Good day, ladies and gentlemen, and welcome to The Clorox Company First Quarter Fiscal Year 2022 Earnings Release Conference Call. [Operator Instructions] As a reminder, this call is being recorded. .

I would now like to introduce your host for today's conference call, Ms. Lisah Burhan, Vice President of Investor Relations for The Clorox Company. Ms. Burhan, you may begin. .

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 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. .

[Operator Instructions] Your first question is from the line of Andrea Teixeira of JPMorgan. .

So -- and thank you for the new format. Linda, I wanted to touch base on your commentary. I think obviously, it came in better than tiered of your low double digits when you closed the fourth quarter of last year -- of last fiscal year.

So I wanted to kind of break down what you think is driven by -- how much you think was driven by the Delta variant coming back? Or how do you see tracking now in the second quarter in terms of demand? And if you can also touch on -- obviously, you put some pricing in place.

How do you think pricing can come in? And if you have that price mix impact as mix has been normalized, and then I have a follow-up on the COGS on the cost side. .

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 as 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, 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 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 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 -- no, 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?.

70% of the portfolio is going to encompass a broad range, but it is in relation to 3 things that we're really seeing pressure on. Commodities is one and certainly additional pressure on resin. Hurricane Ida pushed out the resin curve by a month or 2, and so we're seeing a continued impact there.

Transportation continues to be a negative driver for us, and we're seeing that continue throughout the remainder of the fiscal year..

And although there hasn't been a big material impact directly, we're looking at labor closely given what we're seeing on pressures there. So we're taking all of that into account. We have not announced since you asked the question directly, an additional price increase on Glad.

We've executed high single digits at this point, but we are evaluating an additional price increase on Glad given what we're seeing in resin. And that's been -- we long follow what happens in resin and are able to move pretty quickly on Glad.

And that's something that we're contemplating as another price increase on Glad, in addition to what I talked about in the 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 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. .

And as you probably saw in our prepared remarks. We continue to expect by the back half of the year, we're going to get our sales back into the low end of our long-term sales goal, 3% to 5%. Part of that will be driven by the fact that we'll start generating positive price mix as well in the back half of the year. .

Your next question comes from the line of Peter Grom of UBS. .

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 2 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 at 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 assume 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. .

Your next question comes from the line of Steve Powers of Deutsche Bank. .

Just -- maybe just an overarching question. I think you laid out pretty clearly a better expected start, good elasticities, more pricing on to come but at the same time, the higher cost that you're contending with across many lines of the P&L.

So I guess just for my frame of reference, how do those net out? If your prior outlook was down the middle of your guide, are you now at all biased higher or lower? Or are we still kind of down the middle of your guide with the 1 quarter under your belt?.

Yes, Steve, maybe I'll give you a perspective on both sales and margin and profit. If I start with the top line, to your point, we did come in better than our expectations. We thought we were going to be down low double digits for Q1. You obviously saw our results are sort of more mid-single digits.

Now some of that, we think, is timing, as Linda mentioned. If you look at our performance through the quarter and primarily as a result of Delta, we saw the business really pick up in the second half of the quarter, and that continued through September.

So I think we'll see a little bit of that move between quarters now as there's a little bit of retail and consumer inventory that we worked through. But I don't think that will have any impact on the full year, but you'll see a little bit of timing shifts between quarters..

For us, when we talked in August, we thought the front half would be down high single -- excuse me, low double digits to high single digits. We now think the front half will be down high single digits. So we expect a little bit better performance in the front half of the year on the top line..

And what I'd say, Steve, is I just think it's a little too early to be making any changes to our outlook. We're pleased with the start to the year. We're still only 1 quarter into the year. As you know, there's quite a few things that are outside of our control that we want to see how they play out and they've been fairly volatile.

And so I like the start. We've got a fairly wide range. I think that's appropriate on the top line for now. I want to get into cold and flu, see how that plays out and I want to see how the pandemic plays out before we make any changes..

As it relates to margin and profit, we did come in a little bit better. But as you said, we see that there's a -- there's more cost headwinds than we initially anticipated, about $50 million. We are taking actions between incremental pricing actions as well as increased cost savings that we think we can offset that.

