Church & Dwight Q1 2024 Earnings Call Transcript

Presentation

[Operator]

Good morning, ladies and gentlemen, and welcome to Church & Dwight's First Quarter 2024 Earnings Conference Call. Before we begin, I've 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 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, Chairman, President and Chief Executive Officer of Church & Dwight. Please go ahead, sir.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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 Dierker, our CFO. And when Rick is done, we'll open the call up for questions. Q1 was another solid quarter for Church & Dwight. Reported sales growth was 5.1%, beating our outlook of 4%, thanks to stronger results across the board from domestic, international and specialty products. Organic sales grew 5.2%, which exceeded our 4% Q1 outlook with volume accounting for a very healthy 70% of our growth. Gross margin expanded 220 basis points. At the same time, we increased marketing spending in the quarter and gained market share in the majority of our categories. Adjusted EPS was $0.96, which was $0.11 higher than our $0.85 outlook. The results were driven by higher-than-expected sales growth, gross margin expansion and a lower tax rate.

We continue to grow in the online class of trade with online sales as a percentage of global sales now reaching 20.5%. In March, we signed a definitive agreement to acquire GRAPHICO, our Japanese distributor for approximately $35 million. We expect the acquisition to close later this year. GRAPHICO's annual sales are approximately $38 million. The business is based in Tokyo and has 59 employees. Since 2008, GRAPHICO has partnered with Church & Dwight and driven OXICLEAN to be the number one powder prewash additive in Japan. The acquisition is expected to contribute to greater expansion of our business in Japan and the greater APAC region. We intend to leverage the capabilities of the GRAPHICO team to bring additional Church & Dwight brands to Japanese consumers. Now I'm going to turn my comments to each of the three businesses.

First up is the U.S. The U.S. consumer business had 4.3% organic sales growth, 3.3% that was volume driven, making this the third consecutive quarter of U.S. volume growth. five of our seven power brands gained market share in the quarter and private label market share in our categories remained relatively stable. Now let's look at a few important categories in the U.S., starting with laundry. ARM & HAMMER liquid laundry detergent consumption was flat while the category grew 2%. Many of you may recall, we had pulled back on promotional activity in Q4, and that continued into early Q1. As our promotional activity normalized, ARM & HAMMER liquid laundry saw share gains late in the quarter and the brand has continued to perform well in April. Now elsewhere in laundry, ARM & HAMMER unit dose and ARM & HAMMER scent boosters both grew faster than their categories and grew share in the quarter.

Our XTRA liquid laundry brand, which is our extreme value offering grew consumption 6.3% and increased market share to 3.8%. Regarding new products, we have launched two new products into the detergent category, ARM & HAMMER Deep Clean and ARM & HAMMER Power Sheets. The first ARM & HAMMER Deep Clean is our most premium ARM & HAMMER laundry detergent entering the mid-tier of liquid laundry and delivering a superior clean at a price consumers can afford. The second new product is ARM & HAMMER Power Sheets laundry detergent, which is launched -- which was launched online in August of 2023. ARM & HAMMER was the first major brand to offer this new unit dose form in the U.S. Now due to its online success, Power Sheets is now available in select brick-and-mortar retailers. Power Sheets continues to grow online.

It now has 9,000 reviews with a 4.5 rating, and both Deep Clean and Power Sheets are off to a great start in 2024, and we're excited about the early results we are seeing. Now over in Litter. ARM & HAMMER Litter grew consumption 5% in Q1, which was in line with category growth. Our new lightweight ARM & HAMMER Hardball Clumping Litter is now expanding nationally after a successful in-market test in 2023. We expect this new litter to help ARM & HAMMER capture a greater share of the lightweight litter category. To give you a couple of facts here, lightweight litter today accounts for 16% of the clumping litter category. Our share of lightweight clumping litter has grown from 4% to 6% since year-end 2023, but that compares to our 29% share in regular weight litter. So still a long way to go. Turning to Personal Care, BATISTE continues to see strong consumption growth with consumption up 19% in Q1, growing share to 47.5%.

BATISTE continues to be the global leader in dry shampoo. We are meeting consumers' desire for long-lasting results with the launch of BATISTE Sweat Activated and BATISTE Touch Activated dry shampoos. And so far, consumers are posting excellent reviews for both of these new innovations. Now our mouthwash. THERABREATH mouthwash and HERO continue to perform extremely well. THERABREATH is the number one alcohol-free mouthwash brand and is now the number three brand in total mouthwash with a 16% share. THERABREATH recently entered the antiseptic segment of the category with the launch of TheraBreath Deep Clean Oral Rinse, which represents 30% of the category. HERO continues to drive the majority of growth in the acne category and has grown to become the number one brand in the larger acne category with 19% share.

