Church & Dwight Company, Inc.

Please stand by. Your program is about to begin. If you need assistance during your conference today, please press star zero. Good morning, ladies and gentlemen, and welcome to Church and 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 that are described in detail in the company's SEC filings. I'd 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.

Good morning, everyone. Thanks for joining us today. I'll begin with a review of the Q1 results, and then I'll turn the call over to Rick Durker, our CFO. And when Rick is done, we'll open the call up for questions. Q1 was another solid quarter for Church and 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 a majority of our categories. Adjusted EPS was 96 cents, which was 11 cents higher than our 85 cent 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, Grafico has partnered with Church & Dwight and driven OxyClean to be the number one powder pre-wash 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 Grafico 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% of 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 Extra 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 PowerSheets laundry detergent, which was launched online in August of 2023. Arm & Hammer was the first major brand to offer this new unit dose form in the US. Now due to its online success, PowerSheets is now available in select brick and mortar retailers. PowerSheets 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 mouthwash. Thoroughbreath Mouthwash and Hero continue to perform extremely well. Thoroughbreath is the number one alcohol-free mouthwash brand and is now the number three brand in total mouthwash with a 16% share. Thoroughbreath recently entered the antiseptic segment of the category with the launch of Thoroughbreath 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 and patches combined with adjacent consumer needs, such as the 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 showerhead 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 plan to stabilize our vitamin business through changes to 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 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 call-outs, 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 SBD 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, 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.

Thank you, Matt, and good morning, everybody. We'll start with EPS. First quarter adjusted EPS was 96 cents, up 12.9% from the prior year. The 96 cents was better than our 85 cent 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 makes 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 $1.5 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, 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 inorganic 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 MEGALEC business as well as GRAFICO 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 of product 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 7 cent drag on EPS. As a result, we expect adjusted EPS of 83 cents per share, down 10% versus last year adjusted Q2 EPS. And with that, Matt and I would be happy to take any questions.

Thank you. At this time, if you'd like to ask a question, please press the star and 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star and one to ask a question. And we'll take our first question today from Chris Carey with Wells Fargo Securities.

Hi, good morning, everyone.

Hey, Chris.

Just regarding the queue for Outlook for organic sales to be below the, you know, the run rate that we're seeing in the scanner trends. Rick, you mentioned a trade promotion lapping of Hero-excuse me, I think you said TeraBreath or Hero distribution gains, if you could confirm that. How would you contextualize the drivers of those two items? you know, for the organic sales allocation Q2 being below what we can see in the consumption trends of that in the capital follow-up.

Yeah, thanks for the question, Chris. You're right. You know, 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, Lapping a year ago distribution gains as we went national for Hero was probably the biggest one. And then number two, not getting any contribution from pricing. We've fully lapped 2023 pricing actions as we enter into Q2. And then the third one would be higher coupons and trade for supporting our new products because this is one of our best years of innovations.

That's helpful. The second thing would just be, you know, 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, you know, characterize your expectation for laundry sequentially from here? Clearly, we're seeing the improvement as those laps 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? Thanks.

Yeah, you got a lot of questions there, Chris.

I promise that.

