Church & Dwight Co Inc

NYSE:CHD

Earnings Call Transcript 2022-Q2

[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 -- that on this call the company’s management may make forward-looking statements regarding, among other things, the company’s financial objectives and forecasts. These statements are subject to risks and uncertainties and other factors that are described in detail in the company’s SEC filings.

I would now like to introduce your host for today’s call, Mr. Matt Farrell, Chief Financial [ph] Officer of Church & Dwight. Please go ahead, sir.

[Matt Farrell, CEO]

So 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 Dierker, our CFO. And when Rick's 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 3% 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 six 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 share on eight 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 to 15% year-over-year, and we continue to expect online sales for the full year to be up -- be above 15% as a percentage of sales.

Since early 2021, 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 US consumer business which grew organic sales by 2.4%. Looking at market shares, as I said before, we had good numbers, as eight 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. I’ll 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 rate which is hampering our ability to grow.

Our most recent acquisitions are performing well, TheraBreath which we acquired in December 2021 had a great quarter with 33% consumption growth. TheraBreath grew share of 3.1 points to 16.4% and of the alcohol-free mouthwash category. TheraBreath is the number two nonalcohol math wash 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 1 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 US 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 lows we experienced in Q1, such as fill level issues and delivery issues. Those actually proved 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. Our Specialty Products business delivered a strong quarter with 6.3% organic growth, driven by both higher price and volume.

Now I want to spend a couple of minutes 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 US as consumers trade down to lower press 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 showerheads and this is due to less 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 launch and learn to drive household penetration of flosses.

It's fair to say gum health has not gone away and still only 16% of the US population flosses every day. Now this is a business that has averaged 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. 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.

I think back to April during our Q1 call, we called out the strengthening value detergent segment. In the latest four weeks ended July 17, 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's another an early indicator of trade down, this time in oral care. We had one major retailer point to the strength of manual toothbrush, which has 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 flosser 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 and vitamins, are value products. And in Litter, our orange box is also valued. So we feel well positioned for what may be coming.

Now regarding private label. Private label shares are stable in the five categories where we have meaningful exposure to store brands. As you saw in the release, we have a strong lineup of innovation across our personal care and household categories. I want to highlight the early success of ARM & HAMMER Baby Laundry Detergent, which has already achieved a 10% share of the baby laundry category at Walmart.

The other product I'd like to highlight is TROJAN RAW, which is the thinnest condom now in the market, which is already the number six out of 400 SKUs sold at Amazon. I also want to mention our recent launch of a new lightweight litter that we call Hard Ball. 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 hard ball because of the hard ultracompact 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-thirds 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, CFO]

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 market impact was about $0.04 in the quarter.

Good news is our overall fill rate continued 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 segment, so I will 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 was 7.8%, and we expect two-thirds of 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 to cash. For the first six months of 2022, 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 30, 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 and as our VMS business comps to COVID surge 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 $0.55 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 a year ago, plus higher marketing and promotional support. We expect higher EPS in Q4 to offset the Q3 decline driven by acceleration of organic growth in the absence of prior year onetime investment.

And now to the full year. We now expect the full year outlook for reported sales growth to be approximately 4% to 6%, 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.

[Operator]

Certainly. [Operator Instructions]

And our first question comes from the line of Kevin Grundy from Jefferies. Your question, please.

[Kevin Grundy, Jefferies]

Great. Thanks. Good morning everyone. Two for me, if I could, Matt. So I think you've probably been a little bit more cautious on the consumer probably earlier than maybe some of your peers. Everyone got off practice 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 changing category growth rates underlying your -- underlying your guidance for the year? And then a follow-up. Thanks.

[Matt Farrell, CEO]

It’s a pretty broad question, Kevin. Yeah. As far as the categories go, let's start with 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, 90% of our portfolios are just our everyday essentials, only 10% that's related to discretionary products.

So, we -- although we spend a lot of time talking about the discretionary products and because they do have it have had an impact on 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 a few categories I call that besides of WATERPIK and FLAWLESS like Spin brush for example, rapid was down a little bit. As far as others -- and another one that was soft in the quarter depilatories and also oral gel, but everywhere else you know those categories you saw you saw growth.

[Kevin Grundy, Jefferies]

Yeah. My follow-up is probably is probably for Rick. Just in terms of the EPS outlook. The environment is clearly challenging costs have gotten worse FX not as a big headwind for your guys, but nevertheless still headwind, can you talk about the constraints on the pricing front? And then historically, it's well thought I've been run pretty lean, but other levers to pull here in terms of productivity to offset, offset some of the cost headwinds? And then I can pass it on. Thank you.

[Rick Dierker, CFO]

Sure, Kevin. So, from EPS perspective, we've announced a 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 in the back half. That's a tailwind.

We think trade down is a tailwind in general in a laundry. Matt quoted some numbers on there about how will the value categories starting to grow and 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 in one timer's that we’ve talked about previously. So that's an EPS side.

On Productivity, we talked last quarter, I think Lauren asked the question about productivity phasing and that's so true because early on in this year and even late last year, it's hard to break in to get line time to go do qualification to do any productivity type efforts.