HERO continues to launch innovative solutions in patches combined with adjacent consumer needs, such as recently launched Dissolve Away Daily Cleansing Balm. Now there are two businesses, Gummy Vitamins and WATERPIK that created a drag on total company organic growth in Q1. First, WATERPIK. The good news for WATERPIK is consumption for our water flosser business is healthy. However, flosser shipments were affected by retailer inventory adjustments in the first quarter. This, combined with lower shower head consumption accounted for a 1% negative drag on organic revenue growth but we expect this to be transient. The second is gummies, which also created a 1% drag. The Gummy Vitamin category declined 5% in Q1, which was actually worse than our expectations for the category and our consumption was down even greater, down 12%.

We continue to move forward with our plans to stabilize our vitamin business through changes, through packaging, messaging and greater marketing investments that we've talked about with you in the past. I will close my comments on the U.S. by saying that overcoming the drag from these businesses still -- and still posting a 5% organic sales growth for total company, just illuminates the strength of our portfolio. Turning now to international and Specialty Products. Our international business delivered organic growth of 8.8% in Q1. This was driven by strong growth in the subsidiaries, just a few callouts, especially Mexico, Germany, U.K. and France. And also had growth from our Global Markets Group.

And finally, Specialty Products. Specialty Products organic sales increased 7.2% primarily due to record sales in our Eurasia business as SPD continues to expand globally. I want to wrap up my remarks by reiterating that the company is performing well with all three divisions delivering strong growth. And I want to thank our global employees for their great efforts each and every day. Now we rarely raise our full year outlook after only one quarter. But given our fast start, we raised our outlook for gross margin and EPS growth, and we have confidence in our new full year forecast.

And now I'm going to turn it over to Rick to give you some more color around the quarter.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Thank you, Matt, and good morning, everybody. We'll start with EPS. First quarter adjusted EPS was $0.96, up 12.9% from the prior year. The $0.96 was better than our $0.85 outlook, primarily driven from higher-than-expected sales growth, gross margin expansion and a lower tax rate. Reported revenue was up 5.1%, and organic sales were up 5.2%. Organic sales were driven by volume of 3.7% and positive product mix and pricing of 1.5%. 70% of our organic growth was volume driven. And as Matt mentioned earlier, this makes three consecutive quarters of U.S. volume growth. Our first quarter gross margin was 45.7%, a 220 basis point increase from a year ago, primarily due to productivity, volume, mix and pricing, net of the impact of higher manufacturing costs.

Let me walk you through the Q1 bridge. Gross margin was made up of the following: positive 130 basis points impact from price volume mix and a positive 130 basis points from productivity. This was partially offset by 10 basis points from currency and 30 basis points from inflation. Moving to marketing. Marketing was up $29.7 million year-over-year. Marketing expense as a percentage of net sales was 10.1% or 150 basis points higher than Q1 of last year and led to share gains. For SG&A, Q1 adjusted SG&A increased 80 basis points year-over-year. Other expense all-in was $20.9 million, a $2.2 million decrease primarily due to lower outstanding debt and higher interest income. We now expect other expense for 2024 to be approximately $80 million. For income tax, our effective rate for the quarter was 19.9% compared to 24.4% in 2023, a decrease of 450 basis points due to a high level of stock option exercise in Q1 of 2024.

We continue to expect the full year rate to be approximately 23%. And now to cash. For the first three months of 2024, cash from operating activities increased to $263 million, a decrease of $10.1 million with higher cash earnings, offset by higher working capital. We now expect full year cash flow from operations to be approximately $1.050 billion, up slightly from our previous $1 billion outlook. Capital expenditures for the first three months were $46.3 million, a $21 million increase from the prior year as capacity expansion projects proceed as planned. We expect 2024 capex of approximately $180 million as we complete the major capacity investments that were initiated in 2023, and we expect capital spending to return to historical levels of 2% of sales in 2025. And now for the full year outlook. We continue to expect the full year 2024 reported an organic sales growth to be approximately 4% to 5%.

We now expect full year EPS in the range of 8% to 9% growth. This is up from our previous 7% to 9%. And is inclusive of costs related to the exit of the MEGALAC business as well as GRAPHICO transaction costs. We now expect full year gross margin to expand approximately 75 basis points, up from previous range of 50 to 75 basis points. Given our outstanding Q1 margin expansion of 220 bps, this outlook implies moderate gross margin expansion for the remainder of the year. We continue to expect an increase in manufacturing costs to be more than offset through productivity, mix, higher volume and carryover pricing. We continue to expect marketing as a percentage of net sales to be approximately 11%. SG&A is now expected to be flat as a percentage of net sales compared to 2023, reflecting the investments we are making in our international, e-commerce, infrastructure and costs related to the GRAPHICO acquisition Matt discussed earlier.

For Q2, we have a strong outlook and expect reported sales growth of approximately 3.5%. Organic sales growth of approximately 4%. We had a really strong April from a consumption perspective. So some might be expecting a higher organic growth outlook. Our 4% outlook reflects higher coupons and trade promotion in support of new products. We're fully lapping 2023 price increases and we're lapping a year ago distribution gains for HERO. Moving on to the rest of the P&L. We expect moderate gross margin expansion in the quarter in Q2 as we have less of an impact from carryover pricing. Increased marketing spending to support our innovation pipeline, higher SG&A expense and a significantly higher tax rate of 24% compared to the prior year of 17.9%, which benefited from a high level of stock option exercises. This represents a roughly $0.07 drag on EPS. As a result, we expect adjusted EPS of $0.83 per share, down 10% versus last year adjusted Q2 EPS.

