Church & Dwight Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2023

There are 13 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to the Church and Dwight First Quarter 2033 Earnings Conference Call. Before we begin, I have been asked to remind you 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, President and Chief Executive Officer of Church and Dwight. Please go ahead, sir.

Speaker 1

Good morning, everyone. Thanks for joining us today. I'll begin with a review of the Q1 results and then I'll turn the call over to Rick Durker, our CFO. And when Rick is wrapped up, we'll open the call for questions. Q1 was a solid quarter.

Speaker 1

Reported revenue was 10.2%. Organic sales grew 5.7% and exceeded our 1 Hero, Therabrafts, ARM and HAMMER Laundry and ARM and HAMMER Litter and exceptionally strong sales growth in our international business. The other good news is that the Vitamin business and the Water PICC business hit their Q1 sales plan and we're right on expectations. And finally, it's also fair to say that we had a degree of conservatism in our original Q1 outlook, both top line and bottom line. Our Q1 top line growth reflects the strength of our brands, both premium and value, and also our focus on execution.

Speaker 1

The combination of consumer demand and improved case fill, which is now over 93% in the U. S, is resulting in strong revenue growth. Something else that is noteworthy, we had flat volume growth in Q1, which is an encouraging sign after declining volumes in the last six quarters. We now expect volume growth in our full year net sales outlook. Adjusted EPS was $0.85 Which was $0.10 higher than our $0.75 EPS outlook and that was driven by higher than expected sales in the U.

Speaker 1

S. And we Private label shares remain consistent with historical weighted averages, both domestic and internationally, private label is stable in our categories. And now I'm going to comment on each business. First up is the U. S.

Speaker 1

The U. S. Consumer business had 5.5% organic sales growth And 8 of our 14 power brands held or gained market share in the quarter. Now I want to look at a few of the important categories in the U. S.

Speaker 1

And I want to start with laundry. We look at the big picture, value laundry detergent grew 9%, while premium detergent declined 3%. So the trade down to value detergent continues into 2023. During Q1, the liquid laundry category grew 3.6%, While ARM and HAMMER grew 9.3%, ARM and HAMMER liquid laundry detergent grew share by 80 basis points in the quarter to 14.3%. So with more consumers migrating to ARM and HAMMER Linger Detergent, we have the potential for a long term benefit And our Give It the Hammer advertising campaign, which HALO's met the many categories that ARM and HARE competes in, is resonating with consumers.

Speaker 1

Now in dry shampoo, the dry shampoo category was up 11.8% in Q1, driven by BATISTE consumption, which was up 20%. We now enjoy a 46.2 percent market share in dry shampoo. In the cotton category, cotton category was up 4.1% in Therabreath, which we acquired in December of 2021, had just a great quarter with 70% consumption growth. Thoroughbreds grew share 6.8 points to 22.5 percent of the alcohol free mouthwash. And as promised when we bought the brand, Distribution of TheraBreath has doubled since we acquired it in December of 2021.

Speaker 1

TheraBreath is now the number 2 non alcohol mouthwash brand And the clear number 4 in total mouthwash. We expect this brand to be a long term grower for Church and Dwight. Zicam, this is a December 2020 acquisition, also delivered strong results this quarter. Zicam is the number one brand in the cold shortening There is a great deal of excitement around here about the Hero brand and especially the Hero team. From our oldest brand to our recent acquisitions, Our brands are driving category growth.

Speaker 1

I'm going to give you a few examples. Arm and Hammer liquid laundry detergent, which has a 14% share of the liquid laundry category drove 35% of the category growth. In the dry shampoo category, Batiste has a category leading 46 share, but contributed 75% of the category growth. And in the mouthwash category, Therabreath makes up 11% of the total category, but delivered over 50% of the growth in mouthwash. Next up is international.

Speaker 1

Our international business delivered organic growth of 11.6% in Q1 driven by strong growth in the subsidiaries And the growth was headlined by BATISTE, Vitamins, Femfresh, Waterpik and Gravol. As far as the consumer goes, similar to the United States, unemployment remains low in our international countries where we have subsidiaries. However, in many of these markets, particularly in Europe, the consumer is facing inflation in energy and food. But so far, consumption has remained strong. In China, while it is a relatively small market for us, we are experiencing stronger growth in Q1 and remain optimistic about the full year opportunity.