And so that will delay the benefits a little bit to the back half of the year. But we still believe we're on track for both our outlook and our EPS range. And again, I think it's just too early to be guiding to higher low ends or changing those outlooks. .

I like the start of the year. I like our plans for the balance of the year. And I really like the things we can control. But I also recognize there's a number of areas we don't control, and I want to see how those play out over the next quarter or 2. .

Okay. Great. And I guess maybe a follow-up on just the resin outlook that you just mentioned earlier. I guess I was a little surprised to see you hold to continued expectation of resins and commodities moderating. I'm not saying it's wrong. I mean who knows. Just that it's less conservative than what we've seen from others so far..

So I guess maybe can you -- I get 2 questions really to that.

Can you give us a sense of the margin of profitability at risk if prices remain close to where they are today than what you're assuming? Is that -- can you stay within your range in that scenario? Is it pushing you to the bottom or below the bottom end of the range, that kind of thing?.

And then as I think about the step up -- the implied step up sequentially between margin and the gross margin in the mid-30s in 2Q and then presumably back up above 40 in 3Q, if my quick math is right, what are the drivers there? How much of that is resin moderating? How much of that is the pricing coming in? How much of that is the top line coming back stronger? Just give us a sense for how that step-up occurs sequentially.

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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 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. .

Your next question is from the line of Nik Modi with RBC Capital Markets. .

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.

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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. And 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're 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. And we're also seeing private label pass-through pricing at this point as well.

And so price gaps as it relates to store brand 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. .

Great. That's helpful. And then as a follow-up on -- you mentioned investing in the brands.

And considering the difficult supply chain environment that you're facing and every consumer product company is facing, how do you balance the investment, particularly on the innovation front as well as kind of maintaining core supplies on your core products to make sure you have enough inventory levels and you're building inventory levels.

If you can talk about managing both the innovation and the core brands, that would be helpful. .

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 belong in the -- 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. .

Your next question is from the line of Chris Carey of Wells Fargo Securities. .

I just -- I know it's been asked in different ways, but maybe just to tie it up. If the forward rates on resins don't play out and say current rates do, you're announcing expansion of pricing going into the market. Productivity sounds like a lever, and you have some other levers at your disposal as well.

What's your preference or flexibility to offset the cost environment if it takes another step up? Or said another way, the forwards don't play out, can you expand pricing to more of the portfolio? Do you increase the rate of pricing? You noted that on a slide you're looking at doing just that.

Maybe some perspective on -- should that environment not play out as you expect, what's the -- what are kind of the tools in your arsenal?.

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 at that curve were to be pushed out further. .

Okay. Okay, got it. And then if I could just -- one more on -- I think you kind of mentioned this a number of times that you're taking a balanced approach to the top line. It sounds like you think you have some flexibility there, specifically to the back half, but a lot can play out. But I guess if I'm thinking about this, your mix is improving.

You're not seeing a lot of volume elasticity. If anything, it sounds like you feel pretty good about volumes. Pricing is going to be building into the back half of the year. And I guess if you put all that together, why would you expect to only be at the low end of your long-term target? I guess is question one..

And then secondly, does that have to do with timing of when the pricing comes into the market? Maybe it's more Q4 weighted. So just any perspective around that? And if it's just ever early, then I suppose that's reasonable. But I just want to make sure I'm not missing something there. .

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 1 quarter in.

And keep in mind, the 2 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. .

Your next question is from the line of Jason English with Goldman Sachs. .

A couple of quick questions. So back to the expectation of commodity released 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 a mode of partnership and continuing to build plans with us to build the categories. .

Got it. That makes sense. And you mentioned the -- I guess, 2 more questions kind of drilling in on gross margin. First, the manufacturing expenses you referred to sort of the unusual ones that you thought would fall away over time.

Can you give us any quantification of how big that is?.

And then secondly, in terms of cost savings, it's only 1 quarter, but it was a pretty small quarter in terms of cost savings contribution.

What are you expecting for the full year on that line?.

Yes. Jason, on cost savings, I'd expect cost savings to probably be more robust than we've seen in previous years. As you know, we're leaning into that as one way to help us address the cost environment. It was a little bit lower in Q1. I expect that to ramp up as we move through the year.

So you should expect to see greater value as we go through the year and execute some of the additional cost savings actions we're pursuing..