And with that, Matt and I would be happy to take any questions.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] We'll take our first question today from Chris Carey with Wells Fargo Securities.

[Chris Carey, Analyst at Wells Fargo Securities]

Hi, good morning, everyone.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Hey, Chris.

[Chris Carey, Analyst at Wells Fargo Securities]

Just regarding the Q4 outlook for organic sales to be below the run rate that we're seeing in the scanner trends, Rick, you mentioned trade promotion lapping of HERO -- or excuse me, I think the THERABREATH or HERO distribution gains, if you could confirm that? How would you contextualize the drivers of those two items for the organic sales outlook in Q2 being below what we can see in the consumption trends? And then got you a follow-up.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Yes. Thanks for the question, Chris. You're right. April was around 6.5% consumption growth, really, really strong. And we said three things really driving a lower organic outlook of around 4%, which is probably in the grand scheme, HERO, lapping year ago distribution gains as we went national for HERO. It was probably the biggest one. And then number two, not getting any contribution from pricing, we've fully lapped 2023 pricing actions by -- as we enter into Q2. And then the third one would be higher coupons for -- and trade for supporting our new products because this is one of our best years of innovation.

[Chris Carey, Analyst at Wells Fargo Securities]

Okay. That's helpful. The second thing would just be we're seeing an improvement sequentially in laundry volumes. Obviously, there's been some noise in this category with compaction with stepped-up promotional activity in the year ago base. How would you characterize your expectation for laundry sequentially from here? Clearly, we're seeing the improvement as those lapse normalize, would you expect to continue to see that improvement going forward? And do you just have any expectation for how volumes might shape up in laundry specifically over the next couple of quarters? And if I could sneak in, are you starting to see any competitive activity in your litter business, which is what we're hearing from one of your competitors?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Yes. You got a lot of questions there Chris. Yes. So if you look at laundry category, you got -- there's a lot going on there. You've got liquid laundry, you got unit dose and you got scent booster. So if you look at the categories, the last three quarters for each of those, liquid laundry sort of decelerated year-over-year growth, Q3, Q4, Q1, it's like up 5%, up two, up two. And so it has decelerated. The reason we feel good about where we stand right now is we know we lost some share in the -- early in the quarter, then we normalized the trade spend. And then we're going to have even more couponing and trade going forward. Why? Because of we got Deep Clean that we've launched nationally.

So -- and we think that -- we make that stick in high mid-tier and that could provide years of growth for us. So I think the horse to ride this year and laundry is going to be Deep Clean. As far as unit dose and scent boosters go, unit dose, that's decelerated as well the last three quarters, eight, five, three. But we -- our unit dose grew 34% in the quarter. So we had a lot of success, a lot of trade down going on there. And then scent boosters, which is a very discretionary category, the last three quarters is two, one, one as far as the year-over-year growth. And we grew 7% because we're a value in that category. So we're in a good position, both in unit dose and at scent boosters. So then when you talk about the promotional things are right now. Look, liquid laundry, if you went to Q4 versus Q1, it's up a bit, like up 70 bps.

So just as in measured channels, of course. And of course, you can't see coupons as well. I feel good IRI and Nielsen. But if you look at the sold-on deal, it went from 33.2 to 33.9 sequentially. So you wouldn't say, well, that's not that big a move. But year-over-year, Q1 to Q1, it's up 180 bps. So we would still say that if you go back to pre-COVID times, if you went back to, say, 2018, it's about a 40% sold on deal. So we're a long way from being where we used to be. But I'd say trend-wise, you do a trend line, you'd said it is inching up over the last six to eight quarters. You mentioned litter as well. Litter is same sold on deal in Q1, Q4 it's 15.3%, but still up year-over-year 40 bps, but a long way from where it was.

If you went back years ago, we would more around 20%. So -- but it is -- obviously, we had one competitor that was out of stock for a while, so they'll need to -- I suspect, be promoting to win back -- win back share. But as I said, we've -- the horse we're riding there is a Hardball. We've got a lot of opportunity in the lightweight litter category. So that's -- you had a long question, so it's kind of a long answer, did I hit most of the points, Chris?

[Chris Carey, Analyst at Wells Fargo Securities]

That's perfect. I will -- I will feed the floor. Thank you very much.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Okay, Chris. Thank you.

[Operator]

Our next question will come from Rupesh Parikh with Oppenheimer.

[Rupesh Parikh, Analyst at Oppenheimer]

Good morning, and thanks for taking my question. Also congrats on the nice quarter. So just going back to the vitamin category. Just curious what continues to weigh in the category? And then how should we think about expectations for the balance of the year versus, I guess, the double-digit consumption decline we just saw in Q1?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Yes. Well, if you look at the category, Q4 and Q1 just round numbers are both down 5%, down 5%, down 5%. And normally, you would expect New Year's resolutions and people wanting to get healthy, that would be a boost to the category. We didn't see it in Q1. So it was two things. It still is probably the tail from post COVID. But also, you could also argue that for many people, it's discretionary. So the third thing though is that people moving from gummies to other forms, and that is powders and also things like chewables. And we're launching a chewable this year.

