Church & Dwight Company, Inc.

Good morning, ladies and gentlemen, and welcome to the Church and Dwight First Quarter 2020 Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star then zero. 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 risk and uncertainties and other factors that are described in detail in the company's SEC filings. I would now like to introduce your host for today's call, Mr. Matt Farrell, Chief Executive Officer of Church & Dwight. Please go ahead, sir.

Good morning, everyone. Thanks for joining us today. I'll begin with a discussion of the impact of COVID-19, followed by a review of the Q1 results, and then I'll turn the call over to Rick Durker, our CFO. And when Rick is finished, we'll open the call up for questions. I'll start by addressing the impact of COVID-19 on Church and Dwight. Our priorities right now are the health and safety of our employees, meeting the needs of consumers and retailers, helping the communities where we live, and ensuring the strength of our brands. I want to recognize Church & Dwight employees around the world for their dedication to keep our company going during the pandemic. Church & Dwight has 4,800 employees, and we are committed to each other's safety. We have 3,000 people reporting to work every day who are keeping our plants and warehouses running. We are protecting our employees through temperature checking, working in pods, social distancing, and frequent sanitization of work areas, and we are sparing no expense to promote safety in our supply chain. We have another 1,800 Church and Dwighters who are working from home using Microsoft Teams. We had already invested in the tools to work remotely, so switching to work from home proved to be easy. We are learning how to be a virtual company. We are supporting our local communities with monetary and product donations to local food pantries and shelters, and donations of personal protective equipment and products to local hospitals, pet shelters, and schools. And we are preparing to produce hand sanitizer at our UK plant for both internal use and for donations. With respect to consumers and retailers, we understand the need for our products now more than ever, We have taken steps to increase short-term manufacturing capacity, and we are working closely with suppliers and retail partners to keep pace with increased demand in April. Okay, now let's talk about the results. Q1 was an exceptional quarter. Revenues, gross margin, earnings, and operating cash flow all significantly exceeded our expectations. Our positive results were influenced in part by pantry loading in the month of March. Organic sales growth of 9.2% exceeded our outlook of 3%. Earnings per share of 83 cents exceeded our EPS outlook by 10 cents. Reported sales growth was 11.5%, and gross margin expanded in the quarter. Regarding e-commerce, more consumers moved online. In Q1, 10% of our consumer sales were online, and we have seen growth in all retailer.coms. We expect to easily exceed our target of 9% online sales in 2020. Private label shares are always noteworthy. As you know, our exposure to private label is limited to five categories, and private label shares were unchanged in Q1. Now, to make sense out of March and April, let's take a look at consumption, shipments, and use-up rates. Consumption grew 30% in March for our combined U.S. categories. For the month of April, the good news is that our combined U.S. consumption growth is still slightly positive. This includes both measured and non-measured channels. The brands with positive consumption in April included OxyClean Additives, VitaFusion, and Little Critters Gummy Vitamins, Flawless Women's Grooming, Arm & Hammer Unit Dose, Arm & Hammer Baking Soda, and Orogel Oral Analgesics. The brands with negative year-over-year consumption growth in April include First Response Pregnancy Kits, Trojan, Spin Brush, Batiste, and Waterpik. All right, so that's consumption. Now let's look at shipments. Shipments in March were up significantly across most of our categories, largely due to pantry loading. For the month of April, shipments are tracking to be up 8%. led by laundry, litter, and vitamins for our combined U.S. categories, and continue at elevated levels as we replenish retailer stores and distribution centers. Now, with the backdrop of strong shipments in both March and April, we've attempted to determine use-up rates. We've been conducting weekly surveys to ask consumers if they are using more now than a month ago regarding categories in which we compete. It's not completely scientific, but here's what we learned. In April, our consumer survey showed an elevated use-up rate for household products, including laundry detergent, laundry additives, and baking soda. So, for example, 20% of our consumers say they are washing more, which is good news for the near-term health of our laundry brands and stain finder brands. The exception for household products was cat litter, where there is no reported change in usage. Regarding personal care... our consumers reported elevated usage of vitamins, nasal sprays, and oral analgesics. Most other personal care categories, such as dry shampoo, condoms, pregnancy kits, and toothbrushes, do not report an elevated use-up rate. So, to the extent that those categories experience higher shipments in March, it may take some time to work those off. In the water flosser category, Water pick consumption was down 55% in April due to retailer closures, deprioritization of water flossers by some retailers, and closure of dental offices. As you know, dental offices are closed except for emergency procedures, so there are no water flosser recommendations by dental professionals, which are an important source of first-time buyers. Flawless could be a bright spot, with 10% year-over-year consumption growth in recent weeks in April. With the closure of salons, female consumers are focusing on what they can do at home, and our marketing team has moved quickly to change our marketing messages. Flawless is one of our brands that could benefit from the at-home grooming trend. The dramatic increase in the use of Zoom, Teams, and FaceTime has contributed to the interest in Flawless products so that women can be camera ready. Now turning to investments. In the months ahead, we intend to invest in our business. Innovative new products will continue to attract consumers, even in this economy. There is no pullback in R&D spending or in new product development. With respect to new product launches, many of our new products began shipping in Q1 prior to the COVID impact, although some retailer resets have been delayed due to the virus. And with respect to acquisitions, we are always open to acquiring TSR accretive businesses. We believe we are well-positioned in an economic downturn given our balanced portfolio of value and premium brands and strong balance sheet. In times like these, it is natural to make comparisons to prior recessions for indications of how a company might perform now. In 2009, our organic growth was 4.2%. Today, 37% of our products are considered value, which is similar to 2009 when 40% of our portfolio was value. We have 12 power brands today compared to eight in 2009. Although two of those brands, Waterpik and Flawless, are more discretionary in times of recession, our vitamin brands, which are VitaFusion and Little Critters, are in great demand due to consumer focus on health. And the equity of our flagship brand today, Arm & Hammer, is much stronger, especially in the laundry and litter categories. Our international business is larger today. with a more diverse portfolio and more opportunities to grow, as evidenced by our 9% sales growth CAGR over the past four years. We are well balanced globally with more business in Asia Pacific, and we are less dependent upon more mature markets. In fact, the international business delivered 7% organic growth in Q1 and weathered the initial impact of the coronavirus in Asia. that the 2020 economic downturn is not simply a more severe version of the 2009 recession. There are many differences that influence the path forward. We have social distancing, quarantining, government shutdown orders, retailer closures, the closure of dental offices, and the decline of foot traffic at retailers. And there is always the risk of supply chain interruptions and the potential resurgence of the virus later this year. Because of the virus, consumer trends are emerging which affect our business, including a focus on cleaning, personal wellness, new grooming routines, and a spike in buying online. These consumer trends may endure over the long term, and we are well positioned if they do. In conclusion, there are lots of reasons to have confidence in Church and Dwight. The great thing about our company is we are positioned to do well in both good economic times and in economic downturns. The categories in which we play are largely essential to consumers. We have a balance of value and premium products. Our power brands are number one or number two in their categories, and we have a low exposure to private label. We are coming off one of our best years in 2019 and are entering this downturn in a position of strength and with a strong balance sheet. So finally, we have the resources, the common sense, and the ambition to ensure that our brands perform well in the months ahead. Next up is Rick to give you details on the first quarter.

