Sure. Thanks, Peter, for the question. And let me give you my perspective on how we see margin phasing out this year. As you recall, back in August, our expectation was that Q1 was going to be our most difficult quarter from a cost input perspective. And then we see sequential improvement in margin throughout the year. And importantly, by the fourth quarter, returning to gross margin expansion, and we identify getting back in the low 40s. What has changed since that time are two things, and Linda mentioned them. We have revised our expectation on cost inputs. We originally had assumed about $300 million worth of cost inputs on commodities and transportation. We have raised that expectation now to about $350 million. As part of that, we now think we will see peak cost inputs in the second quarter versus the first quarter. That's primarily driven by resin. We have shifted out our expectations about 2 months as a result of Hurricane Ida in terms of when we'll see peak resin, so we'll see that in the second quarter. As a result of that, I would expect this to be our most difficult quarter from a cost input perspective. I would expect our margins to be in the mid-30s. And then I expect when we get to the back half of the year, based on the incremental actions we're taking, both on pricing and cost management, we'll see sequential improvements as we move through our Q3 and Q4. And we still expect to get to a point of gross margin expansion in the fourth quarter, and we still expect to be in the low 40s.

Okay. Great. So mid-30s that means that to get to the 300 to 400 basis points for the year, I mean, that would imply some pretty substantial gross margin expansion in the fourth quarter. Is that right?

Yes, it would. Now keep in mind that this is based on the assumptions we have for the cost inputs. And as you know, that's been difficult to predict. Our assumptions are resin is one of the assumptions. We continue to assume we're going to see resin prices moderate in the back half of the year. When we talked back in August, we assumed we'd see resin peak in this calendar year and then start to moderate. We still hold that same expectation. All we've done is push out that peak a couple of months this calendar year. And so that's an important assumption for us that resin prices start to go down in the back half of the year. But assuming it plays out like we expect, yes, we expect to see some material margin improvements in the back half of the year.

I have a general question. You’ve clearly laid out a more favorable start, good elasticities, and additional pricing forthcoming, but at the same time, you're facing higher costs across many areas of the P&L. So, for my understanding, how do those factors balance out? If your previous outlook was in line with your guidance, are you now leaning higher or lower, or are you still roughly in the middle of your guidance after one quarter?

Yes, Steve, I'll provide some insights on both sales and margins. Starting with the top line, we exceeded our expectations. We anticipated a decline in the low double digits for Q1, but our results showed a decrease in the mid-single digits. Some of this can be attributed to timing, as Linda mentioned. Our performance improved during the latter half of the quarter, primarily due to Delta, and this momentum has continued into September. We might see some shifts between quarters as we navigate retail and consumer inventory, but this should not affect our full-year outlook. Back in August, we expected the first half to decline in the low double digits to high single digits, but we now anticipate a decline in the high single digits, indicating better performance in the first half of the year. However, I feel it is too early to adjust our outlook. We are pleased with the year's start, but we are only one quarter in, and several factors beyond our control remain volatile. I appreciate the start we've had, and I believe a broad range for the top line is suitable for now. We need to monitor cold and flu trends and how the pandemic unfolds before making adjustments. Regarding margins and profits, we slightly exceeded expectations, but we are facing more cost pressures than we expected, approximately $50 million higher. We are implementing pricing actions and cost-saving measures to mitigate this impact, which may postpone the benefits until the year's latter half. Nonetheless, we remain optimistic about our outlook and EPS range. Again, it's too early to guide towards higher or lower projections. I am happy with the start and our plans moving forward, but I also recognize the uncertainties we cannot control, which I want to observe over the next quarter or two.

I wanted to follow up on the resin outlook you mentioned earlier. I found it surprising that you maintain the expectation of moderation in resins and commodities. I'm not questioning that stance; it's just a bit less conservative compared to what we've seen from others. So, I have two questions regarding this. Can you provide insight into the potential margin of profitability at risk if prices stay where they are now compared to your assumptions? Will you be able to maintain your range in that scenario, or is it likely to push you to the lower end or below your range? Also, regarding the expected sequential step-up in gross margin from the mid-30s in the second quarter to above 40 in the third quarter, what are the contributing factors? How much of this is due to resin moderation, pricing adjustments, and a stronger top line? Could you clarify how this step-up will unfold sequentially?