So we could see some of that shift to other forms. But I would say those are the dynamics that we're looking at. Now as far as our performance, yes, we've had double-digit decline in Q4 and Q1. So obviously, not happy about that. Takes a while to turn that around. You probably are starting to see new packaging in in-store. Not only new packaging but higher marketing spend as well. We are seeing signs of retailer support with respect to shelf placement and facings pre and post resets. So we hope that this is the year we're going to stabilize. We're really hoping that in the second half of this year that this business will inflect and start to grow. But we've been down Q4 and Q1, as I said.

[Rupesh Parikh, Analyst at Oppenheimer]

Great. And then maybe just one quick follow-up for Rick. So you guys raised the bottom line guidance, but still kept the same top line guide even with the Q1, and it sounds like strong momentum in April. So just curious in terms of -- is it just conservatism for reaffirming the guide? Or is it still just early in the year?

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Yes. I think Matt's comment was spot on in his prepared remarks. Usually, after Q1, we don't touch the outlook. Gross margin was so strong in Q1, we felt like we had to reflect that. And as a result, earnings was very strong as well. So that's why we adjusted it. And four to 5, I think it's a great guide. I know we said 4.5 pretty much throughout the year. So I would expect us to talk more about the outlook in July.

[Rupesh Parikh, Analyst at Oppenheimer]

Great. Thank you. I'll pass it along.

[Operator]

Our next question will come from Dara Mohsenian with Morgan Stanley.

[Dara Mohsenian, Analyst at Morgan Stanley]

Hey, good morning. So first, just a clarification on WATERPIK. The 100 basis point issue you mentioned in Q1, is that something that fully comes back in the balance of the year? Is that embedded in the Q2 guidance? Is it more spread out in the balance of the year? And was that just a shipment issue? Or is there some form of retail sales weakness also? And then maybe just broader, Matt, on the U.S. business, you're obviously excited about innovation this year. You mentioned the couponing in Q2. Can you talk about the level of contribution you're expecting from innovation this year? And maybe on some of the key early ones, the reception you're seeing so far from a trade and consumer standpoint?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Okay. A multi-parter. Well let's pick WATERPIK first. I'll make a few comments about that, and Rick can build on that, and we'll come back to what we're expecting for the U.S.. As far as WATERPIK goes, yes, it was down in the first quarter, but we still expect on a full year basis, this business to be up and to hit its plan. So I wouldn't be completely alarmed about the WATERPIK activity in Q1. The fact that the flosser consumption is healthy, is real positive for us. That's a really strong way to start the year.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Yes. I mean consumption for WATERPIK is high -- up high single digit, low double digits. So consumption is great. We had to work through some inventory that was higher than I guess, at retail, and that's been worked through now. So we feel like it's in a good spot as we move forward.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Yes. And as far as our expectations for the year, we called the 4% to 5% organic growth for the year. And we expect just ballpark, about 2% of that driven from new product launches, which is a big number. And -- but if you kind of roll through, we've got Deep Clean launching in laundry. And ARM & HAMMER, we're going national with -- ARM & HAMMER Litter, we're going national hwith HardBall. Those are our two big businesses on the household side of the house. And then when you get into personal care, THERABREATH, launching with the -- antiseptic being 30% of the category, that's gigantic. So we're only just getting started there.

And the BATISTE, I mentioned, we're the number one dry shampoo in the world. You got BATISTE Touch, BATISTE Sweat. If you're getting really high ratings and early days of velocities for virtually everything that we've launched are meeting or exceeding expectations. So that would suggest we feel good about at least after one quarter, that we're going to hit that 2% number for organic sales growth in 2024. And that will probably be one of our biggest years ever for as contribution of organic sales from new products.

[Dara Mohsenian, Analyst at Morgan Stanley]

Great. Thanks.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Great. Thank you.

[Operator]

Our next question will come from Andrea Teixeira with JPMorgan.

[Andrea Teixeira, Analyst at JPMorgan Chase & Co.]

Thank you. Good morning. So I was hoping if you can talk about like the dynamics as you set up shelves. If there is anything you would call out in terms of the -- of any pull forward in shipments and consumption? I understand that obviously, you had a very strong quarter, but you're guiding more conservatively into the second quarter. Just trying to understand the puts and takes or anything that you see the lapse, and I appreciate when you gave us the lapse on some of the components last year.