On the manufacturing up charges, we haven't broken that out specifically. But I can tell you there's a reasonable amount of money that we're incurring as we're leveraging third-party manufacturers and suppliers.

I think I've mentioned to you in the past, historically, we have self-manufactured about 80% of our shipments, and we go to contract manufacturers for the remaining 20%. During this pandemic, that mix is more 50-50 right now. So we're relying on contract manufacturers to a much better degree to help us keep up with demand.

As demand moderates, we'll be able to pull that back into our facilities and unwind some of these agreements we have in place. And there are some nice savings associated with that. And so you'll see that play out through our P&L..

As I mentioned, we'll have to see how demand plays out with the pandemic. I believe, certainly over the -- starting in the back half of this year and over the next 12 to maybe 24 months, we'll be able to step out of those charges. But we'll get started, I think, in the back half doing that. .

Your next question is from the line of Kaumil Gajrawala with Credit Suisse. .

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?.

Yes. Thanks for the question. I'd tell you it's interesting. It goes beyond just what you'd call the co-pack profit margin, which could be up from 10% to 20% depending on the co-packer. We've had to extend our supply chain not just through contract manufacturers, but we've done that through raw and packaging material suppliers.

It's becoming a much more global supply chain to build in the resiliency we need to manage through the disruptions of this environment.

So not only do you have the profit margin or the profit up charge from these folks, but you've got an extended supply chain, which means increased transportation as well as we have to bring product in from further distances..

You also have increased warehousing because we're holding more inventory on hand to manage through the disruption. So there is a level of cost that's built up in our supply chain.

This part of the resiliency we've built in to ensure that we can supply product we will work, I suspect, over the next 12 to 24 months to be able to pull those costs out of our system. Now a lot of that will be driven on how the demand plays out. We assume demand will moderate. Keep in mind, our demand was plus 20% during the pandemic.

We think long term is 3% to 5%. As that demand moderates, we'll be able to start pulling costs out of our supply chain, and that will happen over time..

I'll just -- I'll give you one example of how this played out, and this has happened last quarter. When we had Hurricane Ida, our largest resin provider in the Gulf region went offline for about 2 months and declared a force majeure. But because of the great work our product supply team did, we had increased resin inventory on hand.

We had alternative suppliers qualified, and we did not miss a beat from a production perspective. And we were able to keep shipping product to our customers in spite of our largest provider going offline for the better part of the quarter.

We've had to do that across our entire portfolio, and we recognize that comes with a cost, and that's the cost we're going to be able to go after, which is another reason that gives us confidence we can rebuild margins over time beyond the commodity environment improving. We know we can step out of these charges.

And as I said, I think that's a year or 2 process for us to do that. .

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. .

Your next question is from the line of Lauren Lieberman with Barclays. .

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. And it was just -- the other thing with that is the cash flow this quarter, though, was a lot lower than it was in a normal pre-COVID first quarter. So that wasn't the reason I was asking the question beyond the earnings decline.

Is there anything else just, again, because we don't have the visibility yet into the cash flow statement that's worth calling out in terms of this quarter in particular a sequential performance that we should be thinking about?.

Yes. I would I'd probably note 2 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. And then on the timing elements that you had just called out because -- on particular categories, just anything that might be worth noting. I don't typically think of your categories as ones that see a lot of retailer inventory build ahead of a price increase.

So I'm assuming this is just more about, I guess, retailer concerns about the degree of which Delta was going to persist and your expectations that works through. So sequentially, we should be thinking about sales decelerating. I mean your full year guidance is very clear. I just wanted to get a sense for the 1Q, 2Q dynamic. .

Sure. Lauren, as it relates to Q1, Q2 on sales, as you recall, last quarter, we thought we'd be down low single digits in Q1 and then low -- excuse me, low double digits in Q1 and then high single digits. We've improved our front half forecast. We now think the whole front half will be down high single digits.

That's a little bit better than what we thought back in August. There's just a little bit of timing that will probably move between quarters. As I said, we probably got a little bit of extra retail inventory, a little bit of extra consumer inventory based on the timing of the shipments. I think that will play out between the quarters.

And we continue to expect the front half of the year to be down high single digits. And so I think it will look that much different than what we saw in Q1. .

