Church & Dwight Co., Inc. (CHD) Earnings Call Transcript & Summary

Thank you. Mr. Farrell, without further ado.

Okay. All right. Good to be with you this morning. I just have a few slides for those of you who aren't familiar with the story. I'm going to bump through the safe harbor statement. Take a look at it when you have a chance. Okay. So we've had an evergreen model. So we tell our investors, we try to grow organically: Top line, 3%; bottom line, 8%; try to expand our operating margin 50% -- 50 basis points annually, a little bit from gross margin and the rest leverage from SG&A. Where we get the top line growth is 2% domestic, 6% international and 5% SPD. You'll see it on a slide or two that very small exposure internationally, so we have a lot of opportunity there. And here it is. We're 76% U.S., 18% international and 6% specialty products. And this is very relevant right now in these uncertain times. So our portfolio is down 60% premium, 40% value. Interesting enough, if you went back to 2008, 2009, we actually pointed out we had the same split, 60-40. And we have 14 power brands, and those 14 power brands account for 80% of our revenues and profits. And this company has been built through acquisitions. If you went back to the year 2000, the only brand we had was ARM & HAMMER. All the other brands here were acquired since the turn of the Century. And all of these brands, if you notice these teams, are also #1 or #2 in their categories. So what we say to investors, we're 14 brands today, 20 tomorrow. We think using cash for acquisitions is the highest and best use. So if you look at just kind of the history, we went back to 2004 where top line was $1.5 billion. In 2021, it was $5.2 billion. And if you look along the bottom of the slide here, you can see in just about every year, we've acquired something large or small. And we're very, very fussy about the businesses that we'll acquire. They need to be #1 and #2 share. They need to be able to grow at or above our evergreen model of 3%. They need to have -- at or above our corporate gross margins. Asset light are important too, as we don't like about businesses that have plants. And we'd like to be able to leverage our supply chain, both manufacturing logistics and purchasing. and anything we buy, we have to conclude it's got a sustainable competitive advantage. Now the most recent acquisition was in December. We bought THERABREATH. Now THERABREATH is a non-alcohol mouthwash. It's the #2 mouthwash in the non-alcohol category. And it's the fastest-growing brand in mouthwash. Now how do we run the company? First and more important, we leverage brands. You saw that we have 14 power brands. We've been a friend of the environment for a long, long time. I'll take you through that in a second. We have the most productive employees since CPG. We have about $1 million of sales per employee, about 5,000 employees. And we think that's an underappreciated statistic in investing. We're asset light, as I said before. If we do the first 4 right, we get really good returns. But if you're also able to leverage acquisitions, you're going to get great returns. And we have. And the story about friend of the environment just quickly. If you went back to the end of the 19th century, we're actually putting trading cards, pictures of birds in the ARM & HAMMER boxes just for both the environment. At the turn of the century, we started to use recycled paperboard. In the '70s, we're the only sponsor of the first Earth Day. 20 years later, 1990, we're still the only sponsor of -- corporate sponsor of Earth Day. And then we started planting trees. Recently, 2017, we've planted millions of trees in the Mississippi River Valley. Remember from 5th grade, trees take CO2 out of the atmosphere. And more recently, we committed to science-based Targets. You hear the external goals that we've been promoting for the last few years. We're trying to be 100% carbon neutral by 2025 via planting trees. Second, water, we're trying to reduce our water consumption, 10% a year. And in solid waste, we'd like to recycle 75% well of our waste. We get a lot of recognition for that externally. Of course, we don't do these things for the recognition, but I think it's important to say that our efforts have been recognized. Financials. First quarter. Organic sales grew 2.7%. You see gross margin contracted 190 basis points. Actually, it was a little better than we thought it was going to be. And our EPS was flat, also better than we thought it would be. So we had a really good first quarter. As far as the outlook for the year, we started the year with 4% to 8% call. More recently, we said we're going to be at the lower end of the range, would be 4% EPS growth. And as far as prioritize uses of cash flow, we generate lots of cash. So we think the highest and best use of cash is TSR-accretive acquisitions. And can you roll your eyes down the page here. Obviously, CapEx organic growth, new products, debt reduction. And at the bottom half, return to cash to shareholders. We don't have a big yield about 1%, and we do buy back shares from time to time. And 121 consecutive years of dividends. So as Jason said in his opening remarks, we're a very consistent company. And with that, good fireside chat.