But also, if you're seeing your competitors being more I would say, more aggressive in litter or things like that, that some of them had suffered from, obviously, the cyber attack and all of that. How are the dynamics in terms of market share as we think into the second quarter and the balance of the year? Thank you.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Hey, Andrea, it's Rick. I'll give you a couple of comments, and if Matt wants to add. So first of all, for the Q2 call, I went through a little bit of the details. But really, it's new product couponing and trade promotion is kind of a little bit of a step down or step up in Q2, so that's impacting net sales. We had year ago HERO gains as we went national, that's what I said before. And then we're lapping some of the price increases, right? Almost all of our volume -- all of our organic growth from here forward is almost 100% volume driven. Okay? So we had 70% in Q1, but as we move forward, it's closer to 100%. And then as for litter, Matt went to the amounts sold on deal, it has ticked up a little bit. Private label is up a little bit more, spending is up a little bit, but by and by our shares are strong in litter.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Yes. And as far as you mentioned, supply difficulties of other competitors. Yes, sure. Obviously, we and other brands in the category can benefit and have benefited from that difficulty. And when you have a repeat purchases over and over again. Oftentimes, so changes stick. So naturally, that's our expectation that, yes, we're going to hang on to some of those new consumers that moved our way, but some will be tempted back by promotions.

[Andrea Teixeira, Analyst at JPMorgan Chase & Co.]

That's super helpful. Thank you.

[Operator]

Our next question comes from Nick Modi with RBC Capital Markets.

[Nick Modi, Analyst at RBC Capital Markets]

Yeah, good morning, everyone. Just two quick questions. Rick, maybe on just the marketing guidance. I guess based on our math, the rest of the year would imply kind of reduced marketing, of course, off of very big increases from a year ago. But just wanted to get kind of philosophically, do you kind of saw the upside, would you have a bias to reinvest more given the consumer environment or -- would it be more flowing through to the bottom line? And then the second question is really around reinflation, right? We're starting to see some commodities across the energy complex reinflate. And I would just be curious on kind of how you think about managing that against this consumer backdrop in terms of pricing? Thanks.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Yes. Thanks for the question, Nick. For marketing, we were up 150 basis points in Q1. We expect to be up in Q2. And then Q3 and Q4, but Q3 up probably, and then Q4 down. And why is that? We spent a lot of marketing in Q4 a year ago. We wanted to move and shift part of that to the front half as we supported our new product. So we did that in a meaningful way. Feel really good about that. On an absolute basis, marketing in Q4 would still be a high number. So we feel like we're supporting, the brand is great. To the extent that we overdeliver and have the momentum.

We typically look to reinvest in marketing because it drive share. It drives organic growth, and it's a virtual cycle. On inflation, I would say for us, it's largely unchanged. Inflation expectations aren't moving much at all. Ethylene is down a little bit HDPE is up a little bit. But net-net, we're right where we were when we talked three months ago. So we don't have -- if there's a theoretical question, if there's inflation, what do we do? I would tell you, our productivity program is very strong right now, and we think that's going to be evergreen as well.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Yes. And just to add to that, Nick, as you know, we got a portfolio value brand. So to the extent that interest rates stay where they are, we have some defense against that. We have found that HERO and THERABREATH are really high ranks, but we've really been unaffected by any decline in consumer sentiment over the past few quarters. So they seem to be somewhat resilient, and those are some of our bigger growers right now. So we still think we're pretty well positioned at least for the remainder of 2024.

[Nick Modi, Analyst at RBC Capital Markets]

Great. Thanks, guys. I'll pass it on.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Okay.

[Operator]

Our next question will come from Peter Grom with UBS.

[Peter Grom, Analyst at UBS Group]

Thanks, operator, and good morning, everyone, and hope you're doing well. I was hoping to just follow up on the 2Q organic sales outlook, Rick, you mentioned fully lapping pricing. You touched on the couponing many times throughout this call. So within that 4%, can you maybe unpack what we should expect from a price versus volume perspective? And then kind of the same question for the full year. I think previously, the expectation was that volumes would be kind of 2/3 of the full year organic sales growth. Has that changed? Or is that still the right expectation? Thanks.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Thanks, Peter. In Q1, it was 70% volume and 30% price. And I just made the comment that on a go-forward basis, Q2, Q3, Q4 they'll likely be closer to 100% volume and minimal price, if anything. And if you rewind the clock, pre-COVID, you go back 10 years ago, and that was our track record, 100% volume-driven growth. And actually, sometimes in the past, it was maybe 110% volume-driven growth and a little bit more trade as we went national for some of our brands. So that's the expectation as we look forward. And so for the full year, I probably wouldn't change the outlook we gave you on the mix.

[Peter Grom, Analyst at UBS Group]

Great. And then maybe just a quick follow-up on Dara's question. Just kind of on WATERPIK and the fact that you expect it to kind of reverse and grow for the year, a pretty nice rebound. So just maybe thinking about the sales benefit from a brand perspective? Just in that you overdelivered versus the full year outlook despite that drag? What really gets worse from here? Is it simply just cycling the tough comps and moderating growth of HERO and THERABREATH or are there other brands where you're kind of expecting things to slow sequentially?

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

No. Look, we think the -- not much changed from our original outlook. And we beat the quarter on organic sales growth and despite some of these things that were dragging us down. It's just early in the year to call any incremental upside, and we typically don't do that. So let's see how consumption goes, and we continue to do well on a share perspective. And I think we're very optimistic about the year and the top line.