Yeah, so if you look at uh laundry category you got there's a lot going on you got liquid laundry you got unit dose and you got the scent boosters so if you look at the categories the last three quarters for each of those like liquid laundry sort of decelerated year-over-year growth q3 q4 q1 it's like up five up two up two and uh so so it has uh decelerated uh what reason we feel good about uh where we stand right now is we know we lost some sure enough in the early in the quarter Then we normalize the trade spend. And then we're going to have even more couponing and trade going forward. Why? Because we get deep clean that we've launched nationally. 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 in laundry is going to be deep clean. As far as unit dose and scent boosters go, unit dose, that's decelerated as well. Last three quarters, 853. But our unit dose grew 34% in the quarter. So we had a lot of success, a lot of trade done going on there. And then scent boosters, which is a very discretionary category, last three quarters is 211 as far as the year-over-year growth. And we grew 7% because we're a value company. in that category. So we're in a good position both in unit dose and in scent boosters. So then when you talk about how promotional things are right now, like liquid laundry, if you went to Q4 versus Q1, it's up a bit. It's up 70 bps. This is in measured channels, of course. Of course, you can't see coupons as well if you look at IRR or Nielsen. Tom Frantz, The bit of sold on deal went from 33.2 to 33 nine just sequentially so you wouldn't say, well, that's not that big a move, but year over year q1 q1 it's up 180 bits Tom Frantz, So we would still say that if you go down back to pre pre coven time. So 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 were used to be, but I'd say trend-wise, if you threw a trend line, you'd say that it is inching up over the last six to eight quarters. You mentioned litter as well. Litter is the same sold-on deal in Q1 as Q4. It's 15.3, but still up year-over-year, 40 pips, but a long way from where it was. If you went back years ago, it'd be more around 20%. Obviously, we had one competitor that was out of stock for a while. They'll need to, I suspect, be promoting to win back share. But like I said, the horse we're riding there is a hardball. We've got a lot of opportunity in the lightweight litter category. You had a long question, so it's kind of a long answer. Did I hit most of the points, Chris?

That's perfect. I will cede the floor.

Thank you very much. Okay, Senator. Thank you.

Our next question will come from Rupesh Parikh with Oppenheimer.

Good morning, and thanks for taking my question. Also, congrats on the next 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?

Yeah, well, you know, if you look at the category, you know, Q4 and Q1, just round numbers, are both down 5%, you know, down 5%, down 5%. And normally you would expect, you know, the New Year's resolutions and people wanting to get healthy, that that would be a boost to the category. You didn't see it in Q1. So it was two things. It still is probably the tail from, you know, post-COVID. But also, you know, you could also argue that for many people it's the discretionary. So the third thing, though, is 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, you know, our performance, yeah, we've had double-digit decline in Q4 and Q1, so obviously not happy about that. It takes a while to turn that around. You probably are starting to see new packaging 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 reset. 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.

Great. And 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 beat and sounds like strong momentum in April. So I'm just curious in terms of is it just conservatism for reaffirming the guide or is it still just early in the year?

Yeah, 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. Four to five was a great guide. We said four and a half pretty much throughout the year. So I would expect us to talk more about the outlook in July.

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

Our next question will come from Dara Mosenian with 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?

Yeah, okay, another multi-parter. Let's take 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, yeah, 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. I wouldn't be completely alarmed about the Waterpik activity in Q1. You know, the fact that the foster consumption is healthy is a real positive for us. That's a really strong way to start the year.

Yeah, I mean, consumption for Waterpik is up high single digit, low double digit, 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.

Yeah, and as far as our expectations for the year, we called 4% to 5% organic growth for the year. And we expect this ballpark, about 2% of that, to be driven from new product launches, which is a big number. But if you kind of roll through, we've got deep clean, launching in laundry. In Arm & Hammer, we're going national with Arm & Hammer Litter. We're going national with Hardball. So those are our two big businesses on the household side of the house. And then when you get into personal care, Thoroughbreath launching with intercepting 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've got Batiste Touch, Batiste Sweat. You're getting really high ratings. And early days, the 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 it. organic sales growth in 2020, 2024. And that'll probably be one of our biggest years ever as far as contribution of organic sales from new products.

Great, thanks.

Our next question will come from Andrea Tizera with JPMorgan.

Thank you. Good morning. So I was hoping you can talk about the dynamics as you set up your shelves. If there is anything you would call out in terms 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 leader or things like that, that some of them had suffered from, obviously, this 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.

Yeah, well, hey, Andrea, it's Rick. I'll give you a couple of comments 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 in a new product scenario. 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 a 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 through the amount, settle, and deal. It has ticked up a little bit. Private label is up a little bit more. Spending's up a little bit. But by and by, our shares are strong in litter.

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

That's super helpful. Thank you.