Speaker 1

And finally, Specialty Products. Specialty Products organic sales decreased 5.9%, primarily due to lower volume in the dairy business As low price imports returned to the U. S. Market, I want to wrap up my remarks right now by saying consumption is strong, Our value offerings are performing well as are our premium offerings. Acquisitions are on track.

Speaker 1

We're ramping up our marketing this year in I'm going to turn it over to Rick to give you some more color on Q1.

Speaker 2

Thank you, Matt, and good morning, everybody. We'll start with EPS. 1st quarter adjusted EPS was 0.85 up 2.4 percent prior year, the $0.85 was better than our $0.75 outlook, primarily due to continued strong consumer demand for many of our products and higher than expected gross margins. Reported revenue was up 10.2% and organic sales were up 5.7%. About half of the reported revenue growth year over year was hero.

Speaker 2

Organic sales were once again driven by pricing in Q1. However, as Matt mentioned, the fact that volume was flat was encouraging and gives us confidence that we will return to volume growth later this year. Matt covered the segments, so I'll go right into gross margin. Our Q1 gross margin was 43.5%, a 90 basis point increase from a year ago, primarily due to improved pricing, productivity and the impact of the Hero acquisition, positive 160 basis points impact from price volumemix, positive 120 basis points from acquisitions, A positive 160 basis points from productivity and 10 basis points from currency, partially offset by a drag Moving to marketing. Marketing was up $20,000,000 year over year.

Speaker 2

Marketing expense as a percentage of net sales was 8.6% Other expense all in was $23,000,000 an $8,600,000 increase due to higher interest rates. Our expectations for interest rates for the remainder of the year remain unchanged For income tax, our effective rate for the quarter was 24.4% compared to 23.2% in 2022, an increase of 120 basis points. We continue to expect the full year rate to be approximately 23%. And now to cash, for the 1st 3 months of 2023, cash from operating activities increased Previously, we expected $925,000,000 The $25,000,000 increase is driven by higher cash earnings and an improvement in working capital. Our full year CapEx plan continues to be approximately $250,000,000 as we continue to make capacity investments and we expect to return to historical levels by 2025.

Speaker 2

And now for the full year outlook. Given the strength of our Q1 results and our confidence for the remainder of the year, we are raising our outlook for sales, EPS, gross margin and cash flow. We now expect the full year 2023 reported sales growth to be approximately 6% to 7% and organic sales growth to be approximately 3% to 4%. We now expect full year EPS in the range of 2% to 4% growth. Given the strength of the business, we see opportunities to make incremental investments in our brands and capabilities in As we expect pricing and productivity to more than offset inflation.

Speaker 2

Our full year inflation expectations remain unchanged from our previous outlook. Gross margin is expected to benefit from pricing, pack size changes, laundry concentration and the full year impact of the higher margin Hero business. As you read in the release, 2 items of note that are aiding our margin recovery are new litter pricing that went into effect in February 1 and the latest round of concentration for laundry. We intend to increase marketing as a percent of net sales to 10.5%. We continue to expect SG and A both in dollars and as a percent of net sales to increase compared to 2022 As the company's incentive compensation plan returns to normal levels in 2023.

Speaker 2

As a reminder, our EPS guidance includes a step up of organic sales growth of approximately 3% and gross margin expansion and higher marketing spending. The math would show a sequential decline in sales growth, but it's easy to explain. 1st, distribution pipeline fill for Hero and Therapraft accounted for 1% of growth in Q1 that will not repeat in Q2. The other is around quarterly comps and how that impacts the current year. For the domestic business, there was a large improvement in case fill from Q1 to Q2 last year, which leads to a tougher comp in Q2 of this year compared to Q1 last year.

Speaker 2

As an example, our international business in Q1 in 2022, organic growth was 0 And then Q2 was 6.5% in 2022. As a result, adjusted EPS is expected to be $0.78 per share, 2.6% increase from last year's adjusted Q2 EPS. And with that, Matt and I would be happy to take questions.

Operator

For your first question, it comes from the line of Chris Carey from Wells Fargo. Chris, please go ahead.

Speaker 1

Hi, good morning. Hey, Chris.

Speaker 3

So I just wanted to ask about

Speaker 2

Chris, you're breaking up. Hey, operator, why don't we go to the next question and Chris can get back in the queue.

Speaker 1

We're not hearing anything. All

Operator

right. So for your next question, it comes from the line of Kevin Grundy from Kevin, your line is open. Please go ahead.