[Peter Grom, Analyst at UBS Group]

Thanks so much. I'll pass it on.

[Operator]

Our next question will come from Anna Lizzul with Bank of America.

[Anna Lizzul, Analyst at Bank of America]

Hi, good morning. Thank you for the question. What's the solid volume growth that you saw in Q1? I was wondering if you're seeing a more significant benefit from trade down. I think you mentioned some in laundry in response to Chris' question, but wondering if you're seeing this elsewhere as well? And then we've been hearing from some companies, earnings season that the lower-income consumer appears to be more challenged. I was wondering how you're thinking about sort of the broad health of the consumer across your different income tiers in relation to your categories and volume growth?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Well, with respect to the consumer, you've probably heard us say on other calls that our big barometer is always unemployment. And unemployment has been consistently low. Yes, the interest rates have risen, but they've been high now for a while. So we don't see any change other than maybe people are disappointed that they're not coming down as fast. So yes, and there's -- we all know that student loans started to restart as well. So there's other pressures on the consumer. The credit card debt is rising, delinquencies are rising.

We're all looking at the same data, but that's going to be translating down into consumption for our products. You've seen the first four months of the year. I think that's probably because of -- it's got -- you have to go category by category and brand by brand. So like I said earlier, I do think we're well positioned for the remainder of the year. Yes, what was the first part of your question?

[Anna Lizzul, Analyst at Bank of America]

Just wondering if you're seeing broad trade down. You mentioned some in laundry, any other categories?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Yes. Well, look, the predominant portion of our portfolio that is valued is laundry and litter. And in laundry, we have -- obviously, we have ARM & HAMMER, but we also have XTRA, an XTRA group in the first quarter, it was in my prepared remarks. So we feel real good about that. And that may be an indication of more pressure on the consumer when you see the deep value brand growing. And then over in litter, yes, we have both a high-priced litter, meaning premium litters, we call it the black box. And we have the orange box, which is value. So we keep people in the category. So-- people may trade down, but they'll trade down within ARM & HAMMER, which actually supports our top line. So like I said before, we have some good dynamics in those two big categories that we think are going to help us for the remainder of the year.

[Anna Lizzul, Analyst at Bank of America]

Great. Thanks very much.

[Operator]

Our next question will come from Bonnie Herzog with Goldman Sachs.

[Bonnie Herzog, Analyst at The Goldman Sachs Group]

All right. Thank you. Good morning. I had a quick follow-up on Laundry. Curious to hear how you guys think about managing the balance between driving share and profitability? I guess I'm thinking about it as you step up trade spend and also as you -- especially as you look at it in the context of curtailing some of the ineffective promos you mentioned earlier.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Hey, Bonnie, it's Rick. I just want to be really, really clear. In Q4 of last year, we didn't repeat some bad promotions. And that carried over a little bit into January, and then we were pretty palms up about that. We have a great balance between what we think the right trade spending is and the right growth. And we're just getting back to what we would say was normal before we kind of called some of those bad promotions. So it's not like we're hiking up trade spend to the above category levels or anything like that. We are just pumping it back from an artificial low.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Yes. Our practice generally is we're generally below the category average and liquid laundry from a sold on deal perspective.

[Bonnie Herzog, Analyst at The Goldman Sachs Group]

Okay. That's helpful. And then I just had another question on international business. Your sales growth in the quarter was quite strong at nearly 9%, and the growth really seems pretty broad-based and balanced. So just curious to hear, how much of the volume growth was driven by distribution expansion versus just maybe strengthen your existing markets?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Yes. I think one of the things to point to in international and you're right that all six subsidiaries grew as well as the GMG. So clearly ran the table. But what we're seeing the benefit of is that we're being very selective about what brands we're going to support and what retailers we want to grow with. And we're leveraging revenue growth management far more than we had historically. And that's true in the last 18 months, and it's really showing up in the first quarter. In the past, you may have heard us talk about Global Markets Group, it's grown 15% annually for a lot of years as well.

And they -- there was a Global Markets Group that generally would be driving the international number. Well, that's not true in Q1. Q1, it's subsidiaries that are driving it. And it's for those three reasons that I gave being selective with respect to brand, with respect to retailer, and using all the tools of revenue growth management.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Yes. The second thing that's helping international is a couple of these new brands, HERO and THERABREATH. And typically, it takes us two to three years to get new brands, new acquisitions out internationally, and we're doing it rapidly, and there's been a great response to many countries and many distributors for those brands.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Yes. We think that will build throughout the rest of the year. But that's a nice tailwind on top of what I said in my earlier remarks.

[Bonnie Herzog, Analyst at The Goldman Sachs Group]

Okay. Thank you.

[Operator]

Our next question will come from Olivia Tong with Raymond James.