Thank you, Matt, and good morning, everybody. We'll start with EPS. First quarter adjusted EPS, which excludes an earn-out adjustment and the gain on the sale of an international brand, grew 18.6% to $0.83 compared to $0.70 in 2019. The $0.83 was better than our $0.73 outlook, primarily due to higher volume associated with a significant increase in demand for many of our products in March. Better gross margins and lower marketing. Also included in the $0.83 is a penny drag from FX as the dollar strengthened with the global pandemic and a $0.02 drag from a higher tax rate. We did not have a currency impact assumed behind our Q1 guidance. As we discussed in previous calls, the quarterly earn and adjustment will continue until the conclusion of the earn-out period. Reported revenue was up 11.5%, reflecting a significant increase in consumer demand for our products due to COVID-19. Organic sales were up 9.2%, more than tripling our Q1 outlook of approximately 3%. The organic sales beat was driven by our global consumer growth of 9.6%. We have taken several short-term actions to increase capacity, especially for laundry and litter, due to overwhelming demand. We were able to fast-forward a planned capacity expansion for laundry, and we made the decision in Q1 to exit extra laundry detergent from the less profitable drug class of trade. And in hindsight, the decisions to exit private label vitamins and reduce promotional activity for OxyLaundry were the right ones at a time like this so we can focus on our core products. Now let's review the segments. First, consumer domestic. Organic sales increased by 10.2% due to higher volume and positive price mix. Growth was led by Arm & Hammer liquid laundry detergent, VitaFusion, and Little Critters gummy vitamins. OxyClean stain fighters, Arm & Hammer clumping cat litter, and baking soda, as well as Batiste dry shampoo. One question we usually are asked is, can we bridge our 10% growth for the domestic business back to Nielsen? For this quarter, we have the unusual circumstance of Nielsen and our organic growth are comparable. And actually, there are two large offsetting adjustments. We had 400 basis points of untracked channel growth, largely due to the strong online sales Matt mentioned. So we would say consumption for the quarter was closer to 14%. Our organic growth, as I said, was 10%. So that means inventory at retail declined by 400 basis points as we couldn't fill all the orders in March. One thing to keep in mind during this time is that while scanner data is usually a good barometer for us, the current pandemic has made online growth well exceed brick and mortar. With much of the online class of trade not measured in scanner data, Nielsen data is currently less of an indicator. For example, for the week ending 4-18, scanner data would indicate that we were down roughly 10% in consumption. Well, based on point-of-sale data across all channels that we have, which includes online retailers, our consumption was slightly positive. International delivered a strong quarter for 7.1% organic growth, also benefiting from pantry loading. Growth was driven by Arm & Hammer cat litter, liquid laundry detergent in Canada, and Cure Ash baby wipes and FemFresh feminine hygiene in Australia. Sterimar nasal spray in the U.K. and Batiste dry shampoo in Germany. For our SPD business, organic sales increased 3.4%. Demand continues to grow in the poultry industry. On the other hand, there has been a reversal in the outlook for the dairy sector. Negative market impact from COVID-19 could result in lower milk demand and a negative impact on the dairy industry. Turning now to gross margin. Our first quarter gross margin was 45.7%, a 60 basis point increase from a year ago due to higher pricing and productivity, partially offset by higher manufacturing costs, COVID-related expenses, and effects. The gross margin bridge for the quarter is plus 140 basis points for price volume mix, plus 110 basis points for productivity, plus 10 basis points for acquisitions, less 180 basis points for higher manufacturing costs. of which COVID costs make up 30 bps. Less 10 bps for currency, and then minus 10 bps for distribution costs. Commodities have moved significantly, especially oil. However, for other commodities like ethylene and resins, such as HDPE, while they've moved down, it typically takes six months or longer for them to move in concert with oil. We entered 2020 about 60% hedged, and no doubt commodities will be a tailwind. But unfortunately, the COVID-related costs more than offset any commodity benefit For example, in Q1, we were about $4 million of COVID costs, and that was primarily for the month of April. Moving now to marketing. Marketing was down 1.7 million year over year. Market expense as a percentage of net sales decreased 110 basis points to 8.3%. Q1 is typically our lowest quarter for marketing spend as new products have yet to be launched. We delayed March spending to the back half with consumption in late Q1, and likely Q2 being primarily driven by demand related to the coronavirus and less by marketing activities. For SG&A, Q1 adjusted SG&A increased 40 basis points year over year, primarily due to intangible amortization related to acquisitions. Net operating profit, adjusted operating margin for the quarter was 24%. This represents 130 basis point increase over Q1 2019. Other expense all in was $15.2 million, primarily driven by interest expense. And for income tax, our effective rate for the quarter was 23.2%, compared to 21.9% in 2019, an increase of 130 basis points, primarily driven by lower stock option exercises. This was a two-cent year-over-year drag on EPS in Q1. And now to cash. For the first three months of 2020, cash from operating activities increased 71.5% to $237 million, or almost a $99 million increase from prior year, due to higher cash earnings and a lower increase in working capital. Our full-year CapEx plan has gone from 90 million to 80 million, largely due to delayed start dates. The pandemic has limited access to plant locations, and IT upgrades are being delayed. Our liquidity is strong. We strive to maintain our credit rating while expecting to be sub-two times by the end of the year. As we've previously communicated, we're experiencing a significant increase in consumer demand for many of our products, and thus cash flow is stronger. Furthermore, during January and February, we proactively termed out our CP borrowings until the second and third quarters at favorable rates. Those actions eliminated a need for us to access the commercial paper market for the remainder of the year. Our current cash balances exceed $1 billion, as we drew $825 million from our revolver, giving us ample flexibility. We're confident in our liquidity, which is why we haven't issued long-term debt, even though the market is open for us. The great thing about revolver drawdowns is that they are quickly repayable. Now turning to the outlook, the company previously issued its fiscal 2020 guidance on January 31st, 2020, which did not include the impact of COVID-19. As you read in the release, due to the rapidly evolving situation, the high degree of uncertainty relating to the impacts of the virus, including consumer demand and global economy, the company is withdrawing its fiscal 2020 guidance. As for the second quarter, the company's primary focus is ensuring the safety of our employees a sustained supply to retailers to keep pace with higher demand and maintaining the strength of our brands. And that is really the extent to which we will comment on the outlook. Wrapping up, yesterday the Board of Directors declared a regular quarterly cash dividend of $0.24 per share, a 5.5% increase versus a year ago. That's the company's 477th regular consecutive quarterly dividend. And with that, Matt and I would be happy to take any questions.