And so we said it last quarter, it's still true. It's going to continue to build for 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, Jefferies]

Okay very good. Thank you guys. Good luck.

[Matt Farrell, CEO]

Hey Kevin.

[Operator]

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

[Rupesh Parikh, Oppenheimer]

Good morning. Thanks for taking my question. So, I guess I just want 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 full rate to get back to where you'd like it to be?

[Matt Farrell, CEO]

We expect the fill rates to be back 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. So, that's the one we're focused on the most right now.

[Rick Dierker, CFO]

Yes. Just to give you an example on that, Rupesh, right, 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 can -- we have visibility into rapidly improving that number.

[Matt Farrell, CEO]

Yes. And as far as the vitamins go, if you keep in mind, you've grown off really gigantic base in the last couple of years with growth in 2020 and 2021. 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 -- in the quarter because of the Delta variant, Q3 of last year. So, consequently, that's a really tough comp and so consequentiality we expect it to go negative year-over-year.

[Rick Dierker, CFO]

Yes. As an example, Rupesh, Q3 last year, the category grew 33%. The rest of the quarters grew 19% Q1, Q2 and Q4. So, it's just -- it's more of a comp issue than--.

[Matt Farrell, CEO]

Yes.

[Rupesh Parikh, 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 if you look forward to next year, some of these pressures could roll over? And then just maybe -- just more color on the risk that you see to your cost outlook for the balance of the year?

[Rick Dierker, CFO]

Yes, I'll leave you with two thoughts really. On the cost side, we do think there will 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 -- 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, Oppenheimer]

Okay, great. Thank you.

[Operator]

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

[Chris Carey, Wells Fargo]

Hi, good morning everyone.

[Matt Farrell, CEO]

Hey Chris.

[Chris Carey, Wells Fargo]

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 just really a call on the consumer trading down and that benefit accruing to you? So just trying to get some incremental context and really confidence on that recovery that you're expecting now in the Q4 relative to the Q3. And then I have a follow-up.

[Matt Farrell, CEO]

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 on the personal care side that we're going to benefit from that. And that's more back-end loaded to 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 what 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, CFO]

Yes. 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 support's 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 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, Wells Fargo]

Okay. Thank you. Then a 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 organic is 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.

[Rick Dierker, CFO]

Yes. It's pretty straightforward, Chris. No change really 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-priced 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, Wells Fargo]

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, 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 per unit categories as seeing the deceleration. How do you think about that going just overall for the slowdown period, the macro slowdown period, 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 label 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, CFO]

Yeah, 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 first half result of around 3%. We think the second half is down 3% on volume. That's really a slowdown in the discretionary stuff like WATERPIK Showerheads, for example, or FLAWLESS and offset by the value trade down and whatnot.

Price/mix, on the 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 is a -- as the trade down happens, therefore, is a negative, but then the positive is higher price on laundry and litter.

[Matt Farrell, CEO]

Yeah. And your question about the private label, as I said in my opening remarks, there's five categories where we compete with private label. And those private label shares have been largely stable. Only one that's 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, 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 Securities. Your question please.

[Bill Chappell, Truist Securities]

Thanks. Good morning. Just specific, I guess, housekeeping-type things. One on kind of the cost environment in your hedges, historically, I thought you did some hedging on diesel costs. So I didn't know with the runoff of energy prices, the potential come back around energy prices, if you are locked in more or have some potential where that 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, et cetera, kind of, what your exposure is, and what we should be looking for? Thanks.

[Rick Dierker, CFO]

Yes. So I'll take the commodity one first. I think I said earlier, we have very limited hedges out for 2023. We entered 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 impact, and that's coming through incremental discussions with third-party manufacturers. And it just takes a while for it to go through the supply chain.

Our outlook this time versus last time is minimal on commodities, I would say. Of course, the 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 the 1% drag on the top line, 1% drag on the bottom line. We don't, of course, hedge in translational. Transactionally, we hedge about 80% of our transactional exposures, whether that's the euro or the Canadian dollar.

[Bill Chappell, Truist Securities]

Great. Thank you.

[Operator]

Thank you. [Operator Instruction]

And our next question comes from the line of Andrea Teixeira from JPMorgan. Your question please.

[Andrea Teixeira, JPMorgan]

Good morning and thank you. I was hoping if you can comment on the mix impacts on gross margin. You may see with VMS going negative in Q3 and possibly in 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 trying to clarify.

[Matt Farrell, CEO]

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

[Rick Dierker, CFO]

And you're right. We walked away from private label manufacturing for vitamins a couple of years ago, to get back into that.

On gross margin mix, there's not much of a mix impact on vitamins, whether it grows or it decline from a revenue perspective. Just to talk about gross margin in aggregate, right? 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, round to pricing. And gross margin in Q4 last year was one of our lower quarters. So I know you didn't ask the detail on gross margin, Andrea, but I thought that would be helpful in context.