Sure, Steve. I'd say the profit risk, it's hard to tell exactly what's at risk based on resin because, again, we would take actions. If the resin forecast does not play out like we expect, then we revisit our pricing plans across our portfolio to offset some portion of that. And so it's difficult to put an exact number on if resin doesn't play out to our plan. What I would tell you, though, in terms of our resin forecast, as you can imagine, we leverage outside experts on this as well. And this is generally in line with what we're seeing from the outside experts. So it doesn't feel like it's an off-market expectation that we'll see resin prices moderate in the back half of the year. And then a sequential step-up, as you think about what's going to drive that sequential step-up in the back half of the year. The first one is commodities. We think this is going to be the most challenging quarter we have from a commodity cost input. If you look at Q1, there's about 550 basis points of headwinds on commodities. I expect Q2 is going to be closer to 600 basis points as we pushed out the resin decline a couple of months. And then you'll see commodities start to drop in the back half of the year. So you'll see some pick up there. In addition to commodity input costs starting to moderate. We'll start to see the full benefit of our pricing actions. It's really just in Q2, we're getting the bulk of our price increases in place. And as we talked about, we're pricing an additional 20% of our portfolio, that will be in the back half of the year. And you'll see the benefit of pricing start to step up. You also see the benefit of our cost savings program ramp up in the back half of the year. So that will create additional benefits. And then finally, on manufacturing and logistics. As I think you folks know, we've talked about this quite a bit. We're incurring quite a bit of additional cost as we build more resiliency into our supply chain. We've increased the number of third-party manufacturers we work with. That's true with raw and packaging material suppliers as well. As demand moderates and we'll be able to take more of that production back in-house, we'll be able to step out of these relationships. That will start in the back half of the year. Now that's probably a 12- to 18-month journey to step out of these charges, but you'll start to see us do that in the back half of the year if demand moderates to the extent we expect it will. And those will be the key drivers that will support margin improvements in the back half of the year.

This is Filippo Falorni on for Nik. I want to go back to pricing. You mentioned, obviously, the 70% where you're taking pricing, and you mentioned in the release that elasticities have improved so far. Can you discuss what you're assuming in terms of demand elasticity once you're getting to the 70% of the portfolio with price increases, and also whether you're thinking that private label would also follow? Most of your branded competitors clearly are following on price increases, but also what about on the private label side, and what you're thinking about the price gap relative to private label.

Sure. Yes. So as we spoke about and you mentioned, we're taking pricing on 70% of the portfolio, and elasticities across our portfolio have improved in this period. That gives us additional confidence in our ability to take price and, of course, what we believe will be the consumer reaction in that price increase. As you also mentioned, we are seeing branded competitors move, and we are generally seeing price gaps in our categories aligned to what they were before pricing action took place. So nothing seems to be out of line. We're also seeing private label pass-through pricing at this point as well. And so price gaps as it relates to store brands are also maintaining. If we kind of just take a step back, it's one of the reasons why it's so important for us to continue to invest in our brands as we go through this period. That's why we continue to lean into advertising spending, why we've kept up on our innovation program. And that's really helping us as we sell through, one, support the consumer as they go through this pricing change but also support us from a retail execution standpoint because there are other ways that we can help grow the category in addition to pricing. So again, all on track. I would say elasticities will help us. But we've built that into the outlook that we've had. The assumed elasticities on that improvement is already built in, and we'll just continue to monitor it. But no surprises at this point in terms of category, other people following, and what we're seeing from a price gap perspective.

That's helpful. As a follow-up on your investment in the brands, considering the challenging supply chain environment that every consumer product company is dealing with, how do you balance investment, especially in innovation, while also maintaining core supplies to ensure sufficient inventory levels? It would be helpful if you could discuss how you manage both innovation and core brands.