Awesome. Get comfortable. Make yourself at home. Either one, it's up to you. We got 2. So again, if anyone in the audience has questions, feel free to raise your hand, press the button and vocalize them. Generally, my list of questions are going to focus around 3 topics, M&A strategy, so the recent top line and market share performance and then dig in into margins and all the various puts and takes within that, which is a lot. We have a lot to unpack in terms of supply chain, cost inflation, pricing. I don't know where to start and unpack that. Let's perhaps, you closed. We're talking about your priorities on capital allocation with M&A being one of them. Let's dig in a little bit more there. The last couple of acquisitions have put you into OTC in a bigger way and appliances. Is this where we should expect you to hunt going forward?

No, I wouldn't say appliances is were going to be hunting. If you look at our most recent acquisitions we acquired in 2017, WATERPIK. That's been a complete home run for the company. It's grown top line about 10% annually, and we think it's going to continue to grow strongly. Why? Because we have so much international opportunity. So that was a hit. We bought FLAWLESS then, 2019. That's gone sideways for us, but it was a small acquisition. We had about $475 million for that, but it was only 8x EBITDA. As far as the other ones, more recently with ZICAM at the end of 2020 and THERABREATH at the end of '21, the thing to keep in mind is that all of these acquisitions fit our criteria, whether it's WATERPIK, FLAWLESS, THERABREATH or ZICAM. They're #1 or #2 in their categories. They're asset light. They can grow where they have gross margins at or above our corporate margins, and they have a competitive advantage. So we're somewhat agnostic with respect to the categories that we'll get into. But we're essentially a consumables company, and those -- they have generally the highest priority when we're looking at deals.

I'll be honest with THERABREATH. I never actually dug in and tried to parse out the mouthwash category and thought about it any differently than between alcohol and non-alcohol free. How big is the non-alcohol or the alcohol-free segment of the category? How is it growing? And what do you bring to the table for this?

Yes. Well, the mouthwash category is about $1.6 billion consumption. The alcohol-free is about $700 million, and so we're #2 there with 15% share. And that side of the non-alcohol has been growing about 4% a year. THERABREATH has been growing 20% to 50% a year the last few years. So it's sort of a new kid on the block. And the big dogs are LISTERINE, Crest Scope. But we're now the #4 in all mouthwash and #2 in non-alcohol. What we bring to the table, frankly, is scale. We have bought lots of businesses that are -- were family-owned. So obviously, we have a professional sales organization. We can drive distribution. We can also take it internationally because they didn't really have an international presence. And obviously, we can bring some synergies to the table as well. You may not notice, Jason, but we make mouthwash in our Montreal plant for ORAJEL, some of our other brands. So we're not a stranger to mouthwash.

And on ZICAM, is it similar? I mean it's a different category, obviously, but in terms of what you bring to the table.

Yes, cough and cold. It was -- when we bought it, it's essentially the same playbook. Whenever we buy a business, we -- now that one went off a cliff. We bought it in December of '20. We knew that people were masking, social distancing. So 2021, the sales has dipped significantly. But it's coming back now. So in the first quarter, ZICAM was up 50% year-over-year. By the way, THERABREATH in the first quarter, consumption was up almost 40%. So that continues to grow. And the reason why that grew so much, partly is tube distribution, but also just velocity. Consumers are discovering the brand.

And with ZICAM bounce back, is that just bouncing off the COVID loads? Or are you controlling some like destiny?

Yes. No, it's -- I talked to somebody on another large pharma company. And what she told me is that what they're seeing is that people don't want to be sneezing or coughing in public. So there's a lot of preventative consumption that's going on right now.

I can relate to that. I've got some allergies acting out, and I feel guilty every time I cough. Like it's someone going to be -- I have been COVID tested, by the way, I'm clear. It's like -- I'm paranoid around this. Yes, I could appreciate it.

Okay. I got some in my back. I can help you out.

Yes. Send it my way, slip it over. I'll give it a try.

Your question.

You got 20 power brands. Can you talk about a fail that this way you don't have '21 -- or not necessarily fail, [indiscernible] the last one. And kind of get the return on that. What happened? What lessons? Can you give me examples?