No questions.

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Our first question comes from Rupesh Parikh with Oppenheimer. Your line is open.

Good morning. Thanks for taking my question, and congrats on a strong quarter. Hey, Rupesh. Hey, Matt. So I guess just starting out with flawless, I mean, really surprising commentary in terms of the strength that you're seeing in April on the consumption side, even with some of your customers, all the bad dots beyond with all their closed stores. So just any more color, I guess, in terms of, you know, are consumers now buying this product more online? I know you gave some more color of, I guess, women using more Zoom and using your product more, but it's just really impressive to see those results and just trying to better understand what's driving that strength and where they're buying the product.

Yeah, you know, in fact, if you look at the weekly numbers, it went 0%, 10%, up 35% year over year. So it's been building through the month of April. And, yeah, you're right. If you go back to some of the things we said, we said we're going to expand our distribution points by 15% in 2020. So that's done, check. But you are right that people are moving online. So we've seen a big uptick in our Amazon sales. And, of course, other retailers also have the dot-coms as well. But Amazon is up big time for us in April year-over-year.

Yeah, and the only thing I'd add to that, Rupesh, is about 20% of that business is in retailers that have closed down. So when we say those consumption numbers, that's even more impressive.

Yeah, which is where you were going. It's remarkable considering the specialty stores are closed, and yet they're up year-over-year.

Okay, okay, great. And then just from a, I guess, out-of-stock perspective, So clearly, you know, you had a strong month of shipments in April. If you look at, I guess, across all your categories, like are your products now fully stocked at all the retailers that want your product? Or if we go to stores, will we still find out-of-stocks in some of your key product categories?

I'd say if you look at that 8% shipment growth in the month of April, you know, the big drivers there would be laundry, litter, and vitamins. So that's where you would find more of the out-of-stocks for us. We got wiped out in March.

Okay, so there's still a lot to talk about even today then at retail, you're saying?

Yeah, absolutely. Absolutely, right. So we're still playing catch-up for those three.

Okay, and I guess my last question, just as you look at the promotional backdrop, Sokovia has been less promotional lately, but just any thoughts in terms of what the environment could look like for the balance of the year?