Sure. I think first, getting to your point on supply, the good news is we're back in a position across our core brands and innovation that we can supply. So about 5% of our portfolio is on allocation at this point. So we're able to meet consumer demand across the vast majority of our portfolio. And that bodes well for getting distribution back on our core brands, which we purposely narrowed during that pandemic period, but we're beginning to expand that again, and that's going well. And really, when we think about advertising, we are an ROI-based advertiser. We believe in the long term, and we believe in building brands, but we're also very carefully managing how we spend that dollar. So we know in the return we get on investing in innovation, the return that we get on investing in the base. And the team is always optimizing that over time. That has led to very strong ROI improvements on our advertising over time using that model. And even though we put significantly more money in and spent about 11% of sales last year, and we plan to spend 10% of sales this year, we've continued to see that ROI go up. And what we've really been focused on is getting much more out of our digital advertising. And as part of our IGNITE Strategy, we had talked about wanting to get to know about 100 million consumers in the U.S., and that allows us to further drive efficiencies in our digital spending and effectiveness. And that is well on its way. We are halfway to that goal, and that has really helped us with the ROI. So again, it is really about thinking about the long term on the brands. We balance the spending within the brands based off of an ROI model, and we're always able to adjust as we learn more, but it is about building those brands over time and ensuring that we have superior value with consumers.

I understand this has been asked in different ways, but I want to wrap it up. If the expected rates for resins do not materialize and current rates persist, you are announcing a pricing expansion in the market. Productivity seems to be one approach, and you have additional strategies available as well. How flexible are you in managing the cost environment if it increases further? In other words, if the expected situation doesn't unfold, can you broaden pricing across more of your portfolio? Will you raise your pricing strategy? You have mentioned a plan to do that on a slide. Could you provide some insights on your available strategies if the environment does not develop as anticipated?

Sure, Chris. Thanks for the question. I think as Kevin highlighted, we do have an increased expectation on the cost environment, and then we've taken the appropriate actions through pricing and cost reductions to deal with that. And that's exactly what we would do is we would see that resin curve continue to be pushed out. We would evaluate both the rates and the degree of pricing across the portfolio. And frankly, we have all of that ready now. We've been evaluating that and would be ready to go if additional increases were warranted. We'd, of course, want to balance that to ensure that we don't get out of whack with price gaps and to ensure that we continue to support our innovation, et cetera. And then, of course, we're always looking for ways to reduce costs, and we would continue to put focus there through everything that we possibly can do. So know that, that's what we are thinking about. We have contingency plans in the event that that happens, but we'll be balancing all of that if we were to have to take additional actions if that curve were to be pushed out further.

Okay, got it. If I could ask one more question, you've mentioned several times that you're taking a balanced approach to the top line. It seems like you believe there's some flexibility there, particularly in the second half of the year, though a lot can happen. If I consider this, your mix is improving and you're not experiencing much volume elasticity; if anything, it appears that you're quite optimistic about volumes. Pricing is expected to build during the latter half of the year. Given this information, why do you expect to be at only the low end of your long-term target? Also, does that relate to when the pricing will enter the market? Could it be more weighted toward Q4? I would appreciate any insights on that. If it's just too early to tell, that's understandable, but I want to ensure I'm not overlooking anything.

Yes, Chris, I would say on our sales outlook for the year, the minus 2% to minus 6%, we think that's a balanced view where we sit today. And you mentioned it, it is still very early in the year. We're only one quarter in. And keep in mind, the two biggest items that can impact our results that are outside of our control are both how cold and flu season plays out as well as how the pandemic plays out. And so I think it's much too early to start changing our outlook. As we said, we're pleased with the start to the year relative to our expectations. But we also know there's a number of items that we don't directly control that will impact our results. And so we'd like to get another quarter or so into the year and see how those are playing out. And then we'll truly come back and update you if we have a different perspective.

A couple of quick questions. So back to the expectation of commodity release in the second half of the year, I think I also heard Linda mentioned that you guys plan to kind of enact more price increases in the back half of the year. So my question is, what's the risk that retailers begin to push back? If you kind of hold out and wait to push the next round through until commodities are actually already rescinding, isn't there a higher risk that they won't actually be enacted, utilities are going to push back?

Jason, so when we're talking about back half increases, many of which go into discussions at the beginning of our back half. We're continuing to see that cost environment ramp up. And I don't think anybody is thinking that this is going to abate or to be to a place where people are starting to think about we're in a full recovery. So I don't anticipate the back half being an issue. I think retailers will appreciate the fact that we're taking a very disciplined approach to this and continue to partner with them to ensure that we're doing the right things for the categories. And I wouldn't anticipate there being a different environment in the back half given what we're seeing from a cost perspective. Of course, we're being very thoughtful about that. We're building that into the consideration as we plan when we will announce pricing. But we are doing that knowing full well how our categories behave, consumer trends, key merchandising periods, et cetera. And I would say, given the fact that we continue to invest, and we're bringing retailers really strong innovation plans, they have still been in a mode of partnership and continuing to build plans with us to build the categories.