Okay. Great. And then just one more question to -- I know everyone's been asking about resin and gross margin. But I was just curious, you hadn't mentioned chlorine. I think it was asked about earlier in a question, but I think there's been a pretty sizable move in chlorine since August.

And just any other color on labor and logistics and how you're thinking about that into your forecast with things improving in the back half of your year. .

Sure. As it relates to commodities, as you know, back in August, we knew this is 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 2 changes versus what we talked about in August.

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Your next question comes from the line of Kevin Grundy with Jefferies. .

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 on the pricing question, Kevin. So on the 30% we're choosing to not price at the moment, we're evaluating category by category, what the cost increases are. We're looking at commodity and cost justification.

And there are some of our categories that have not been as impacted that are not as driven by resin and certainly might be impacted by transportation but to a lesser degree, and there's other choices that we can make. And as we've talked about, we're taking a look across the entire P&L to see where we can reduce costs.

And so nobody is excluded from that. None of the businesses are excluded from that..

But as it relates to pricing, we're really looking at it category by category, looking at the cost impact and what we think will happen from a consumer standpoint and making that choice.

That doesn't mean, though, of course, as we continue to navigate throughout the year, if we were to have additional pressures that we wouldn't consider pricing that additional 30%. But at this point, we think it's the best mix not to..

And then elasticities, I think it is true that consumers have turned to branded solutions during this pandemic. They want trusted solutions, and they certainly turned to our portfolio. And we've spoken about the numerous ways our portfolio has gotten stronger during this time, whether that be household penetration.

Again, stronger retention in buy rates, higher repeat rates. And what we deem as the best consumer value we've seen since measuring it with 70% of our portfolio deemed superior by consumers. That has translated into stronger elasticities..

That doesn't mean though there is an elasticity impact, and I just want to make sure that's clear. They've improved, but we certainly do expect a volume impact to taking pricing. It's just with a lesser degree that we would have seen prepandemic. And we're watching that closely.

And the reason, again, that we continue to invest to keep those elasticities holding as people move through. .

And just the one caveat I would continue to warn. Consumer behavior has been very difficult to predict during this pandemic. All the fundamentals look good right now, but we'll continue to see, as Kevin has articulated what happens in cold and flu, what happens through the course of the remainder of the pandemic.

But at this point, we feel very confident that our brands are strong. We can take this pricing, and if that's -- those lower elasticities will hold. .

Got it. And just a quick clarification. Do you care to comment on which categories you do not -- at this point in time, I'm looking at the Nielsen data, and it would certainly not appear to be the case in salad dressing or charcoal.

Are those the 2 categories primarily at this point? Or you do not care 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. .

Next question is from the line of Linda Bolton-Weiser with D.A. Davidson. .

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, if you look at the 2-year stack for that business, this quarter was up 19%, so it continues to perform very well. I mean we saw a double-digit growth in a number of our businesses, including our wipes business, Burt's Bees, Cat Litter, and mid-single-digit growth in another of our large businesses, including Glad and Brita.

So I feel, overall, very good about international..

Depending on the market, we're seeing significant pricing pass-through in some of markets which -- so we're taking double-digit pricing in places in international, and that's gone well to date. But we're really leaning into those growth levers we have in international.

I would say depending on the market is -- to the degree which the pandemic is impacting that, and you can appreciate, given we compete in over 100 markets, it's very different by market.

But generally, we're seeing cleaning behaviors continue to persist across the globe where people are cleaning more and more concerned about their health and wellness. And we're taking advantage of that across our portfolio to deliver innovation, to continuing to invest in our brands and expand our distribution. .

So I think to your point, international did perform well. We do have some tough comps coming up here again in Q2. But we have strong plans, and our brands are growing share in the markets that we compete in. .

And can I just ask one more about -- I know there were a couple of questions about the cadence of sales for first quarter and second quarter. And I'm not sure I'm understanding why you would expect overall sales decline to get bigger in the second quarter.

The POS data actually seems to indicate only a modest decline in October, what we're seeing in the data. So can you just give one more -- say one more time why you expect the sales decline to be bigger in the second quarter. .

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 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. .

This concludes the question-and-answer session. Ms. Rendle, I will now like to turn the program back to you. .

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

Thank you. And this does conclude today's conference call. You may now disconnect..