Yeah, well, I can tell you what it'll look like in Q1. If you look at the laundry category in Q1, the amount sold on deal was down 280 basis points. So everybody pulled back. So P&G, Henkel, and Church & Dwight all pulled back in Q1. That's in the laundry category. And Litter was up 20 bps for the category sold on deal. It was entirely driven by Tidy Cat as Arm & Hammer had pulled back on promotions as well as Fresh Step. It's really too early to tell right now. A lot of retailers just eliminated a lot of the promotions just because people were going to stores, in any case, buying product. So they were reduced in the end of March and early April. So I don't care to speculate right now with respect to what's going to happen in the promotional environment.

Okay, great. Thank you.

Okay, Rupesh.

Thank you. Our next question comes from Dara Mohsinian with Morgan Stanley. Your line is open.

Hey, good morning, guys. Hope you're doing well. Hey, Dara. So, Matt, I was curious for your thoughts on potential consumer trade down as we move beyond the social distancing phase of COVID. You're in a fairly unique position, as you mentioned, with a mix of premium and value brands. So, Are you expecting significant consumer trade down? Have you seen anything so far that would indicate it's to come? And how do you think you're positioned for that?

Yeah, it's too early right now to make any predictions with respect to trade down. Once all the shelves get restocked, and you find that across a lot of categories, if you've spent any time in supermarkets lately, that won't be able to tell, okay, what's attracting consumers to move from, say, premium to mid-tier or to value. Your question, I'm sure, is more directed towards laundry detergent. That's one of our biggest categories, and we benefited greatly back in 2009. We still have what I would call the unfair advantage that we are the only advertised brand in value, and the brands we compete with are Purex and Sun. So we still stand to gain should there be a movement down from premium to value laundry detergents. We feel like we're in a great place, you know, because if you go back to 2009, 40% of our products were value, and today they're 30%. So we largely look just like we did back in 2009 as far as our portfolio.

And I would remind you that organic growth in 2009, you know, I'm not saying that's what it would be, but as an indication of how we do in recessionary times was about 7%. for the domestic business.

Right. Okay. That's helpful. And then specifically on Trojan and Batiste, you mentioned some weakness there versus strength in the rest of the personal care portfolio and some of the other brands. Can you just give us a bit more detail on the extent of weakness there? Is that a category growth phenomenon, and is that something you see lingering going forward, or do you think that's more temperate?

Well, Trojan and Batiste did well in the first quarter. So now it's an April phenomenon. So they're down significantly in the month of April. And the simple reason is that people are staying at home. So if you look at what's going on with Batiste, when we did a survey with respect to USAP, that's down significantly. It was somewhat pantry-loaded in March. And if you look at Trojan condoms, as far as the impact of social distancing and quarantining, people are having less sex. So it's natural that Trojan is also going to be a dam until those restrictions are lifted.

Okay, great. Thanks. Okay.

Thank you. Our next question comes from Kevin Grundy with Jefferies. Your line is now open.

Hey, good morning, guys, and I hope you're doing well. Hey, Matt. I want to start just on some of the tailwinds that have emerged this year and how you're thinking about investment and how perhaps those investment priorities may have shifted. So consumer demand clearly significantly higher, promo levels down significantly, at least for now, commodity costs sharply lower. So a lot of things kind of going your way and understanding that you withdrew guidance, but perhaps even at a high level, Matt, just maybe talk about how you're thinking about investment and how that shifted perhaps over the past two to three months.

Okay. Yeah, well, I mentioned in my opening remarks that the annual spend on R&D and new products is unchanged. In fact, that would be one of the destinations we'd want to spend back this year. Rick commented on CapEx, and we went into the year with a $90 million plan for We're at $80 million right now, but for the simple reason that we just can't get access to the plants. Neither we can get access to the plants or the third parties that might be helping us with the equipment installations. So we went from $90 to $80. The other thing is part of that dip of $10 million was related to IT projects. Same issue there is limited access. As far as the trends go, I mentioned some of the trends that I think are going to help us. One is cleaning. and obviously we have some really strong brands there, not just Arm & Hammer and Extra, but we also have OxyClean. So OxyClean had a really big month of March and also strong in April. Personal wellness is next. So we have two plants, two captive plants that make gummy vitamins, obviously in great demand right now. So naturally, you would think the consumer would be far more interested in the gummy vitamins that are directed towards immunity or to help immunity. So that would be a destination for us. And, you know, the new grooming routines is the other one. You know, people want it to be camera ready. That certainly benefits Flawless. So that would be a destination for marketing dollars. If you put more money behind that technology, because it is a new brand and it's one that we see a tremendous amount of opportunity and growth going forward, be another one to invest in.

And maybe one other one is just from a cash investment. We are investing a little bit more in capacity in the supply chain, right? I said in my remarks about a new laundry capacity. We're looking at cat litter as well. You know, we're making sure that we're well positioned for the future in this surge of Laundry litter vitamins is an example.

Yeah, in fact, we have a new laundry line coming online right now.

And then also co-packers, right? We want to make sure we have backup supply, and so we're also investing in our partners.

Yeah, that's a good point. One of the things I mentioned is we always have the risk of the resurgence of the virus later in the year. And also you have upstream risk in the supply chain. So it's not just our plants, but you worry about suppliers of raw packaging materials and also co-packers. So we can make some investments to make sure that we have some redundancy across our supply chain should it resurge or get any worse later this year.