Our next question will come from Nick Mody with 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, you know, kind of, you know, reduced marketing, of course, off of very big increases from the year ago. But just wanted to get kind of philosophically, if 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.

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. 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. I 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 brands great. To the extent that we over-deliver and have the momentum, we typically look to reinvest in marketing because it drives share. It drives organic growth and it's a virtuous cycle. On inflation, I would say for us, it's largely unchanged. You know, 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, you know, if there's a theoretical question of 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.

Yeah, and just to add to that, Nick, as you know, we've got a portfolio of value brands, so to the extent that interest rates stay where they are, obviously we have some defense against that. We have found that Hero and Thoroughbred are really high rings, but we've really been unaffected by – 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 I still think we're pretty well positioned, at least for the remainder of 2024. Great.

Thanks, guys. I'll pass it on.

Okay. Our next question will come from Peter Grom with UBS.

Thanks, Operator. Good morning, everyone. I 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 two-thirds of the full year organic sales growth. Has that changed or is that still the right expectation?

Thanks. Thanks, Peter. You know, 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, you know, pre-COVID, you go back 10 years ago, and that was our track record, you know, 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.

Great. And then maybe just a quick follow-up on Dara's question. You know, just kind of on Waterpik and the fact that you expected to kind of reverse and grow for the year, a pretty nice rebound. So just maybe thinking about the sales data from a brand perspective, just in that you over-delivered 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 in Hero and TheraBreath? Or are there other brands where you're kind of expecting things to slow sequentially?

No, look, we think not much changed from our original outlook. 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.

Thanks so much. I'll pass it on.

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

Hi, good morning. Thank you for the question. With 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's question, but wondering if you're seeing this elsewhere as well. And then we've been hearing from some companies this 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.

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. Yeah, 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. 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 it doesn't seem to be translating down into consumption for our products, since you've seen the first four months of the year. I think that's probably because you have to go category by category and brand by brand. Like I said earlier, I do think we're well positioned for the remainder of the year. What was the first part of your question?

I'm just wondering if you're seeing broad trade down. You mentioned some in laundry. Any other categories?

Yeah. Well, look, the predominant portion of our portfolio that is valued is laundry and litter. And in laundry, obviously, we have Arm & Hammer, but we also have Extra. And Extra grew in the first quarter. It was in my prepared remarks, so you'll 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, yeah, we have both a high-priced litter, meaning premium litter, 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 with an 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.

Great. Thanks very much.

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

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 as you step up trade spend and also especially as you look at it in the context of curtailing some of the ineffective promos you mentioned earlier.

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 culled some of those bad promotions. So it's not like we're hiking up trade spend to be above category levels or anything like that. We are just, you know, bumping it back from an artificial low.

Yeah, our practice generally is we're generally below the category average in liquid laundry from a sold-on-deal perspective.

Okay, that's helpful. And then I just had a Another question on international business, you know, 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, you know, how much of the volume growth was driven by distribution expansion versus, you know, just maybe strength in your existing market? Thanks.

Yeah, I think one of the things to point to in international, and you're right that all six subsidiaries are 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. You know, in the past, you may have heard us talk about Global Markets Group. It's grown, you know, 15% annually for a lot of years. Well, and they, it was a global markets group that generally would be driving the international number. Well, that's not true in Q1. In Q1, it's the 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.

Yeah, the second thing that's helping international is a couple of these new brands, Hero and TheraBreath. And, you know, 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.

Yeah, we think that'll build throughout the rest of the year. But that's a nice tailwind on top of what I said in my earlier remarks.

Okay, thank you.

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

Great. Thanks. Good morning. I wanted to ask you about the graphical acquisition and, you know, what drew you to that. Are 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, you know, thoughts on the M&A environment overall, particularly in goods, what you're seeing and interest there. Thank you.