Speaker 4

Great. Thanks. Good morning, everyone. Can you guys hear me okay?

Speaker 1

Yes.

Speaker 4

Great. So I want to start on the gross margin outlook, some of the key drivers there, maybe how you're seeing that a little bit Given the strong start to the year and some of the moderation in commodities and sort of tie that in with how you're thinking about potential reinvestment. So the outlook now up 120 basis points on gross margin year over year, the prior outlook was up 100 to 120, so it's modestly better. Rick, maybe just comment on how you're seeing the contribution Pricing, commodities and productivity, sort of the key levers. And then, Matt, maybe you want to chime in on just how you're thinking about restoring advertising and marketing levels.

Speaker 4

It was kind of a stair step function, at least that was sort of the thinking coming into the year. Is there any thought to maybe accelerating that sort of within the context of advertising 12% of sales, just down to 10% this year, the thinking is 10.5%. How should we be thinking about the potential reinvestment If gross margin exceeds expectations, I have a follow-up. Thanks.

Speaker 2

Yes. Thanks, Kevin. I'll go first. I think gross margin, we said in the release and in my script that really we expect gross margin to expand, the expansion continue to improve throughout the year, we did do better than we expected in Q1, that's why we raised the full year. From a pricing perspective, as we go through the year, there will likely be less pricing overall.

Speaker 2

There will be less inflation overall and productivity kind of ramps up as we go through the year as well. So All those things we think are will be a tailwind, and to the extent that we over deliver on gross margin that's why we put the Investment commentary in the release as well. Matt?

Speaker 1

Yes. He asked a good question with respect to marketing. So everybody knows, last year in 2022, our marketing as a percentage of sales was 10%. It was kind of a low point What contributed to that was all our difficulties with the fill rate, etcetera. And we said, hey, we're going to build that back.

Speaker 1

We want to get back to 11 we go halfway there in 2023, and you can see from we had a really good Q1. We let some of that flow through We always take a long term view with the company. So yes, to the extent that we have even better performance in future quarters, it's going to give us an opportunity to go Higher than 10.5% as a percentage of sales. And we know whenever we're in a position like this and it's been a few years we Since we've been flush, but there's 3 destinations. First is going to be growth.

Speaker 1

So we'll be looking to pay for marketing, Can we go higher than 10.5%, for international, we have a lot of runway there. So one thing we can do there with respect to Regulatory, we can get 3rd party help to help us knock out product registrations that might have been scheduled for next year or the year after. And there's always R and D projects as well that we can allocate to. And then from an efficiency standpoint, we Like most companies, we're trying to automate this place and there are discrete projects we can accelerate to automate some repetitive transaction processing in the in the company and also there's always IT investments. And finally, with respect to the environment, we're real focused on our Sustainability.

Speaker 1

So there are projects with respect to sustainability like alternative packaging that we could fast forward as well. So It gives us the degrees of freedom and so we're in a good spot here looking forward for the rest of the year, Kevin.

Speaker 4

Yes. I appreciate the comments. If I could just get in one more, Just on and for Rick as well, Euro seems to be performing much better, I think maybe than folks had modeled. How is it coming in relative to your own expectations, Presumably better, I would think and why is that? Has the distribution ramped more quickly?

Speaker 4

Has the velocity been better? Is it both? And sort of why? And then maybe just updated thoughts on your outlook for the brand, and I'll pass it on. Thank you.

Speaker 2

Yes. I'll give you a couple of comments, Kevin. It's Rick. I think both is the answer. Velocities are even better Than we expected and I think distribution gains and TDPs are even better than we expected, faster than we expected.

Speaker 1

I think

Speaker 2

in the maybe in Matt's Script, he commented about TDPs for Hero and we're 50% higher since we bought the business already.

Speaker 5

Go to

Operator

our next question, it comes from the line of Chris Carey from Wells Fargo. Chris, your line is open. Please ask your question.

Speaker 3

Hi, good morning and sorry about the technical difficulties there in the last question. So I just wanted to ask about Personal Care Business, clearly, we're continuing to see a little bit of sequential improvement. I guess, can you just comment on your visibility on this business relative to even a few months ago? And also just what you're seeing from a kind of gap between what we can see in the consumption data, which remains stronger relative to what you're actually delivering from an organic sales standpoint, just any visibility on when you think Your organic sales will start to look a little bit more than like what we see in the consumption data, which is a little bit better. Thanks so much.