Okay, that's helpful. I'll ask just one more and then pass it on. From a capital deployment perspective, maybe talk a little bit about the timing there in terms of when you think, as best you know today, it'd be more viable to potentially transact. And then what are you seeing in the environment? We're all kind of watching the same trends. There's been an obvious shift to e-commerce. Working from home will become more prevalent. And then also, Matt, I'd be curious to get you with those trends, point number one. And then point number two, the past couple deals, water pick and flawless, longer replacement cycles, more discretionary, sort of less defensive. Does the current environment inform the view at all? Do you think perhaps we would go back and the next sort of asset you'd look at would be more sort of daily use, consistent with sort of the core portfolio? I'll pass it on. Thank you.

Yeah, that's quite a list of my last question. We'll start with M&A, Kevin. Yeah, in my remarks I mentioned that we're open for TSR creative acquisitions right now. We have a very strong balance sheet, and so the window is open. As far as Waterpik and Flawless go, yeah, you're right. Those were two brands that have longer purchase cycles. Flawless is a new brand, only been around for a few years. That's a shorter purchase cycle than Waterpik. Waterpik is three to five years. Flawless may be more closer to six months or so because it's a less expensive product. I wouldn't say that... we would preclude acquiring a device. Both of those brands met all of our criteria, that they were number one or number two brands, they were fast-growing, they had high gross margins, and they were asset-light. So whether it's a device or, as you say, a traditional brand, either one would be attractive to us. And certainly Waterpik is impacted positively. right now in comparison to prior years because of the closure of dental offices. That's a big source of recommendations for us for the use of water flossers. So once that is resolved, that should definitely help that business come back to life. I don't know if I hit all your questions, though, Kevin. What else did you ask?

No, no, no. That's perfect. Thanks for the time, guys, and be well. Okay.

Thank you. Our next question comes from Lauren Lieberman with Barclays. Your line is now open.

Great. Thank you. I just wanted to go back to the decision to draw on the resolver. I mean, Rick's point is clear that it's easy to repay. But just given the fact that sales are coming through so strongly, right, so you're talking about a more certainly seemingly more positive than negative outlook, You don't have a need to tap into commercial papers. So why draw on the revolver at all?

Yeah, no, it's a fair question, Lauren. I think it's all about uncertain times. And I think in my prepared remarks I said we still expect to be levered less than two times by the end of the year, so you can infer what you want from that. But it's really about uncertain times, and we just put the cash on our balance sheet. We have no plans of doing anything with it, and we'll likely get repaid before the end of the year.

Yeah, and the good thing about that is these things are easily repayable.

Yeah, okay. And then just thinking about just the trade-in, I know you'd said, Matt, it's early to gauge. Just one thing I thought was interesting to look at is how much your market shares in laundry have grown versus 2009, right? So it's like You know, you, like I said, only advertised brand in that price sphere, but you really capitalized on the opportunity back in the financial crisis and largely held the share that you gained. In the work that you had done, presumably even pre-COVID, any thoughts on kind of the structure of the laundry category long-term? Because I think there's an element of some categories that feels like there ends up being a ceiling to how the price to your shakeout over time, you know, private label value premium. And any thoughts you have on what that could look like for laundry?

Yeah. Yeah, if you go back to 2009, our laundry shares were around 7.5%. And, you know, today they're 15%. So we're much bigger in laundry than we were back in 2009. The shared donor over time has been the mid-tier laundry detergent. And premium has been winning, and value has been winning. So consequently, we would expect that would continue over time. You saw Persil come into the high end, you know, brought their product in from Europe, seeing an opportunity also, presumably, to grow share in the premium end. And then on the other end, you know, I talked about back in 2009 – We weren't even a national brand. We weren't in all doors and all classes of trade, even for Arm & Hammer. So we're way, way stronger today and more recognizable as a brand. And I always say we have the unfair advantage of being the only advertised value brand. So I think we're positioned for growth in value long term.

Okay, that's great. And then one of the questions I had was the marketing spending issue. I was just surprised to see that you could adjust as quickly as you appeared to just even during the quarter. Now, that may be because you book your marketing on a kind of sales curve basis. But I was just curious about that because it seemed like, not that it's not a smart decision, but very quick to be able to adjust, you know, intra-quarter. So I was curious about that, too.

Yeah, well, hey, Lauren, it's Rick. I would say we were only a few million lower in March than we had originally planned to be. Remember, Q1 is our lowest quarter of spend anyway. Usually Q2 and Q3 are higher numbers for us. So it wasn't that big of an adjustment, and typically we're pretty nimble, so we were able to react pretty quickly in March.

Yeah, we moved really quickly in March to move Q2 out to the second half because we could see what was coming. So that was clairvoyant on our part to make that decision.

Okay. All right. Thank you so much. Yeah.

Thank you. Our next question comes from Steve Powers with Deutsche Bank. Your line is now open.

Great. Thanks. You guys mentioned tight inventories and that you're catching up, but do you have a sense when you think you'll fully close that, fully close the gap, is it 3Q best guess? And is it more at this point about your ability to supply to demand, or is it about retailers' ability to focus across categories beyond, like, food, cleaning, paper, and water?

No, I think we're focused on our categories, the three categories that I mentioned. You know, vitamins – We got wiped out in March, and that's a big part of the shipment increase in 2000, pardon me, in April. But, you know, consumption is way up. You know, when we did that use-up study, we learned that consumers are taking far more vitamins than they were a month ago. So I wouldn't say it's going to take until Q3. That would be a long way out. You know, we've got two months to go here. Steve. So we would hope to, by the end of the quarter, to have resolved all of our issues in all classes of trade.

Based on what we know today and based on what incremental consumption is.