Got it. That makes sense. You mentioned two more questions focusing on gross margin. First, can you quantify the unusual manufacturing expenses you referred to that you believe will decrease over time? Secondly, regarding cost savings, while it's just one quarter, it was relatively small in terms of contribution. What are your expectations for the full year in that area?

Yes, Jason, regarding cost savings, I believe we will see more significant cost savings than in previous years. We are actively pursuing this strategy to manage the current cost environment. While the savings were somewhat lower in the first quarter, I anticipate an increase as the year progresses. You can expect to see enhanced value as we implement additional cost-saving measures. Concerning manufacturing upcharges, we haven't specifically detailed that, but we are incurring considerable expenses by utilizing third-party manufacturers and suppliers. Historically, we have produced around 80% of our shipments internally and relied on contract manufacturers for the remaining 20%. Currently, that ratio has shifted to about 50-50 due to the pandemic, meaning we are depending more on contract manufacturers to meet demand. As demand decreases, we plan to gradually revert to in-house production and renegotiate some agreements, which will lead to notable savings reflected in our financials. We will need to observe how demand evolves with the pandemic, but I believe that starting in the latter half of this year and extending into the next 12 to 24 months, we will begin to eliminate those extra charges. We expect to initiate this process in the second half of the year.

I'm glad I'm next. I want to follow up on, Kevin, on your answer to Jason on producing a larger percentage of your portfolio. Can you maybe talk about how we should be thinking about what the spread is in terms of the margins of self-manufactured versus third-party? And then how long should we be thinking about or what's the timing in being able to get back to that 80% range?

Thank you for the question. It's an intriguing topic. The profit margin related to co-packing can vary significantly, typically ranging from 10% to 20% depending on the co-packer. We have broadened our supply chain, not just through contract manufacturers, but also by working with suppliers of raw and packaging materials. This shift has created a more global supply chain that enhances our ability to manage disruptions in the current environment. Alongside the profit margin from these partnerships, we're also dealing with a wider supply chain that incurs higher transportation costs due to sourcing products from greater distances. Additionally, we've increased our warehousing capabilities since we are holding more inventory to navigate these disruptions. This has led to added costs within our supply chain. We see this as part of our strategy to build resilience and ensure product availability. Over the next 12 to 24 months, I anticipate we will work on reducing these costs. Much of this will depend on how demand evolves. During the pandemic, we experienced demand growth of over 20%, but we believe that long-term, it will settle at around 3% to 5%. As demand normalizes, we expect to begin reducing costs in our supply chain gradually. For instance, last quarter during Hurricane Ida, our primary resin provider in the Gulf was offline for about two months. Thanks to the efforts of our product supply team, we had sufficient resin inventory and alternative suppliers in place, allowing us to maintain production and continue delivering products to customers despite the disruption. We recognize that these measures incur costs, but we are confident in our ability to address these expenses, contributing to our long-term margin recovery as commodity conditions improve. We aim to systematically eliminate these charges over the next year or two.

Okay. Got it. And if I could just ask about mix. You were pretty clear in your comments and in the release that now you have value packs, multi-packs, all these things are kind of coming back. In your kind of 2 to 6, have you provided how much of the drag mix will be over the course of the full year?

Yes. In terms of the course of the full year on the top line, as I said, we had about a 3- to 4-point benefit from price mix due to this temporary benefit of less merchandising activity and a lower level of assortment we were offering. That will be reversed out. And so I'd expect 3 to 4 points of unfavorable price mix. It started in Q4. It continued in Q1, expected for 2 more quarters. By the fourth quarter, we've lapped it. And we've also got the benefit of pricing. So I'd expect favorable price mix by the time we get to the fourth quarter.

A couple of questions. So first thing I wanted to ask about was cash flow. You've called it out in the release, and it was $48 million quite low this quarter. There was a mention of higher inventory, but it still seems pretty dramatic. So I'd just love a little bit more color on that, if possible.