Operator

By the way, we lost Chris' line at this time. Should we move on to the next caller? All right, I'll just go ahead and check here.

Speaker 2

Yes,

Operator

sure. I'll just try to stop stream for now, then let's see if that would refresh the connection. So okay, stopping the stream for now. All right, so good day, ladies and gentlemen, apologies for the technical difficulties. So we're going to be resumed with a Q and A.

Operator

So go for your next question, it comes from the line of Laura Lieberman.

Speaker 6

Okay. I feel like reorient myself to the fact that we're live again. Okay. Hi. So let me just, Okay.

Speaker 6

Go back to my questions. So I guess consumer domestic was like let's call it 500 basis. It was much stronger than what we saw in Nielsen. So I was just kind of curious what drove that kind of anything you can talk to us about untracked channels? Was there any rebuilding of retailer inventory?

Speaker 6

I know, Rick, you called out the one point on Hero and Therabraft, but I was just curious if anything else, Helpful to know about, Untracked. Thanks.

Operator

Hi, Lauren. Just want to check if you can hear me. This is the operator.

Speaker 6

I can hear you. Okay, so just down to some people are messaging me that they can hear me, but not here at the company.

Operator

Okay, so for Mr. Farrell and Mr. Dierker, So Lauren, please stand by. I'm really sorry about the technical difficulty at this time. Hi, Gus.

Operator

This is Kyle. I can hear you.

Speaker 2

Okay. Well, this is our cell phone. Now we're on this way.

Speaker 6

Hey, Rick, it's Lauren. I can hear you.

Operator

Yes, sir. Can I answer the call now?

Speaker 2

All right. Well, hey, take 3. Hi.

Speaker 6

Okay. Did you catch my question or no? Because I can repeat it if you need me to. No, I

Operator

got it. And I think everybody has heard you.

Speaker 2

The question was really, how does consumption match up with organic for domestic?

Speaker 6

Yes. And just particularly untracked, right? Just curious on untracked channels.

Speaker 7

Yes, yes. We don't think there's a

Speaker 2

huge disconnect Actually, we, IRI consumption is 7%. That included some of the hero consumption. And so that got if you back that out, that's around 6%. So 6% is what IRI would say is our organic consumption and we were at 5.5 and the drag is as you would say it's from untracked channels like WATERPIK for example, Online or other businesses. So we think the disconnect is a little bit closer.

Speaker 6

Okay. And there was just the, you've called out there was the one point benefit to total company from Pipeline on Hero and Therabraft, which is small, but when you look at the second half of the year, I know you've talked about improving volume and volume now being up the total company for the full year. I was just curious on any updated thoughts on what you've deemed the more kind of we categories and how you're thinking about shipments for WATERPIK Vitamins as we go through the year?

Speaker 2

Yes, and I partially thought I was answering that when I answered Chris' question, I probably got cut off. In 2022, those three businesses we said in the release at the end of 2022, they were about a 4% drag for those three businesses. In Q1, they were closer to 3% drag. And I said, we expect personal care Organic to inflect positively in the back half and a big reason is because those businesses are not A drag and furthermore, Matt said it in his script, but it was very encouraging that WATERPIK and vitamins hit their internal Plan numbers.

Speaker 1

Yes.

Speaker 6

Okay. So you expect them to those businesses in particular for volumes to be up in the second half or Not calling out yet and don't need to.

Speaker 2

I wouldn't call that yet. I would just say we don't expect them to be a drag in the back half.

Speaker 6

Okay, got you. I will pass it on to anyone that's dialed in and we can hear. Thanks.

Operator

For our next question, it comes from the line of rupesh Parikh from Oppenheimer. Your line is open. Please go ahead.

Speaker 8

Good morning and thanks for taking my question. And can you also hear me right now?

Speaker 1

We can hear you.

Speaker 8

Okay, great. So I Just continuing on with just vitamins, just curious what you're seeing right now in the category and I believe your fill rates have now improved in vitamins. So just curious if you're starting to see progress on the share front?

Speaker 1

Yes. The vitamin fill rate is improving sequentially month by month. Take that, November, December, January, February, March, which is a really good thing. And as far as the category goes, if you look at the last few categories for gummies, You may remember in the Q3 last year, it took a big decline, so gummies were down 8%. But then Q4 was down 2% And Q1 down 2.3%.