[Olivia Tong, Analyst at Raymond James]

Great. Thanks. Good morning. I wanted to ask you about the GRAPHICO acquisition and what drew you to that? Is there other markets that have distributor relationships? And does that seem like an area where you may be interested in more deals? And then just on thoughts on your -- on the M&A environment overall, particularly in goods, what you're seeing and interest there? Thank you.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Yes. Well, if you go back a few years, the way we got established in Germany was, we had a very small distributor that had introduced BATISTE into Germany. And that while, that being the basis for starting a very small subsidiary in Germany, which has grown over time. This one is different in that, GRAPHICO is a public company in Japan, obviously, a micro cap. But they have been working with OXICLEAN for 25 years, even before that Church & Dwight bought the business back in 2008. And they have a very capable team that's driven the brand to be number one, prewash, additive, and powder and Japan.

And so we benefit them from getting just buying a critical mass of talent in Japan and now we can introduce our other products into Japan. Keep in mind is when you're -- oftentimes, we have multiple distributors in a country because some distributors are households, some are personal care, they're experts in different areas. And this enables us to concentrate our brands through one subsidiary. Will there be other distributors in Japan? Yes, there could be a couple of others, but this is one where we can have a base of operation.

We should have a -- this should be a really big business for us given the size of the economy and the population of Japan, but also its a really nice beachhead for us in Southeast Asia from which to grow. So we're really enthusiastic about it. We've got a great team that we're -- that's coming on board as a result of this acquisition.

[Olivia Tong, Analyst at Raymond James]

And then just thinking through about the M&A environment overall?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Well, look, you know we're always on a hunt. Its the highest and best use of cash for the company, where we have a disproportionate amount of our cash that goes towards acquisitions. And there's always something for sale, but that's about as far as I can go right now.

[Olivia Tong, Analyst at Raymond James]

Great. And then just one on -- following up on Bonnie's question around promotion. You talked about it continuing to creep up, but still obviously well below pre-COVID norms. Is your expectation that it does get back there or just continue to show creep through the year? And then on the couponing, still point of clarification, is this more than normal or more a function of the timing of new products and the trial building couponing that goes with that to support the launch?

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Yes. That's really more on your second question, it's more of your second explanation. It's incremental couponing to support higher and more new products is the short story. On the -- on your first question on amount of promotion and really trade spend. I think it's -- same that we told Bonnie. It's -- the forward look for promotion for laundry is always dependent upon how category growth is doing. And if category growth is stable, then normally, promotion stays in line. And right now, category growth is great.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Yes, one thing to keep in mind, Bonnie, is -- all its price increases that went through the last couple of years, they were really unusual for all CPG and food companies. So yes, that does obviously make it more expensive for the product, but didn't necessarily expand gross margins for people. So yes, I don't -- like Rick said, we have to react to what's going on in the category. So you can't really predict or we're certainly not going to telegraph what we might be -- our plans might be for the remainder of the year.

[Olivia Tong, Analyst at Raymond James]

Got it. Thank you.

[Operator]

Our next question will come from Lauren Lieberman with Barclays.

[Lauren Lieberman, Analyst at Barclays]

Great. Thanks. Good morning. I was curious in thinking about the gross margin progression from here and for the rest of the year. One of the things you called out with regard to sales slowing down, particularly starting next quarter, was that lapping on distribution gains from HERO? So I was just -- what we can see in Nielsen, which I know isn't representative of the full distribution of the brand. Is that like, let's call it, same-store sales still really, really strong? But is some of the slowing down that's implied in HERO also impacting that gross margin forecast going forward? Because I imagine and we know it's super accretive. And so I just want to think about -- talk about how to think about the contribution of HERO to that gross margin build as we move from here and start to lap the distribution? Thanks.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Yes. No problem, Lauren, this is Rick. That isn't really in our thinking as we move forward. The two things that are driving gross margin to maybe not grow as fast would be less carryover pricing, and I know what I talked about from the organic revenue side, too. So we're fully through all the carryover pricing. And then number two, we talked about it during our Analyst Day in January, we're adding more fixed cost to the system for capacity reasons, like new distribution centers, those are coming online as we move through the year. So those are the two things.

[Operator]

Our next question comes from Javier Escalante with Evercore ISI.

[Javier Escalante, Analyst at Evercore ISI]

Hi, good morning, everyone. I do have a follow-up on the gap between retail sales that we see and the reported domestic number. You flagged WATERPIK as a point of impact. But we use Ocana and I believe that you guys do too. And the retail takeaway is more about 7%, 8%. And so there is a little bit of still kind of like a two-point gap. Do you think that it's related to a slow retailer reorders as your competitor in laundry mentioned earlier in the season? And I have a follow-up.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Yes. Are you comparing Q1 when you're -- for your question, Javier?

[Javier Escalante, Analyst at Evercore ISI]

Correct. Yes. Correct. Exactly. Correct. Just trying to understand whether is this something of the accounting of the couponing or something weird that basically we are overstating your retail sales growth and therefore, your shipment growth?

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Yes, I got it. No. It's interesting. I know we all have similar databases. Our -- internally, our shipment number, of course, is organic sales is 4.3%. And then IRI, our number is around 6%. So our gap is closer to 1.5%. Part of that is the couponing. Part of that is the water pit consumption that we've talked about working through retail inventory. And yes, I mean, those are the two biggest pieces.