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. That wound up being the basis for starting a very small subsidiary in Germany, which has grown over time. This one is different in that Grafico is a public company in Japan, obviously a microcap. They have been working with OxiClean for 25 years, even before that Church and Dwight bought the business back in 2008. And, you know, they have a very capable team that's driven the brand to be number one pre-wash additive in powder in Japan. And so we benefit then from getting, just buying a critical mass of talent in Japan that now we can introduce our other products into Japan. The thing to keep in mind is 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? Yeah, there could be a couple others, but This is one where we can have a base of operation. This should be a really big business for us given the size of the economy and the population in Japan. But also it's 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's coming on board as a result of this acquisition.

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

Well, look, you know we're always on the hunt. It's the highest and best use of cash for the company. We always 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.

Great, thanks. 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, just a 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?

Yeah, that's really more on your second question. It's more your second explanation. It's incremental couponing to support higher and more new products is the short story. On your first question on amount of promotion and really trade spend, I think it's the same that we told Bonnie. 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.

Yeah, the other thing to keep in mind, Bonnie, is all those price increases that went through the last couple of years, they were really... you know, unusual for all, you know, CBG and food companies. So, yeah, that does obviously make it more expensive for the product, but it didn't necessarily expand gross margins for people. So, yeah, 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.

Thank you.

Our next question will come from Lauren Lieberman with 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, you know, starting next quarter was that lapping on distribution gains from Hero. So I was just, you know, What we can see in Nielsen, which I know isn't representative of the full distribution of the brand, is that, 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 we know it's super accretive, and so I just wanted 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 lapse the distribution. Thanks.

Yeah, 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 that's kind of 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 costs 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.

Our next question will come from Javier Escalante with 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 flag Waterpeak as a point of impact, but we use Circana, and I believe that you guys do too, and the retail takeaway is more about 7%, 8%. So there is a little bit of still kind of like a two-point gap. Do you think that is related to slow retailer reorders as your competitor in laundry mentioned earlier in the season? And I have a follow-up.

Yeah. Are you comparing Q1 for your question? Correct.

Yes. Correct. Exactly. Correct. It's just trying to understand whether this is something – of the accounting of the couponing or something weird that basically we are overstating your retail sales growth and therefore your shipment growth.

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

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 Thoroughbred? What was the driver of the better gross margin for the earnings bid?

Yeah, 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 helped with throughput and efficiencies, and then a little bit favorable mix.

Okay. Thank you very much, guys.

Our next question will come from Filippo Filorni with Citi.

Hey, good morning, everyone. I wanted to follow up your point of the cycling of the distribution gate for Hero and maybe extend it to Theta Breath as well. Can you comment like how much incremental shelf space that you get in this year compared to last year in the U.S.? ? And then I think at Cagney, 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.

Yeah. Okay. Yeah. When you think about TheraBreath and Hero, you know, TheraBreath, we bought that business in 2021, Hero in 2022. So for TheraBreath, you know, with resets this year, we're getting more doors and But I would expect that the distribution gains from a number of doors perspective is going to plateau for Thoroughbred 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, so I think more facings and innovation are going to drive future growth for Thoroughbreath 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 Thoroughbreath, there's still some distribution gains to come with some decent sized retailers, but we expect 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 Thoroughbreath Hero, we're planning on launching in 40 countries in 2024. And that'll 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 Thoroughbred are high-ring products. And so if you're a retailer, you really like a high-ring product with 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.

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

Yep. Okay.

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

Hi, good morning. I was hoping to dig more into the hero business in the U.S. The 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 talk about what you're seeing with respect to existing consumer demand, new users, trial and repeat, and other drivers. Thanks.

Yeah, I didn't hear the first part of your question. I'm sorry. Okay.

know it was just it's the hero business in the us right so huge distribution gains right so you see significant sales growth so just trying to understand i guess one level below and 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 on the sales group uh well look the volumes for this business uh you know continue to grow so it's not it's not a price driven business and um

the awareness and household penetration is still ahead of us for this brand. You may remember that back before patches hit the scene, it was really ointments and lotions and et cetera 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 adjacency.

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.

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

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

This does conclude today's conference call. Thank you for your participation. You may now disconnect.