[Andrea Teixeira, JPMorgan]

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

[Operator]

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

[Kaumil Gajrawala, Credit Suisse]

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 for -- particularly for WATERPIK and some of the discretionary items as -- discretionary items at retail, a series of other categories seem to be quite high.

[Rick Dierker, CFO]

Yeah. 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 built up supply. And so yes, 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. 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.

[Matt Farrell, CEO]

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

[Kaumil Gajrawala, Credit Suisse]

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, CEO]

Are you specifically talking about vitamins?

[Kaumil Gajrawala, Credit Suisse]

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, CEO]

Well, if you think about value detergent now, some of the numbers that I quoted just like in the last four-week period ended July 17 is that 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 like 11%, 12% in the quarter. We grew even faster. And it wasn't just our premium brand, our black box, [indiscernible] 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 is you have baking soda and also oral analgesics, which is Orajel. And again, the private label shares are pretty stable right now.

[Kaumil Gajrawala, Credit Suisse]

Thank you.

[Operator]

[Operator Instructions]

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

[Stephen Powers, Deutsche Bank]

Hi, guys. Good morning. I just want to start going back to vitamins. I think your call on the third quarter is pretty clear, but where 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, CFO]

Yes. Hey, Steve, it's Rick. I think the back half of 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 years 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. We really have 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, CEO]

Yes. And Steve, 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 year, but keep in mind that the other tailwind is the transition from pills and capsules to gummies. That's going to sustain the growth of the gummy category in the future. And of course, new ingredients and new product offering assist the other catalysts.

[Stephen Powers, Deutsche Bank]

Yes. And you guys are value priced in the category, too.

[Matt Farrell, CEO]

Yes.

[Stephen Powers, Deutsche Bank]

Okay. So then I wanted to pivot also 1.5 months 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 2023, 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, CEO]

Yes. Well, we'll start with M&A. Our two most recent acquisitions were ZICAM in a couple of years ago in 2020, which got us into a 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. We've got a lot of opportunity outside the US.

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 of the year because of our fill rates. If not for that, we'd be in far better shape. But it'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 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 got 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, Deutsche Bank]

Okay. Thank you very much.

[Matt Farrell, CEO]

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, Barclays]

Great. Thanks. Just wanted to ask a little bit about pricing. 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 you mentioned they would come more likely in the form of package size adjustments.

So I was curious, A, if that's still the case? And then B, I think you'd also mentioned that those -- that, that approach would require some CapEx investment and some lead time to deal with tooling. And the CapEx guidance is 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.

[Matt Farrell, CEO]

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'd probably be both. On CapEx, it's immaterial to CapEx outlook on change parts for like a line, for a carton or for a new mold, for a bottle. So, it's a handful of million dollars or so, it's not that impactful.

[Lauren Lieberman, 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, CFO]

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

[Lauren Lieberman, Barclays]

Okay, great. Thanks a lot, I should say that.

[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, 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's always some timing lag. But is there concrete plans to take incremental pricing? And if not, I guess, why not?

[Rick Dierker, CFO]

Yes. 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, 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're coming in versus what you expected and if you've seen any sequential change recently on that front?

[Rick Dierker, CFO]

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

[Dara Mohsenian, 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 you're 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?

[Matt Farrell, CEO]

Yeah. Well, what I would say there is through the end of June, we were pretty happy with elasticities. Remember, we have new price increases that are just hitting shelf 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 pullbacks brand by brand. So the Purex was down 500 basis points year-over-year. We were down 340. So we pulled back because we were going through concentration, and others may be pulling back as a way to modulate price.

And also in litter, litter's also a category that promotions are down again year-over-year. Sold-on deals around 11%. It's normally in the high teens. And then back to liquid laundry, about 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.

[Rick Dierker, CFO]

And, 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, 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, Goldman Sachs]

Awesome. Thanks guys. I guess, I'm the closing act. Thanks for letting me in. I think, I heard you in the prepared remarks that you expect -- it may be in the press release, I don't 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, CEO]

Well, laundry is the big one, where we expect that trade down. I'd say that's the big swinger. And 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 growing faster than premium. And in the latest four weeks, value detergent is, 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 yeah, we do have a fair amount of support, both advertising and trade behind our detergent in the second half. So that's the reason, the context for why we think things are going to accelerate.

[Jason English, Goldman Sachs]

And P&G talked about laundry on its earnings call earlier. And they did reference marginally promotional activity, paper bath, but not to get more price, but because they hit a capacity ceiling that's now been resolved. And so 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 of that jeopardize your outlook and your expectations for the fourth quarter?

[Matt Farrell, CEO]

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, the pricing and trade.

[Jason English, Goldman Sachs]

Yeah. Fair point. Thanks a lot guys. I’ll pass it on.

[Matt Farrell, CEO]

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, CEO]

Yeah. Okay. Well, look, it's a simple story, all right? Our reported now for the full year is 4% to 5%, organic 3% to 4%. And we did call down the EPS from 4% to flat. Why? Because 1% is currency, and the rest, the other 3% is cost. Shares are healthy. Fill rates are improving. Trade down is happening. And we've got big support in place for the second half, and we'll talk again with you at the end of October.

[Operator]

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.