Sure, Lauren. You're exactly right. In terms of cash flow, we delivered $41 million. It was down 89%. Typically, if you look at the cash we generate, it's fairly consistent across the quarters. A little bit of a dip in Q2 because of some seasonality in our Kingsford business. But historically, we generate our cash pretty consistently across the quarters. It's going to look very different this year. In the front half, it's going to be depressed because of the reduction in net earnings. Keep in mind, we're lapping about 50%, 60% growth in net earnings last year. So earnings are down more materially in the front half of the year. That will reduce the cash we generate. And then I expect that to pick up pretty significantly in the back half of the year. In total, before the pandemic, we were generating somewhere between $900 million and $1 billion of cash on an annual basis. I think we'll be a little bit lower this year, expected to be in the $850 million to $950 million range primarily driven because the increased costs will depress our earnings a bit this year. And so it will be a little bit below our normal run rate in terms of cash we generate, and then I expect that to rebound as we move into fiscal year '23.

Okay. Great. The cash flow this quarter was significantly lower than what we typically see in a normal pre-COVID first quarter. That wasn't the only reason for my question about the earnings decline. Is there anything else we should consider regarding this quarter's performance, particularly anything sequentially that we should keep in mind since we currently lack visibility into the cash flow statement?

Yes. I would probably note two items. There was some timing on receivables and payables. And one example, I mentioned earlier, we saw a really strong performance later in the quarter as a result of the Delta variant. We had a pretty strong month of September. And what that means is our AR balance was higher than we had anticipated. That's just timing related. We've already collected those receivables by now. But just based on the cutoff, we carried some extra AR going into the end of the quarter. And then inventory levels, as I've talked about, we have raised inventory levels as part of the work we're doing to ensure supply. And so those will be elevated for a while, and we'll start working that down over time.

Okay, great. Regarding the timing elements you mentioned, are there any specific categories worth noting? I usually don't associate your categories with significant retailer inventory buildup prior to a price increase. It seems this is more about retailer concerns regarding how long Delta might persist and your expectations around that. So, we should anticipate a deceleration in sales sequentially. Your full-year guidance is clear; I just wanted to understand the dynamics for the first and second quarters.

Sure. Regarding our sales for Q1 and Q2, we previously expected a decline in the low double digits for Q1 and high single digits thereafter. We've since updated our forecast for the first half of the year, and now expect sales to be down in the high single digits for the entire front half. This is an improvement from our August projections. There may be some timing shifts between quarters due to slightly higher retail and consumer inventory from shipment timing. Overall, we still anticipate the front half of the year to see a high single-digit decline, and I don't expect that to differ significantly from what we experienced in Q1.

Okay, great. I have one more question. Everyone has been asking about resin and gross margin, but I'm curious about chlorine. There has been a significant change in chlorine prices since August. Can you provide any insights on labor and logistics and how you expect these factors to influence your forecast as conditions improve in the latter half of the year?

Sure. As it relates to commodities, as you know, back in August, we knew this was going to be a tough year, and we had anticipated about $300 million worth of cost increases, which is pretty significant for us. In a typical year, we might see $50 million, maybe $60 million of cost increases. So we knew there's going to be a tough year on substrate, on soybean oil, on resin, and that was baked into our outlook back in August. What has changed for us based on our initial assumption is really resin has gotten worse. We think the peak resin price will push out, as we said, a couple of months. But by and large, we think we have gotten the commodity environment mostly right. Resin is the only one we're updating. And then transportation is the other one. I had assumed that we'd start to see transportation rates come down in the back half of the year. And what we think now is this imbalance in supply and demand we're seeing in that market is going to continue for all of fiscal year '22. And so that's the other change we're making. And those are really the two changes versus what we talked about in August.

A couple of clean-up questions for me on pricing because I know we've covered a lot of ground at this point. So you indicated intentions to price on 70% of the portfolio. I think that's clear. And I apologize if I missed this. Can you just comment on the remaining 30% where, at the moment, you currently do not intend to take price just given the pressure on gross margin? It would certainly seem like across the board, there's a cost justification for that. Perhaps you can just comment on it. And then on the elasticity, the second question, Linda, your elasticities have been better than expected. This is broadly held true across the CPG and it sounds like you expect that improvement to hold. Maybe just spend a moment on that. Talk about that a bit and why you do not expect to see any sort of mean reversion to historical elasticities.