Speaker 1

So I would say it's really stabilized, which is a good thing for us. Now we did lose share in the Q1, again, due to our fill rate difficulties, but we've anticipated Some of that, we probably benefited a bit because the category was stronger than we expected. So consequently, the vitamin business wasn't a drag On our outlook, they hit their plan for the Q1 and we think things should improve from here for the rest of the year.

Speaker 8

Great. And then maybe just one follow-up question. So I know at the end of the day, your team gave expectations for organic growth expectations by segment. So it appears at least consumer domestic, a stronger international stronger, maybe specialty products is weaker. So just curious if you have updated views on expectations by segment for the year?

Speaker 2

Yes, sure, Rupesh, it's Rick. Domestically, we're now calling 3% to 4%, international between 5% and 7%, SPD is actually slightly negative and that gets us to the total company organically of 3 to 4.

Speaker 8

Okay, great. Thank you. I'll pass it along.

Operator

Our next question comes from the line of Olivia Tong from Raymond James. Olivia, your line is open. Please ask your question.

Speaker 9

Great. Thanks. Good morning. I just wanted to get a little bit of an update on your view on the U. S.

Speaker 9

Consumer, particularly any early reads on the incremental pricing you took,

Speaker 1

Okay, that's a broad question, Olivia. I'll talk about the U. S. Consumer. Look, we're all reading the same data, The U.

Speaker 1

S. Unemployment remains low, although it's clear that job growth is slowing. And we also stats will suggest The growth the year over year growth of household income is also decelerating. And I guess the other thing we have coming ahead is student loan payments resume late summer, now you might think that may not be a big deal, but 40% of millennials and 25% of Gen X Consumers have student loan debt. And I think the combination of all that is contributing to Consumers being sold, feeling tensed and trade down from premium to value.

Speaker 1

What was your second question, Olivia, your second part?

Speaker 9

Sorry, it was around compaction, the pricing, any early reads on those and

Speaker 1

Yes. We've been taking price for the past couple of years. In some cases, we've taken it 2 or 3 times depending on the category like a litter or laundry detergent. So the gas, the price gas between Brands are actually largely similar to they were pre COVID. And so I would say that there's no story there Right now.

Speaker 2

Yes, and it's kind of early to call any impact from concentration that just rolled out late Q1, but we Expect that will be positive.

Speaker 1

Yes.

Speaker 5

Great. Thank you.

Speaker 2

Okay.

Operator

All right, thank you. And for your next question, it comes from the line of Dara Mohsenian from Morgan Stanley. Dara, your line is open. Please ask your question.

Speaker 10

Hey guys, good morning.

Speaker 11

Hey, Kara.

Speaker 10

So clearly a strong Q1 that was better than you expected. The guidance for Q2 looks favorable relative to consensus also. Just trying to understand if you look at org sales and EPS, you didn't necessarily fully flow through the upside in the quarter to the full year, obviously a full year raise, but more modest. So just help us understand that there are some specific limiting Factors there or is it more just the reinvestment you talked about earlier, conservatism in a volatile environment And particularly on org sales, the question is on org sales and earnings, but org sales, you're not assuming a sequential acceleration in the back half despite easier comps. So just wanted to understand that relative to the first half expectations.

Speaker 10

Thanks.

Speaker 1

I think you answered the question for me, Dara, we're 3 months into the Q1 and we follow a lot of companies. And so we're not alone And having a good Q1, but not necessarily following all through just because there's always uncertainty with respect to the economy. So that hasn't so we do have the freedom now to take the long view and increase our Marketing from 10.5% higher and we have all of the Place where we can put money, which I went through with Kevin, growth, efficiency or sustainability projects, They're all available to us. So yes, we feel like we got a lot of flexibility going forward for the rest of the year. Yes.

Speaker 2

And it's very rare that if you look back at our history that we've ever raise after 1 quarter, typically we talk about that in the second quarter. So this is a bit of a positive.

Speaker 10

Okay. That's very helpful. And then can you just give us a little more detail on some of the problem areas recently, WATERPIK, Just sequential performance in Q1 relative to recent trend. I know you mentioned in a couple of them you were on plan, but Just wanted to get a little more detail on sort of the year over year performance, both in terms of consumer demand as well as retailer inventory levels, if you can just give us a little more insight there. Thanks.