I'm going to replay that question because he wasn't on the mic for a little bit. So can you give us examples -- and correct me if I'm not paraphing properly. Can you give us some examples of where some of your M&A went wrong, where you bought a business that should have been your next power brand and it failed to effectively become that? And if so, what drove that failure?

Yes. one of our competencies is that we're -- if you look at our total shareholder return over the past 15 years is because we don't make those mistakes. The only one I would call out to say didn't go according to plan was FLAWLESS. That sales pretty much went -- consumption went flat for the last few years. Now the front end was managed by the organization that sold it to us. So they made decisions with respect to sales and marketing. And why? Because we had an earn-out tied to it. But now we own the whole business. We own the sales and marketing at the front end of it. So we still like our chances to be able to grow the business going forward.

And you mentioned ZICAM rolled over quickly after you bought it. But pretty sure I recall you buying it and saying this business is going to roll over. Like we're going in eyes wide open, what COVID does here and like it's factoring into expectations, price, et cetera.

Yes. We just thought that could be a long-term brand. The other thing too is, with ZICAM, if you could get like emergency, if you could convert that to an everyday usage, you drive significant growth. So that's one of the things that's an opportunity for us as opposed to be an episodic when you feel a cold coming on.

Sure. Now highlighting your presentation, 60% premium, 40% value. We're all hypersensitive around price sensitivity for the consumer building. A few data points here and there saying maybe it is. But for every data point, saying maybe it is, is a data point saying not really yet. What are you seeing in your portfolio? Any evidence of that trade-down piece, that more value-oriented piece beginning to get more momentum in this environment?

Yes. There's a few things that I could call out. So in our litter business, we have 2 types of cat litter. We have premium cat litter and we have value cat litter. And in the first quarter, the value cat litter was growing faster than our premium cat litter. So we hadn't seen that. The second thing is that if you look at the detergent, just look at detergent as segments, the premium segment and the value segment. Premium have been gaining share over value for many quarters. And in the first quarter, that actually was flat. It didn't lose share. The third one I would call out is for WATERPIK. So what we have high-end water flossers and then we have some less expensive ones. We're seeing that greater velocity on the less expensive versions in the first quarter. So I would say those are 3 things we're keeping an eye on.

And I know you don't have a crystal ball, but you all do a lot of work on assessing the consumer and making some educated assumptions of what the future holds. Do you think that builds even more momentum, meaning the trade down components? Do you think we're early innings in that? Or -- if you want to say it.

Yes. Well, look, sometimes $5 for a gallon of gas is somewhat sudden. We weren't living with that last year. And when you think about the median household income in the United States being around $65,000 a year, $5 gas does take a bite. Besides that, the food -- everything's gone up, food, consumer products, et cetera. So I think it's just common sense to think that the consumer is going to feel squeezed. And the question is, for how long is that going to last? Is it got to be 2 or 3 quarters or are we going to go into a recession? But I think we're maybe on the front end of that.

Yes. Now correct me if I'm wrong, but -- well, 60% of your portfolio is premium and 40% is value. My perception is that your share within the value tier is actually higher than it is within the premium tier. So if we start to get a rotation back into value, it's going to actually benefit your overall market share. Is that a true statement? Or did I just totally fabricate that?

Well, the way we look at it is -- one of the big categories is value. That would be detergent. That would be cat litter, which is your orange box. And vitamins. Vitamins has been really rocking, and it's been a very strong category. So I think those being our 3 biggest businesses. If there was a trade down, I think we stand to benefit.

Yes, yes. So this is my natural transition into the broader market share comments that I told you I want to get into. It's been a tough year. I'm not sure that I recall seeing so many other categories in the red from a market share perspective as we've seen more recently. I know there's a lot of transitory factors at play there from a supply chain perspective. Can you unpack those for us and give us more context and detail around that?

Yes. So we have -- you heard we have 14 power brands, and we do publish our report card pretty regularly saying how many of those gained share. So in the first quarter, it was 7 and 7 lost share. And we've been struggling with a number of brands as far as the supply chain goes. It's no surprise. We have difficulty getting at times bottles, difficulty getting raw materials, packaging materials, labels. One small ingredient can affect your ability to ship a product. So our goal is for any particular -- for 2/3 of our 14 brands to grow share, and that is still our objective. But yes, we've been hampered by some issues in supply chain.