Sure. I’ll start with the pricing question. Regarding the 30% that we're currently not pricing, we're assessing cost increases on a category-by-category basis. We're examining commodity costs and justifications. Some categories haven’t been as affected and are less driven by resin, although transportation may still have an impact, but to a lesser extent. We also have other options we can consider. As we've mentioned, we’re reviewing the entire profit and loss statement for potential cost reductions, and all businesses are included in this review. In terms of pricing, our focus is on evaluating the cost implications and anticipating consumer reactions, which informs our decisions. This doesn’t eliminate the possibility of pricing changes if we encounter additional pressures later this year, but for now, we believe maintaining the current approach is best. On the topic of elasticities, it’s true that consumers have gravitated towards branded solutions during the pandemic, seeking trusted options, and they've turned to our brands. We've discussed how our portfolio has strengthened during this time, including increased household penetration, better retention, and higher repeat purchase rates. We've found that 70% of our portfolio is considered superior by consumers, leading to improved elasticities. However, it’s important to note that while elasticities have strengthened, we do anticipate a volume impact from pricing increases, though it's less severe than what we would have expected pre-pandemic. We’re closely monitoring this situation and continue to invest to maintain these elasticities as consumer behavior evolves. One thing to keep in mind is that predicting consumer behavior has been quite challenging throughout the pandemic. While the current indicators are positive, we will observe how seasonal factors like cold and flu seasons influence the market going forward. Nonetheless, we're confident in the strength of our brands and believe we can manage pricing effectively, trusting that the improved elasticities will hold.

Got it. And just a quick clarification. Can you comment on which categories you do not see performing well at this point? Looking at the Nielsen data, it certainly does not seem to be the case with salad dressing or charcoal. Are those the two categories primarily in question, or would you prefer not to comment?

No comment yet, Kevin. I hope you can understand we're working through this live right now. And so as we have all of these price increases implemented, then we can talk more about the details of the categories. But I would just say, as you watch the data, I know that pricing will be rolling through this quarter and in the back half as well. And so you'll be seeing that flow through across a number of our categories coming up here quickly.

Yes. The international business performed a little bit better than we expected on the sales line. Can you talk about whether you think the international markets are still experiencing some benefit from the pandemic or not?

Yes, the international business showed a 19% increase compared to the two-year stack this quarter, continuing to perform very well. We observed double-digit growth in several areas, including our wipes business, Burt's Bees, and Cat Litter, along with mid-single-digit growth in other significant brands like Glad and Brita. Overall, I feel optimistic about international markets. Depending on the specific market, we are experiencing substantial pricing pass-through, taking double-digit price increases in some international areas, which has been successful so far. We are focusing on growth opportunities available in international markets. The pandemic's impact varies by market, given that we operate in over 100 of them. However, we generally see ongoing cleaning habits and increased health and wellness concerns worldwide. We are leveraging this trend to drive innovation, invest in our brands, and expand distribution. In summary, international performance has been strong, although we anticipate challenging comparisons in Q2. Nevertheless, we have robust plans in place, and our brands are gaining market share where we compete.

Can you explain again why you expect the overall sales decline to be larger in the second quarter? I noticed there were a few questions regarding the sales trends for the first and second quarters, and I’m not sure I understand the reasoning behind your expectation of a bigger decline in the second quarter. The POS data suggests that October showed only a slight decline, based on what we're observing.

Linda, what I'd say on the second quarter compared to the first quarter, a few things for you to think about. As we've said, we think our sales will be down high single digits in the front half of the year. So hopefully, that helps you think about the second quarter. We're lapping 27% growth again in Q2, which is what we had to lap in Q1. And also, as we mentioned, we think there's a little bit of a shift of timing between Q1 and Q2. So we had very strong shipments late in Q1. We think some of that's created some additional inventory with both retailers and consumers that get worked out in the second quarter. So I think when you consider all those items, you get to down high single digits in the front half which will put a little bit more pressure on Q2 as you have some shifting between quarters.

Thanks, Michelle. Thanks again, everyone. I look forward to speaking to you again on our next call in February. Until then, please stay well.