Right.

All right. Great. And I guess on the topic of redundancy, which you also mentioned, I guess as I think about the go forward, I guess two perspectives on redundancy. One is on this topic of retail inventories, do you think retailers, when they build back those inventories, will actually build back more inventory to prepare for a potential recurrence in the second half or into 21? And how does that factor in your thinking? And then from your own cost perspective, is there a way to size some of the supply chain redundancies that you're putting in place now from a cost perspective? and, you know, and how much of what you're doing now is likely to, you know, be like a structural cost that we'll be thinking about, you know, into the future.

Yeah, I'll take the second one first. You know, it's Rick. You know, I kind of alluded to what the COVID costs were in the month of March, and that would include things like, you know, COPAC or upcharges or structural stuff like that. The capacity structure of like for laundry and for vitamins and for litter, those are CapEx investments that we would be making anyway, and some of them have already been completed or underway. We would just be moving the timeline up on some of those things. So, you know, I don't think we're ready to really frame out exactly how big that would be. I would just tell you that it was $3 or $4 million in the month for March, and one aspect of that happened to be some Copacabana charges, along with You know, cleaning costs, higher labor costs internally, donations, you know, even our revolver fees are thrown into that. So that's the second question.

Yeah, and it's your first question with respect to retailers building inventory. We don't have anything conclusive on that right now, Steve. I did mention in my remarks that there's the potential for the resurgence of the virus in the fall. The good news for us is that we have, for example, we have three laundry plants and we have new capacity coming online right now. So we can build some inventory in anticipation of that. So we'll be in a better position to take advantage of it were it to happen. The same is true for vitamins having two captive plants. Again, we can build inventory and we can be in a position should it resurge later in the year. So we like where we're sitting right now, particularly with respect to Those two trends, you know, cleaning and personal wellness. And the other one, as far as the new grooming at home trend, you know, flawless early days. Looks like they're well positioned as well. And, you know, even when everything opens up, you know, I think people are still going to be doing a lot more Zooming and FaceTiming and using Teams going forward. So there will be a need for that product as well. All right. Great. Thanks so much.

Okay.

Thank you. Our next question comes from Olivia Tong with Bank of America. Your line is now open.

Great. Thanks. Good morning. I just want to dig a little bit deeper into what you're expecting on the evolution of demand and your view on your ability to take share given more value-tilted price points as we emerge out of the stock-up phase and then obviously into a recession. There's obviously a need to replenish at retail, but it seems like home pantries are pretty full now. So do you think that the fact that home pantries are as full as they are helps or hurts you in terms of your ability to grow share when we come out of the lockup?

Yeah, well, you know, one thing, Olivia, is you're kind of assuming that all categories are fully pantry loaded. And what Matt said in his prepared remarks I thought were good comments. Like for some of our big categories like laundry and vitamins, it's incremental consumption. And you heard, you know, Proctor the other day say that about 20 percent of incremental laundry consumption, and we would actually agree with that according to studies that we've seen. So part of it is there's incremental consumption, and like in April we saw big spikes in consumption for laundry, and we're still seeing positive, you know, positive numbers in April. So that would tell you that the deloading isn't really happening, so it's real consumption for laundry as an example.

Yeah, Olivia, some of the brands I mentioned that had positive consumption in April were OxyClean additives, R2 vitamin gummies, VitaFusion and Little Critters. Flawless was up in consumption, Arm & Hammer unit dose, baking soda, and also oral analgesics. So all of those had positive consumption. And remember we did the studies we did with respect to people using more. For personal care, we found vitamins and oral analgesics, which is Orgel, were elevated. And we also found that laundry detergent, laundry additives, and baking soda were all elevated as well. So that's why I said in my remarks, you've got to look at three things, shipments, consumption, And to the extent you can get it, some use-up rates. And it's not scientific, but it does give you some indication of which categories will the pantry loading be worked off faster than others.

Yeah, here's a great stat on baking soda. I think in March, consumption was up 65% or 70%. In April, it was still up 55%, 60%. So as you can see, it's just consumption and consumption and consumption.

Great. That's helpful. And then can you talk a little bit about your discussions with your retailers about how they're thinking about some of the longer-lasting impact of this pandemic? Obviously, I'm not sure even if those discussions can happen right now since everybody's still focused on keeping shelves stocked. But as we come out of this, you know, what's your expectation there in terms of, you know, any changes in terms of brands or carry, how many products they shelve, assortment, just thinking about, you know, affordability and also just how much, how many brands they want to carry. Thanks.

Well, look, I think we haven't had those sorts of discussions with retailers right now. If you look at some of the consumer trends and some of what's written about consumers is that well-known brands and bigger brands are more likely to do better than less well-known brands. And so that's real good for us because, as you know, we have 12 brands that are very recognizable that are number one or number two in their category. So I think Bigger brands, well-known brands will probably likely do better than the smaller ones right now because people will trust the bigger brands.

Yeah, as you would expect, most of the conversations happening right now are about supply and stock and those types of numbers.

Great, thank you.

Okay, Olivia.

Thank you. Our next question comes from Joe Adubello with Raymond James. Your line is now open.

Thanks. Hey, guys. Good morning.

Hey, Jeff.

I just want to go back to something you just said, Rick, about what's truly incremental, right, in terms of usage. If you look at your U.S. business, for example, the organic number was plus 10 this quarter. That's been trending plus 3 to plus 5, let's call it, over the last two, two and a half years. Is there a way to quantify how much of that delta stays with you for the rest of the pandemic, for example, how much of that was truly just pantry loading?