Any line of sight of those supply chain issues abating?

Yes, yes. No, as far as the supply chain, we've been spending a lot of time qualifying lots and lots of new suppliers and co-packers, no different than any other CPG company. So -- and that doesn't necessarily create more incremental cost, it's just that you have another supplier. So we'll be concerned about the gross margin hit to that. But there are lots of raw packaging materials that we never thought we would need a second supplier, but now we do. So we think we're better prepared coming out of it. Our field levels are starting to come back, finally. We're in the high 80s now. And normally, it's 99%. And when I say fill level, I mean are we filling 99% of retailer orders? So it's high 80s right now.

And I thought you were like low 80s exiting the year, still sort of low to mid-80s in the first quarter.

Yes. No, first quarter, we -- first quarter, one of the months, we dipped below because we had the Omicron, a lot of people calling out plans. A lot of our suppliers are having the same problems with attendance. So that hurt us. And our organic growth in Q1 was 2.7%. I think we left a lot of money on the table where we're able to ship.

Did you -- remind me, did you guys quantify how much money you think you left on the table?

No, because that...

Will you qualify it today? Can I pry this from you?

No.

But sensing you've gotten back to the high 80s, it's obviously a good place. To get all the way to bright, it sounds like you need some of these new suppliers to come online. Any sense of when they will be online?

Yes. Internally, we're saying we expect to be in the mid- to high 90s by the end of the year, by Q4. So it will be a kind of a slow build.

And do you have -- is there -- do you have subdued inventory levels at retail? Like will there be a catch-up here as you look to replenish shelves and get us back to bright?

There'll be some of that. But I do think that there's probably a little bit left to go as far as the distribution centers filling up, but I think they have a base level right now that able to replenish the shelves.

And I'm surprised that you're saying it's not going to weigh on cost. I mean, I've always had this perception that the reason you go to a single-source supplier is to consolidate volume and scale behind said supplier. In turn, they, of course, give you a better deal than if you were to fragment it. So how can you go and unwind that and start to fragment it without suffering incremental cost?

Yes. Well, there's still competition, right? So if there's a particular raw material or component that you're looking for, we're not necessarily going to the only person that can supply it. So there are other options. And we may have stayed with the same supplier for 10, 15, 20 years and say, now we got to get a backup to a lot of these suppliers. And so consequently, it's still a bid process in RFP.

And I think the impact here has been most notable on litter, you called out, I think, because of clay supply. Is that right?

Yes. No, actually -- well, at times, we had intermittent issues with supply of clay, like I said, also supply of cartons was an issue like glue. So there were a lot of things that from time to time that were hurting us with respect to litter. And similarly for detergent with bottles, labels at times. Again, these are coming from third parties.

And some of this was as you were converting to the more concentrated formula.

Yes, that's right. So we recently converted 150 SKUs and laundry detergent and concentrated it. So we took 10% of the water out. And so right, that was going on at the same time we had some issues with respect to components. So -- but that's behind us now. That was a Q1 issue.

I'm going to come back to that in a minute as we leg into the cost side because I want to probe on what sort of cost that unlocks. But real quick, to close the loop on share and sales. You mentioned vitamin category has been ripping. It doesn't look like it's doing that well for you.

No, it hasn't been because we can't -- we haven't been able to supply.

That's the supply issue there, too.

Yes. And we have third parties as well that we use for supply.

So really -- so we've got laundry, litter, vitamin, back to your point, your 3 biggest categories, all see supply constraint issues.

Yes, yes. But that's going to be behind us. We're going to be out of the woods in the second half.

Okay. Good, good. You also -- speaking front half or second half, you came into the year with the expectation of front half gross margins down. Not a big surprise. And as you mentioned, you actually fared a little bit better in the first quarter than you expected. And you're looking for a back-half recovery in gross margins. I know you're still calling for at least a fourth quarter recovery on gross margin. Could we see it as early as the second quarter -- or sorry, third quarter?

No. I think what's going to happen, the first quarter was down, 190 basis points. We think the second quarter is going to be a replay of the first quarter around down 200 or so. Q3 will be better. It won't be as much for contraction year-over-year, but it'll still be negative. We don't think it's -- it won't be -- expand until the fourth quarter. And the things that will be helping us by then are things like price increases because we have another round of price increases that we just announced for laundry and litter that will take effect July 1. Our fill levels will be better because there's a lot of inefficiencies associated with that. And we'll be lapping some of the costs, some of the big cost increases that we had year-over-year, '21 versus '20. So I think that's -- those are probably the primary reasons why we think we're going to be expanding in Q4.

And on lapping those costs, I love the illustration you have from somebody within the organization, showing somebody running down a hill, chasing a ball.

I know, yes.

And I know you've been talking for -- it feels like 2 years now, about just trying to catch up with cost, it's like chasing a ball downhill because the costs just keep going. We've seen some fatigue in the freight markets. Resin, it looks like we're lapping the hurricane-related disruptions and maybe we're not down as far as we hope. But from a spot price, we're still below where we were last summer. Any evidence collectively that maybe we found a ceiling here and we're not still chasing the ball downhill?

Yes. Well, look, it's -- you're right about resins came off a little bit, but they're still really high. And the way we plan the rest of the year is that they don't come down, that we're planning on. They stay at current spots for resin. What was the other commodity you were...

Freight.

Yes, freight. You're right, freight has come back a little bit. But you got to keep in mind, diesel now is all-time high. So you do have an offset there. So we don't necessarily look at the inputs right now and see signs of relief, at least not in the near term.

Yes. But even signs of no longer chasing the ball downhill will be incrementally positive.

Right. Yes, that's right. Because if you say that the costs are going to start plateauing and you've been -- we've been raising price, we've priced up 80% of our portfolio globally. And more recently, 2 large categories, laundry and litter that will take effect. That's a second ramp. It takes effect July 1. We think at that point, as far as chasing the ball downhill, we will have started -- by Q4, we'll have started to cover all the cost increases.

Yes. Yes. And I remember early innings, you guys got hit by force majeure issues left and right on the resin complex. You now have the industry. I think they're unlocking like somewhere high single-digit percentage of new capacity expansion coming in the back half of this year. Is it possible that we actually get some relief there and your assumption of we're moving sideways proves to be too conservative?

No, I don't think it's too conservative. I think it takes a while for a lot of stuff to come online and to work its way through the supply chain. So I wouldn't expect relief until 2023 on resin.

And I guess, here's a bigger question. I'm going to ask a few people today. There's always been this debate for decades actually. Is deflation good for the industry or not? Would we rather find ourselves in an environment where we've got 2% to 3% sort of evergreen, steady as she goes inflation that you can put 1 to 2 points of pricing in every year and get a little bit of leverage? Or would we rather get a windfall of costs coming in and a margin recovery?

Yes. That's all a question of what's driving the deflation. Now if the deflation is driven by reduced consumer demand, that's a bad thing. But if deflation comes why because the availability of foreign packaged materials is more widespread, then we would take that. But I would generally prefer to have a period of just low inflation -- low steady inflation. But it's very possible that we will have a bit of deflation when things come back down to earth, when availability comes back.

Yes. Yes. It feels that way. More on your side of the house than some of the food companies I cover right now. They've got some issues that look like they're going to be, I don't know, evergreen, but certainly a bit more durable.

Yes.

Sticking on margins, productivity. Because I was going to have pricing, but you actually covered proactively a fair amount of the pricing actions that you've taken. Were there any sizable productivity initiatives that you had to put the pause on during COVID just trying to keep up with demand? And is there going to be an armlock on the back end of, hey, we got this pipeline of projects now that we can finally unleash?

Yes. We always have a pipeline of projects. We have this continuous improvement program we call Good to Great, the book that everybody is familiar with, but probably very few people have read. The Good to Great program, we have lots of projects for '22, '23 and '24. So you can't do everything all at once. And you're right, we haven't been able to crack into a lot of the lines in the plants in order to make changes, so it become more efficient. The -- our productivity programs in the first quarter were about 70 basis points of a tailwind of help for us. That was all netted in that 190 number that you saw up there. By the end of the year, that will probably double between 100 and 140 basis points, I think, by Q4 of a tailwind. So that's ahead of us. But we baked that into our thinking.

Sure. Sure. Well, is that like getting back to normal run rate? So should we take that 140 and extrapolate it?

No, that's just happened to be a year-over-year math. It's -- we'll start all over next year, but we have programs in place for next year. Generally, what we try to do is to target about 2% of sales. So we had $5 billion sales. You're looking for 2%. You look for $100 million of ideas to reduce the cost and make itself more efficient. We don't always get there every year, but we get damn close.

And back to laundry compaction, the ways we had...

Yes. That's another reason for a second half improvement of...

It's embedded in that 140.

Yes. Right, right. So that would be another reason why fourth quarter we're going to exit the year with expansion of gross margin.

Okay. And we'll get some wrap around run rate on that, too, then.

You mean next year, '23 versus '22.

Yes. At least in the first quarter, maybe a little in the second quarter.

Yes, that's right.

Okay. Now every company, rewind the clock to 2020, was calling out extraneous onetime COVID-related gross margin drags. Like we have onetime pay, onetime bonuses, all the testing, people not showing up, everybody...

Right. Sanitizing plants.

Yes. And there's not a single company I'm aware of who's now called out the benefit of lapping that. So is -- like where did the costs go? And this isn't -- I know I'm kind of picking on you because you happen to be on stage next to me. But like I said, there wasn't a single company that's called that out. Are these still comparison tailwinds that we should expect? Are these costs going to fall away?

Yes. Once you're in '22 though, most of that's gone away. I think a lot of that started to abate in '21. We've started to sanitize less frequently, and we're able to run the plants more efficiently as well as we figure out how to protect employees. But I think that's all behind us now. And of course, going the other way is wages, and that's permanent. When we talk about deflation, wages won't be part of that. Deflation can only come from raw and pack materials, maybe transportation.

Yes. Yes. On that topic, and this is more of a debate, our economists they ask us, they survey the covering analysts once a month. We all know wages are went up and you had to spend -- pay more to get people back. Is it still escalating? Or have we found sort of a new level on the right wages, the right compensation to have your employees back in the manufacturing facilities, the distribution centers, et cetera?

Yes. I would say we probably have hit the right level. And what would be the empirical data support there, it would be the ability to hire. So if you -- particularly, we -- 5,000 employees and 60% of them are in our supply chain. So they're in our plants. We've got 15 plants. And we've had a lot of vacancies over the past couple of years. And more recently, we've made a dent in that. Just every week, we're growing. We're hiring more people and closing the gap. So I would say we probably have hit the right level with respect to wages.

Just a reminder, anyone in the audience has questions, I welcome them. Feel free to raise your hand and jump in. All right. Nobody has taken the bait right now. So we talked about the...

You ask me about the cows.

Yes, yes, let's hit it. We'll do that. I'll ask you about your cow Gatorade. The specialty nutrition business. It's cyclical, but we've got dairy prices up into the right, right now. I've got to believe this is supporting the robust growth outlook for that business.

Yes. Well, look, you mentioned it's cyclical. That is true. So it's for people who are not familiar with. We have a $300 million business in Specialty Products, 2/3 of that is animal productivity. So historically, most of the business was -- all of the business was devoted towards dairy. And in the last few years, we've acquired a couple of small businesses that got us into other species, catalyst, swine and poultry. So now 70% of the business is nondairy. And consequently, this will be the first time we've had 3 years in a row of organic growth in that business. Historically, it's 2 up, 1 down, 2 up, 1 down. So we feel good that we're finally getting to the point where we'll have sustainable organic growth.

Yes. And fingers crossed, you'll sustain it for another year or two. It kind of comes back to where we see the commodities, though. But with grain prices where they are, I've got to imagine that...

Well, milk prices are up as well.

Exactly. Exactly. That's going to support it. And even with higher grain prices, I think last time I saw the income on fees -- the farmer economics still is pretty healthy.

Yes. And then the other one, international business has been a juggernaut for us historically. So you saw the opening remarks that we -- our evergreen model calls for international to grow 6% a year, and it has grown at or above that for the last 5 or 6 years. In the first quarter, it was 0. It was 30 basis points, so we call flattish. And second quarter, we're expecting more of the same, maybe 0% to 1%. The reason for that is because we have the lockdowns in different parts of the world. And the biggest part of our international business, the fastest-growing part is our Global Markets Group, and that's where we ship product to 80 countries around the world. And the struggle there is delivery. So we have the orders, we just can't get them there. So again, we expect that to start to improve in the second half.