Speaker 10

Yes. I'll give some insight on go there, thanks.

Speaker 1

Yes, I'll give some insight on Waterpix. So as I said, we're happy with the progress of Waterpix that hit their internal number. So not a drag on our outlook, but the economy is affecting consumer behavior. Consumers Are either not buying or trading down to lower cost flossers. On the push side, our lunch and learns are back to normal with high volume of dental offices.

Speaker 1

Of course, that's very important to recommendations for first purchases of water flossers. I would say we're it's we went into the year saying it's going to be a little choppy the 1st 6 months and I think that the comps will get easier in the second half. And vitamins on the vitamin side as well, the category outperformed better than expected, it was only down 2% in the Q1. And as I said, our fill rates have improved monthly, So that now we're getting into the high 80s and so it's one of the drags on our total company fill rate. As that progresses, we're going to be in a better position

Speaker 2

Yes. So those 2 are stabilizing and meeting expectations. The third one is flawless. Retail inventories are moving slower than we expected. That's partly have an impact on our inventory reserves for slow moving inventory on our end, but we think we've appropriately captured that from here and we're moving forward.

Speaker 10

Great. Thanks guys.

Operator

And for your next question, it comes from the line of Anna Lisle from Bank of America. Anna, your line is open. Please ask your question.

Speaker 9

Great. Good morning. Thank you so much for the question. I'm curious around volumes. Volumes were flat in the quarter and you're now expecting volumes to be positive overall for Q2 and the full year, you've commented previously on economization on volume expected in certain categories such as Laundry, Litter and Toothpaste.

Speaker 9

So I was wondering if you're seeing a reversal in that from consumers who maybe are more accepting

Speaker 2

I have a point or 2 to add to. What we said on volumes and just to be super clear was they were flat in Q1 And we expect to inflect positively in the second half and for the full year. So you can infer that that means we think they're going to be negative in Q2. Originally our outlook was down in Q1, down in Q2 and inflect positively in the back half. So we're encouraged by what happened in Q1.

Speaker 2

That was largely because that was our largest year over year delta in case bill. A year ago, Q1 case bill was 72%, Q2 is 89%, so we just have less volume to make up there. Yes, so I would probably say Volumes continue to impact inflect positively in the back half. We're now calling volume to be positive for the year, and that's kind of the short story.

Speaker 1

One thing I would add to that is that we were out of the gate early, some of our categories with respect to pricing. And so consequently with the passage of time, Pricing is going to have less of an impact on us and volume greater. So we think that the flat volume is a great story For the company, expecting positive volumes for the year, again, this is typically what investors expect from us.

Speaker 9

Great. And then just in terms of pricing and margins, just curious how would you attribute the benefit to outright pricing versus the package

Speaker 2

Yes. We haven't it all gets bundled into that Price volume mix on the gross margin bridge. And so our outlook in February was 180 basis point tailwind. It still is that in April, 180 basis point tailwind from price volume mix. And that would have, for example, the litter list price increase, but it would also have pack size changes that are happening, it would have at times, it would have the laundry concentration benefit in there.

Speaker 2

So It's a mix. We don't break them out anymore independently than that.

Speaker 9

Okay. Thanks very much.

Operator

All right, thank you. And for your next question, it comes from the line of Bill Chappell from Churit. Bill, your line is open. Please ask your question.

Speaker 4

Thanks. Good morning.

Speaker 1

Hey, Bill.

Speaker 7

Hey, Matt, just a little bit

Speaker 12

more on kind of your commentary about consumer trade down. And I'm just trying to understand how you feel like Why you think it's consumer trade down as you're benefiting versus just the power of the ARM and HAMMER brand, because especially in laundry detergent, we For years, you've been taking share from kind of the smaller old Unilever or Sun, whatever their whoever owns them now brands. You look at a lot of the stores and a lot of these brands have lost some or all of their shelf space and you gained shelf space. So I'm trying to understand like what you're seeing that Where you think it's trade down benefit versus just power of the brand benefit that isn't sustainable regardless of what the economy does?

Operator

Yes. Well, look, it's a combination

Speaker 1

of both. Yes, the ARM and HAMMER brand is a very powerful brand. We got a $5,400,000,000 in sales, $2,000,000,000 of it is ARM and HAMMER. So we're able to advertise ARM and HAMMER across lots of different categories. When we look at the macro numbers, just look at value laundry detergent grew 9%, While premium loan distribution declined 3%, that's in the category, all brands premium, all brands value.