[Javier Escalante, Analyst at Evercore ISI]

And when it comes to the gross margin getting better than expected, and I know that price mix was an issue -- was the driver. Is it more kind of like the change in the portfolio, meaning richer sales from HERO and THERABREATH, what was the driver of the better gross margin are there for the earnings bit?

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Yes. That's a good question. I think it was really the two things. It was -- mix was a little bit more helpful and volume was helpful. I mean price came in as expected. Manufacturing costs came in as expected, productivity was in line. So it was really higher volumes, which help with throughput and efficiencies and then a little bit favorable mix.

[Javier Escalante, Analyst at Evercore ISI]

Yes. Okay. Thank you very much, guys.

[Operator]

Our next question will come from Filippo Falorni with Citi.

[Filippo Falorni, Analyst at Smith Barney Citigroup]

Hey, good morning, everyone. I want to follow up to your point of the cycling of the distribution gain for HERO and maybe extend it to THERABREATH as well. Can you comment like how much incremental shelf space are you getting this year compared to last year in the U.S? And then I think at CAGNY, you talked about more international opportunities for those brands. So maybe can you give us some sense of the potential contribution from international? Thank you.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Yes. Okay. When you think about THERABREATH and HERO, THERABREATH, we bought that business in 2021. And HERO in 2022. So for THERABREATH, resets this year, we're getting more doors. But I would expect that the distribution gains from a number of doors perspective is going to plateau for THERABREATH this year, and that we're going to be getting -- the way to look for distribution gains in the future are going to be more facings. And we are seeing that already from some existing retailers where we already have good distribution, but maybe not the amount of facings -- we deserve. And then innovation, which will, so I think more facings and innovation are going to drive future growth for THERABREATH once we plateau with respect to the number of doors.

For HERO, since we've owned that a little bit less a year less than THERABREATH, there's still some distribution gains to come with some decent-sized retailers. But we expect this the same thing to happen. But with respect to HERO, what we'll be starting to do is start to move from just patches and acne into adjacent consumer needs, such as skin care, pre and post acne. And you mentioned international. So international is an area where we're running to launch HERO and THERABREATH. HERO, we're planning on launching in 40 countries in 2024, and that will happen throughout the year.

And then, of course, the sales growth will start to build in future years. But I think the other thing that's probably worth pointing out is that both HERO and THERABREATH are high rank products. And so if you're a retailer, you really like a high rank product which is a growing brand. And consequently, you do want to give that brand more facings and listen to innovation. So we think the dynamics for each of those brands are going to bode well for growth not only in 2024, but in 2025.

[Filippo Falorni, Analyst at Smith Barney Citigroup]

Thank you, guys. I'll pass it on.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Yes, okay.

[Operator]

Our last question will come from Brett Cooper with Consumer Edge Research.

[Brett Cooper, Analyst at Consumer Edge Research]

Hi, good morning. I was hoping to dig more into the HERO business in the U.S. So distribution is up significantly, making sort of the underlying read of demand a bit difficult. So I was hoping you could click one level below and say, and talk about what we're seeing with respect to existing consumer demand, new users, trial and repeat and other drivers? Thanks.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Yes. Could you -- I didn't hear the first part of your question, I'm sorry.

[Brett Cooper, Analyst at Consumer Edge Research]

Just -- it's the HERO business in the U.S., right? So huge distribution gains, right? So you see significant sales growth. So just trying to understand, I guess, one level below, kind of what you see from consumers that have been in the business for a while and then what you're seeing with respect to new users, trial and repeat and any other drivers on the sales growth?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Look, the volumes for this business continue to grow. So it's not a price-driven business. And the awareness in household penetration is still ahead of us for this brand. You may remember that when the -- back in -- before patches hit the scene, it was really ointments and lotions etc, that people were using to address acne. It's patches now that are driving the category. And our ability to grow is going to be going into adjacencies.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

And I would probably say in all channels, we are growing and have positive growth even in channels that are declining because of some maybe macro or secular trends. So that bodes well for this brand.

[Operator]

That will conclude today's question-and-answer session. I will now turn the conference over to Mr. Farrell for any additional closing remarks.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Well, thanks for joining us today. We had a great quarter. So let's see everybody in July.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Matthew T. Farrell, President and Chief Executive Officer
• Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations

Analysts

• Chris Carey, Wells Fargo Securities
• Rupesh Parikh, Oppenheimer Holdings Inc.
• Dara Mohsenian, Morgan Stanley
• Andrea Teixeira, JPMorgan Chase & Co.
• Nick Modi, RBC Capital Markets
• Peter Grom, UBS Group AG
• Anna Lizzul, Bank of America Co.
• Bonnie Herzog, The Goldman Sachs Group, Inc.
• Olivia Tong, Raymond James
• Lauren Lieberman, Barclays PLC
• Javier Escalante, Evercore ISI
• Filippo Falorni, Smith Barney Citigroup
• Brett Cooper, Consumer Edge Research