Yes, the export business.

Yes, yes. It's been really important to the growth story.

Sure, it has. And where -- and China is one market that some of us got excited about because you recently -- I don't know how long you've been there, but certainly there's a much bigger spotlight on it a couple of years ago when we looked, and I think you're looking to go across border and penetrate that market in a bigger way. Any update on the progress on that?

Yes, we've been doing well in China. The biggest brands we have in China are WATERPIK and vitamins. And then we sell into China through 2 major distributors that we've contracted with. So that's going well. The lockdowns don't help right now as far as consumption goes. So that's another reason why we see that 0 in the first quarter for organic growth. But we do think long term, that's going to be a big grower for us because it's just a population and we're just so underrepresented there.

Yes. Now turning back to the U.S. I've been covering this industry from the outside looking in for a while and I worked in it before. I've never seen the industry being able to price with such ease. I haven't seen it since 1990s. I mean it doesn't seem like the industry has been able to just push this much price in the U.S. in decades, literally decades. Why is it so unique? And is this a new normal? I mean do you think that the industry perhaps flexed their pricing muscles and realized, wow, maybe we have more muscle than we actually appreciated. Maybe we've been capitulating and playing coattail to Walmart for too long and like we actually have leverage in this relationship.

Yes. No, it's -- no, you're right. We haven't been able to take price for many, many years. We were almost wholly dependent upon efficiencies in our operation in order to drive gross margin expansion. Yes, as far as the muscle goes, yes, you're right. It is a new muscle. But you also have to be careful about volume destruction. You get to the point where you say, okay, the consumer just can't tolerate it anymore. But I do think you're right and that I think CPG companies and food companies now have a process. They probably have an internal capability they once didn't have. So there's a lot of science behind raising prices and measuring elasticity, and not a lot of companies have developed the talent in-house in order to evaluate a category to determine, okay, how far do you go with price and what do you think the analysis are going to be. But we have that muscle now. We actually started developing our pricing group 5 years ago. Well, so a good thing too because we were ready when the opportunity posted itself.

For sure, for sure. Yes, I think you've demonstrated you're able to get out there faster from some of your other competitors despite some of the maybe price makers moving slower.

Yes, it was unusual for us to lead price in laundry and not being the #1 brand.

Yes. And it worked out okay.

Yes, it has.

I think part of the reason elasticity is I think we all know part of the reason elasticity functions have been so low is because everyone has been marching to the same beat and move in unison. And category elasticities are never really that high, it's always the cross-price elasticities, where things get blown out of whack. How does this play out if we start to see costs come in? Do you -- would you expect that there's going to be somebody who goes for that market share and it gets the spiral of promotional intensity, building back up?

Yes. No, that could happen. If you have deflation, then you get a price umbrella, a profit umbrella. And so consequently, you can't reach for it and start dealing it back. If you look at the sold on deal behavior right now, usually, you have to look at the household products because trade promotions is in a big lever on personal care products. But on the household side, liquid laundry detergents are around 30% sold on deal today, and it's typically around 35%. So you may see that float back up to that in a period of deflation. And then for cat litter, sold on deal is around 10%. And that's generally in the high teens, 18%, 19%. So that's actually very depressed. And I think the reason for that is because just about all of the producers, Nestlé, Clorox, Church & Dwight had problems from time to time with respect to supply. And so consequently, I think all the trade was pulled back. But yes, certainly, that is a potential in the future if there's a big pullback in costs.

Potential, but in the interim, it looks like the outlook for your business is improving, not eroding, particularly as we go into the back half of the year. Supply chain issues, become in the system coming out, paving the way for better top line, more pricing taking effect, productivity ramping, cycling some of the cost. We should get market share improvement, top line improvement and margin improvement, all coinciding at the same time.

Good summary.

It's a good summary. And it's a great way to end this. So with that, let's wrap this up because we're bumped -- we bumped up against it. That was perfectly timed.

Okay. All right.

So we're actually out of time. Matt, thank you so much for your time. Really appreciate it.

All right. See you.

Folks, we'll be back in 5 minutes with the lovely folks from the Simply Good Foods Company. So don't go far.