Yeah, you know, we tried to do it back at the envelope, Joe, and it's really a best guess is what I'll caveat this as. But we would say for Q1, our outlook was 3% organic. We were tracking to probably 4% organic pre the outbreak. Our best guess is that part of the laundry incremental sales in vitamins was has incremental consumption in there. So maybe around 6% or so would have been organic in terms of consumption driven with the virus. And then the balance of that going to 9% would be the incremental for pantry loading. That's just the back of the envelope, and that's our best guess.

Okay, that's very helpful. And just secondly, on shelf space, you touched on this a little bit earlier, but it seems like consumers are gravitating toward bigger brands, leading brands, and I imagine retailers are focusing on that more. Would you guys expect to come out of this with more shelf space than you had going in?

Well, that's the dream for sure. I think the ability to supply can influence the shelf space. So to the extent that you have voids and you have other competitors that may have difficulty in producing product or getting access to product, we stand to gain, right? So, for example, in laundry, we've got this new capacity coming on. To the extent there are upsets for any of the smaller brands, we would be able to fill those.

And maybe one other comment on the pantry loading that we talked about last question, Joe, is for a lot of our value portfolio for lower-income consumers, they can't afford to pantry load. So it really is a lot of consumption, especially for the value brands.

Okay. Great. Thank you, guys.

Thank you. Our next question comes from Andrea Texiera with JP Morgan. Your line is open.

Thank you. I hope all is well. Just coming back to the Clean and Simple Launches Fund, so how are you tracking and did you see how did the displays work out amid the pandemic? And then I have a follow-up on the bridge to the second quarter. Okay.

Yeah, we're super excited about Arm & Hammer Clean & Simple, Andrea. Thanks for asking. So that started shipping before COVID-19 hit. And, you know, we have spread out. We've gotten actually more distribution at one retailer in particular than we expected, and also as a result of COVID that we're able to spread out even more. So that's really good news. It's still early. Obviously, the retailer traffic in stores is way down. So, you know, to the extent of spending money on the displays, et cetera, it's probably not a good spend right now. But it is on trend. You know, this is a detergent that has six ingredients, and most detergents have 15 to 30. So we're well positioned and on trend for the consumer that believes less is more.

And you were in New York, Andrea. You saw how big of a deal we thought it was, and we think this is one of the biggest launches that we've done, period.

Now, that's helpful. And just to follow up on trying to bridge the consumption and the shipments, and I know we're getting that voice here in the comments for the second quarter, you said the consumption outpaced shipments by 400 business points out of channels in the U.S. in the first quarter, and you're looking for 800 business points shipments in April. So... Like just trying to bridge and you called out to the prepared remarks that you that you expect to be stocking in May and June. So just trying to think about how how the puts and takes into the second quarter. So you're looking at a negative shipment trend in May and June, or you're still going to be elevated because of what you mentioned in terms of consumption.

Yeah, I mean, it's a pretty detailed question, and we said we're not going to give an outlook. I would just tell you if you do the math, and even if shipments are zero in May and June, you still have positive shipments for the quarter is kind of what I would tell you. But, again, we're not going to get into trying to forecast the next 30 days or 90 days because it's just too volatile right now. We can just tell you that retail inventories are low. They need to get back in stock. We're going to have higher shipments. And some of the Nielsen reporting that you may have seen over the last couple of weeks was just flagging negative consumption. And we wanted to say, well, that's not really true. It's actually slightly positive because of all the untracked channels that there's not visibility to. So it's actually a little bit better.

Yeah, and we thought that providing some shipment information for April would be helpful so everybody could understand kind of where we are And that 8% number is a U.S. number. International is more around 7%. And even our specialty products business is running ahead for April.

So really encouraged about the start for Q2.

Yeah, but can't make any predictions with respect to May and June.

Okay, that's fair. Thank you very much. Okay.

Thank you. Our next question comes from Steve Smith. Strykola with UBS. Your line is now open.

Hi, good morning, and congratulations on a good quarter. So my question would be, on the decision to withdraw guidance, you know, a lot of companies are doing it, so no real surprise there. But we really want to just understand, is this a function of achievability or just a wider range of scenarios? And I ask this in the context, because Q1 was strong. You have very little emerging market exposure. Commodities are deflationary. And the portfolio tends to do well during a recession. So if you could just help me through the mindset as to how you push back against someone saying, well, isn't your guidance still pretty achievable? And I have a follow-up.

Yeah. Okay. Well, here's – if we knew the answers to the following, which would be, you know, what's going to happen with government shutdown orders and how long will social distancing continue, quarantining in different parts of the country, Which retailers are going to remain closed? When will they open? What will be the store hours? What kind of foot traffic do we think they're going to have? And when are dental offices going to reopen? There's just none of these questions have ever been asked. None of these conditions have ever occurred in a prior economic downturn. So we looked at those and we said, you know, there's just too many other factors right now that we can't predict. So consequently, the sensible thing to do is just withdraw guidance.

Yeah, if you would have seen this more like 2009 and it was higher unemployment or a financial recession, we would have definitely just kept guidance out there.

Yeah, I was with the company in 2009, and we did not withdraw guidance. And we had a good year. I think the company's organic sales were 4.2% in 2009, and the U.S. business, I think, Rick, was up around 7% in 2009, so. This is not just a more severe version of 2009. It's different. Okay.