Speaker 1

So It's clearly happening. That's our biggest category. And then we look at litter, we see the same thing. We have a black box, which is our premium cat litter. We got a yellow box, which is our value cat litter.

Speaker 1

And we see this consumers have traded down within the category From the black box to the yellow box, but that's where you have the power of the brand, where people stick with ARM and HAMMER as opposed to move over to a different brand. I'd say it's probably a combination of both, Bill.

Speaker 12

Well, and I guess just to follow-up on that, are you seeing Outsize or accelerating growth for the Extra brand or for that deep value or more shelf space for the being given by retailers for the deep value?

Speaker 1

Yes, yes. No, that's a good one. We said 8 out of 14 brands gained share in the quarter. We were almost at 9. We just missed by hair with Extra.

Speaker 1

And I would say in recent weeks Extra has shown a lot of strength. So we think that that one could turn positive for us as a share grower in future quarters. Great. Thanks so much. More evidence of trade down, right?

Speaker 1

Yes.

Operator

Peter Growe from UBS. Peter, your line is open. Please ask your question.

Speaker 7

Thanks, operator, and good morning, everyone. So I was hoping to get some perspective on what you're From an input cost perspective, kind of building on Kevin's earlier question, can you maybe just help us understand where you're seeing costs moderate, we're seeing cost be stickier, and Rick, I know you previously mentioned that you were less hedged on commodities than you typically would be heading into this year. To the extent that commodities continue to moderate, how quickly could we see that benefit flowing through? Thanks.

Speaker 2

Yes. Okay. Thanks, Peter, for the question. In the release, we said that largely for us, our inflation expectations were unchanged. And there's puts and takes on the commodity side.

Speaker 2

Sugar is higher. Some resins are down. Ethylene is down. So it's a mixed bag, but it kind of nets to kind of neutral from our original outlook. You're right.

Speaker 2

We did say at the beginning of the year that we were less hedged this year than we have in many years, just thinking that commodities would come down over time as the recession was potentially looming and it just takes a few months for Cost to actually be down and stay down before you start seeing those commodities trickle into material pricing and trickle into and then you have to buy them, they go on the balance sheet, they get expensive to They get expensive to P and L when you sell it. So I don't know if you see something down now, it has to be down for a few months and then probably within 6 months it would flow through the P and L.

Operator

All right, thank you. And for your next question, it comes from the line of Andrea Teixeira from JPMorgan. Andrea, your line is open. Please ask your question.

Speaker 5

Thank you. Good morning. So I wanted to just one is a clarification, the other one is a real question. 1 on the whole pricing and mix dynamics and volume. Understandably, you have these dynamics in the second quarter, you've got to help In the Q1, but the second quarter the second half, sorry, as you implied the new guide And you still have some pricing to come through.

Speaker 5

I understand you lap as everybody else, the pricing that you put in, but you put in some pricing even Towards the end of last year and beginning of this year, so I was just trying to reconcile what should we expect in the second The real question is on the ARM and HAMMER share gains, which obviously have been remarkable. Just wondering on liquid, your biggest competitor also reduced some price points that were, I think more take a shot to some consumers, have you seen that change these dynamics as you exit the quarter or you continue to gain share we hand out our channels. Thank you.

Speaker 2

Yes, I'll take the just the first half, second half dynamic of pricing. But Matt's comment is true. A lot of pricing does roll over, but the first half average, we think is in the 160s and the second half we think is 180, 190, so the full year is 180. So we do think there's a little bit and that's really Because of our litter price increase in February is the and the concentration impact that kind of flows through there as well. So those are the 2 things that help in the back half a little bit.

Speaker 1

Yes. And with respect to pricing, obviously, we do watch What happens, what our competitors do in all of our categories, but with respect to any recent price increases, Not just in launch a bit elsewhere, it would be too early to tell. We knew a quarter or 2 before we can comment on that. What I will add though is that And I think Olivia might ask this question earlier, our rents sold on deal. If you look at liquid laundry detergent look at it a year ago, the sold on deal was 31%.

Speaker 1

And if you look at where it is today, Q1 2023, 31.7%. So not a big change year over year in promotions and even sequentially, Q4 was 32% and Q1 31.7%. So things are pretty stable in the liquid laundry detergent. It's a different story in cat litter. Cat litter a year ago, Solen deal was 10.7% and Q1 this year was 14.9%.

Speaker 1

So it's been kind of a stair step up quarter by quarter over the last 5 quarters. In fact, Q4 was 13.9%, so And historically, and we've talked about this on previous calls, that the litter sold on deal It's typically much higher than the high teens, 18%, 19%, 20%. And I guess the other promotional category would be vitamins and last year, it was 38.9% sold on deal in Q1, this year 38.5%. So I think that gives you a little bit more color on what's going on with respect to pricing and promotions.

Speaker 5

But do you expect promo to continue to accelerate as we go? I think I appreciate it's backward looking, but forward looking, you're embedding that, obviously cat litter will be 1 and perhaps vitamins or you think that this is going to be a similar dynamic?

Speaker 1

Yes. No, but Andrew, we would never telegraph our plans, but typically we're going to be React to competition when it comes to trade. Yes.

Speaker 2

And I would just say laundry for Q1 looked a lot like Q4 From a promotional perspective, I was going through.

Speaker 5

And just on that side, just a clarification, the $180,000,000 $190,000,000 is the that you mentioned on the pricing front. That's on top of that's what the incremental pricing would come from these 2 price increases that you mentioned, right?

Speaker 2

Well, that's for the full year. So there's also partial pricing finishing That line, we don't break out the 3. So that's also volume growth of higher margin brands as an example Year over year. So there's a lot in that number, but I guess the answer for you Andrea is it's a tailwind and the tailwind gets a little bit better in the second half.

Speaker 5

So you should say like all said and done according I mean, if my math is right, you're going to have a second half with pricing of about 2% That's what comes out with your guide, if that makes sense.

Speaker 2

Yes, I'm not saying that. I'm just saying that 180 basis points is also Volume mix, that is not just price by itself. Okay?

Speaker 5

Okay, perfect. All right. I'll pass it on. Thank you.

Operator

Thank you. And for your next question, it comes from the line of Javier Escalante from Evercore. Have your line is open. Please ask your question.

Speaker 11

Good morning, everyone, and hopefully you can hear me. I would like to double click on the ever And the greater degree of conservatism built in guidance and what we're going to see in tracked channels. So one is you have positive volumes in the second half despite of compaction in detergents. Is it are we going to see a gap between truck channels and what you report because you correct for wash loads? On hero doing very well, do upsides trigger impact higher impact of restricted stock?

Speaker 11

And thirdly, on the marketing investment, do you have you built any sales lift in the second half or just basically investment

Speaker 2

Yes. I'll take the first two and then maybe Matt has the third one. But I'll even take your second one first. You threw in RSUs for Hero. Our adjusted EPS excludes any impact of amortization related to RSU.

Speaker 2

So that's kind of not a factor in our outlook or And our adjusted EPS, so that's apples to apples. Number 1, We don't expect to see much of a gap between shipments and consumption at all. And when you see tracked versus our Nielsen or consumption versus our organic growth in the back half, it should be really close is the short answer. In Q2, you may see a little bit of disconnect again because some of those brands like WATERPIK As they continue to stabilize and go backwards a little bit, that's largely in untracked channels. Some of hero growth from a reported perspective is also in untracked So I would say overall, we've kind of talked about we had a great quarter.

Speaker 2

We're raising the full year on reported organic EPS across the board. We've made the comment that we're going to make investments if we continue to outperform on revenue and profits. And Matt? Yes.

Speaker 1

As far as marketing goes, what we have in our forecast is we're 1.10.5%. But if you look at what happened in the Q1, Q1 were up 70 bps. We said for the full year, we'd be up 50. So our track record so far is that as we get into a quarter and to the extent we have the same experience we've had In Q1 and Q2, we have the opportunity to take it up again more than 50 bps. But it's going to be Pay as you go.

Speaker 11

And if I can follow-up on the detergent side because perhaps I Didn't explain myself is that when you compact, don't you have a negative impact on volume? Or does your reporting basically adjust

Speaker 2

Yes. These compaction levels are not to the extent that happened 5 years ago, 10 years ago, when we were doing 100 percent compaction, they are a lot more marginal. Round 1 happened a year ago. This is round 2 for us and they just we don't anticipate them throwing volumes or price off in a major way.

Speaker 11

Thank you very

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Earnings Conference Call
Church & Dwight Q1 2023
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