And in that vein, is there any way to help us just think about if we drew a T-bar about, like, what you put in, like, parts you feel pretty confident about and maybe what are, like, more the left-tailed type of scenarios? What would you kind of say that – because you have added some businesses to the portfolio relative to where we were in 2009 – any perspective there would be helpful. And then Rick, can you comment on what percentage of the portfolio is now hedged through 2020? And so we can think about, you know, what's locked in versus exposure for 2021. Thanks. Uh, yeah.

Well, in 2009, we had, uh, eight, uh, power brands. Uh, today we have, uh, uh, 12 and, um, you know, the four that we added were, uh, Batiste, uh, vitamins, um, Waterpik and Flawless. And if we just took those, we see vitamins is a terrific place to be right now compared to 2009. In 2009, what really pulled the train for us was value laundry detergent because it's a big trade down. Right now, we still have value laundry detergent. It's way stronger than it was back in 2009. And We have vitamins, which is a second engine to help us pull the train through an economic downturn. Yeah, it's true that Waterpack is down right now big time because of the dental offices closures, but there is a therapeutic need for water flossers. So we expect that that should start coming back. I don't know when those dental offices will open up. Those recommendations will start again, but that will happen at some point. flawless looks like in recent days, we could benefit from, I mean, obviously that was a brand that was off to a rough start when we first purchased them, but we feel real good about the signs that we're seeing more recently in the month of April. So when you have more brands and you have more categories, you've actually spread your risk more. So we're actually in a better position now than we were in 2009. We've got a lot more degrees of freedom, and a lot more weapons.

And then in terms of hedging, I said in my prepared remarks, I think we're about 60% hedged in 2020, and we're about 25% hedged for 2021. But you will likely see us not do a lot of incremental hedging. In times like this, it's best to let demand play its course to see what happens to the commodity market. Great. Thank you.

Thank you. Our next question comes from Bill Chappelle with SunTrust. Your line is now open.

Thanks. Good morning. Hey, Bill. A couple things. One, just on costs, I know it's still early, but any kind of thoughts on resin surfactants as we move, you know, over the next few months? I realize you're hedged, but just kind of the long – would it change – how you hedge out as we go into 2021?

Yeah, no, it's a fair question. A little bit of what Steve said or asked. I'll start with that first. We're 25% hedged into 2021, and we're not going to layer on, in our opinion, much more hedges because it's really a demand game right now for those markets, and demand is down. So we're going to wait and see how those commodities shake out. But by and large, I'll give you some examples. Oil is down 50%. But ethylene is down 9%, and HTPE is flat. Polypro is down 7%. That's just spot pricing from February to March. And that just shows you, you know, what we've said for a long time is it's disconnected from oil unless oil stays down for a long time. So when I say long time, you know, four to six months. So, you know, that could be a tailwind, but we have to wait and see how that plays out.

Got it. And then just on the marketing advertising near term, you know, I guess the question of are you seeing or expecting some changing trends as we come out of this? You may have heard my state of Georgia is moving a little bit faster than others. And, you know, as people go back to malls this weekend or just regular stores, you know, be it pregnancy kits, be it vitamins, be it, you know, do you change some of your marketing advertising to kind of, to adjust for some near-term trends, or do you really just kind of push everything towards the back half?

Yeah, no, that's a great question, Bill. Yeah, no, all of our marketers have been very busy adjusting all of our marketing messages to be contemporary in recognizing the change in consumer behavior. You know, you have an advertising, now that you can't go to the salons, fill in the blank. Now that you can't go to the dental office, fill in the blank. These are things you have to communicate to the consumer that recognizes the circumstances that they're in. So we've been racing to do that for all of our brands. And because the consumer is moving online, we're spending a lot more money changing our digital messages, and we think we're probably going to spend more on digital media as a percentage in total this year than we have in the past year.

Got it. Thanks so much. Okay, Bill.

Thank you. Our last question comes from Mark Astrichan with Stiefel. Your line is now open.

Yeah, thanks, and good morning, everybody. I wanted to ask on e-commerce adoption. So you touched on just how much bigger it seems to be. I think we've seen that across a whole bunch of companies thus far coming out of what's going on. what would be your expectations on how much of those consumers buying online stay that way and away from stores? And specifically to your business, how do you think about your online position and share, and how do you capitalize on kind of that opportunity, especially in key categories?

Yeah, I would say it's a permanent change. It's a permanent step up in online sales. I think a lot of people who had not purchased online, late adopters, have discovered it now because of quarantining and requirements to stay at home. You see a big uptick, not just in online sales, but also click and collect. So buy online, pick up in store is up huge as well. So these have all been discovered by consumers. So I think that's a permanent change. And we probably got a few years of development in a couple of months for his online sales. So that's good. We would look at that as a good thing. In 2015, we had 1% of our sales online. Last year, 8%. This year, we had a target of 9%. We'll probably well exceed that. So we've done a lot of work over the last few years putting ourselves in a position to be a formidable competitor online, and I think we are. So we think that we're fine with that trend. where it were to happen. Thank you. Okay, Steve.

Thank you. And that does conclude today's question and answer session. I would now like to hand the call back to management for any closing remarks.

Yeah, I think we're in a great position going forward. As I said earlier, we perform well in good times and in bad. We've got to terrific balance sheet, lots of cash, strong brands, and I think we're well positioned for what's coming. And we'll talk to everybody again in August.

Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect.