Church & Dwight Company, Inc.

Please stand by. Your conference is about to begin. Should you require operator assistance today, simply press star and zero. Good morning, ladies and gentlemen, and welcome to Church and DeWitt's second quarter 2024 earnings conference call. Before we begin, I have been asked to remind you that on this call, the company's management may make forward-looking statements regarding other things, the company's financial objectives and forecasts. These statements are subject to risks and uncertainties and other factors that are described in detail in the company's SEC filings. I would now like to introduce your host for today's call, Mr. Matt Farrell, 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 Q2 results, and then I'll turn the call over to Rick Durker, who's our CFO and Head of Business Operations. And when Rick is done, we'll open up the call for questions. So Q2 was another solid quarter for Church & Dwight. Reported sales growth was 3.9%, which beat our outlook of 3.5%. And that was thanks to strong results across the board from domestic, international, and specialty products. Organic sales grew 4.7%, which exceeded our 4% Q2 outlook, with volume accounting for a very healthy 3.5% of our growth. Adjusted gross margin, expanded 150 basis points. At the same time, we increased marketing spending, and we gained market share in the majority of our categories. Adjusted EPS was 93 cents, which was 10 cents higher than our 83 cent outlook. That was a quality quarter and Rick will take you through that later. The results were driven by higher than expected sales growth and gross margin expansion. And we continue to grow in the online class of trade with online sales as a percentage of global sales now reaching 21.2%. Now I'm going to turn my comments to each of the three businesses. First up, is the US consumer business with 3.8% organic sales growth. Volume growth was 3.3%, making this the fourth consecutive quarter of volume growth in the US. As you read in the release, Church and Dwight had the highest dollar consumption growth among our top 10 peers. And five of our seven power brands gained market share in the quarter, with a few hitting all-time highs. Now let's look at a few important categories in the US. innovation is a big contributor to our success this year. And as I comment on the categories, I'll highlight the success of our new product launches. I'm going to start with laundry detergent. So Arm & Hammer liquid laundry detergent consumption outpaced the 1.6% category growth and achieved an all-time high record share in the quarter of 14.8%, which is up 20 bps. Arm & Hammer unit dose Arm & Hammer scent boosters and extra liquid laundry brand all grew faster than their categories and also grew share in the quarter. 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 laundry detergent entering the mid-tier of liquid laundry. Arm & Hammer Deep Clean accounted for 40% of Arm & Hammer's liquid laundry detergent consumption growth in the quarter and is highly incremental to the Arm & Hammer franchise. The second new product is Arm & Hammer Power Sheets. This is a laundry detergent. Arm & Hammer was the first major brand to offer this new unit dose form in the U.S. last year in August. Since expanding the launch of this product into bricks and mortar retailers this year, we have seen high consumer interest in the form. Arm & Hammer PowerSheets is proven to be highly incremental to both the sheets category and the total laundry detergent category, and we are seeing repeat rates increase. We feel great about the future prospects for this product and form. Now I'm going to talk about litter. Arm & Hammer litter grew consumption 6% in Q2, which was almost double the category growth. Our new lightweight Arm & Hammer Hardball clumping litter is outperforming our expectations. as our share of the lightweight category has grown from 4.5% in Q1 to 8.2% in Q2. And this is important because lightweight accounts for 16% of the clumping-level category, and so we expect hardball to continue to grow in the coming quarters. Turning to personal care, the gummy vitamins business continued to be a drag on the total company organic growth in Q2. The gummy vitamin category declined 1.9% in Q2. which is an improvement from the 5% category decline in the past two quarters. The bad news is our consumption was down even greater. We were down 10.9%. We continue to move forward with our plan to stabilize our gummy business through new packaging, upgraded formulas to improve the consumer experience, new forms like chewables, and greater marketing investments that we've talked about with you in the past. However, the improvement is taking much longer than we anticipated. Next up is Batiste. Batiste continues to see strong consumption growth with consumption up 14.5% in Q2, growing share to 47%. Batiste continues to be the global leader in dry shampoo, and innovation is very important to the success of this brand. So listen to this. This year we launched Batiste Sweat Activated and Batiste Touch Activated dry shampoos. These products are bringing new users to the category, and already these two new products account for a 2% share of dry shampoo, and Sweat Activated is the number one new product in the category. Over in mouthwash, Thoroughbreath continues to perform extremely well. Thoroughbreath is the number one alcohol-free mouthwash and the number three brand in total mouthwash with a 17% share. This year, TheraBreath entered the antiseptic segment of the category with the launch of TheraBreath Deep Clean Oral Rents. It's important to note that antiseptics represents 30% of the $2 billion mouthwash category, and our launch into antiseptics accounted for 100 basis points of our 400 basis point year-over-year market share gain in total mouthwash. So that's a great indicator of the future of the antiseptic launch. Hero continues to drive the majority of growth in the acne category and has grown to become the number one brand in the acne category with a 20% share. Hero continues to launch innovative solutions and patches combined with adjacent consumer needs. An example would be the recently launched Dissolve Away Daily Cleaning Balm. Now a few comments about private label. Regarding private label, the good news is our weighted average private label exposure is relatively stable. We have seen notable private label share gains in gummy vitamins, where private label gained two share points, achieving a 16.7% share, which is back to pre-COVID historical highs. This has also contributed to our difficulties in that business. In the litter category, private label share has increased sequentially, in the last few quarters from 13.1% in Q4, 13.3% in Q1, and 13.5% in Q2. So current levels are historical highs. The good news is that it's a different story for us as Arm & Hammer Litter continues to gain share in spite of the private label strength. I'll close my comments on the U.S. by saying that although consumption has been strong through the first half of the year, we did experience a slowdown in June and July. And for context, and you read this in the release, our categories averaged four four point five percent dollar consumption growth through May of this year. But since then, it has been close to two percent. Now, this is not entirely a surprise, as we expected a deceleration as year over year pricing rolled off. However, unit consumption has also saw a deceleration from the first five months to what we saw in June and July. So it appears that the consumer may be getting extended and is making choices around spending habits. While we have only seen this trend for the last couple of months, we expect that categories are likely to grow at a slower pace than we experienced in the first half of the year. And as you know, our balanced portfolio of value and premium offerings performs, I should say, is well-suited to changes in consumer buying patterns. Turning now to international and specialty products, our international business delivered organic growth of 9.3% in Q2. This was driven by strong growth in the subsidiaries as well as our global markets group. And just a few call-outs, we had strong growth in Canada, Mexico, Germany, and our global markets group. And finally, specialty products. Organic sales increased 3.9%, and that's two quarters of solid organic growth for this business. We're confident that this division will achieve of 5% organic sales growth this year, which would hit our evergreen growth target. I want to wrap up my comments by reiterating that the company's performing well, all three divisions delivering strong growth. I want to thank all the Church and Dwighters out there for doing such a great job each and every day. And now I'm going to turn it over to Rick to give you some more color around the quarter and full your outlook.

Thank you, Matt, and good morning, everybody. We'll start with EPS. Second quarter adjusted EPS was 93 cents, up 1.1% from the prior year. The 93 cents was better than our 83 cent outlook and is a high quality beat, primarily driven from higher than expected sales growth and gross margin expansion. We'll walk through the details of the P&L. But this was a strong quarter with 8% growth of profit before tax versus the prior year, excluding the tariff benefit. Another important highlight for the quarter was the majority of our brands gained share. Reported revenue was up 3.9% and organic sales was up 4.7%. Organic sales was driven by volume of 3.5% and positive price mix of 1.2%. Volume was a primary driver of organic growth and we expect volume growth to continue for the rest of the year. And as Matt mentioned earlier, this makes four consecutive quarters of volume growth. Our second quarter gross margin was 47.1%, a 320 basis point increase from a year ago reflected a one-time benefit on a favorable ruling and rebate related to historical tariff payments. Excluding this impact, adjusted gross margin increased 150 basis points due to productivity, volume, and mix net of the impact of higher manufacturing costs. Let me walk you through the Q2 bridge. Gross margin components are as follows. Positive 80 basis points impact from price volume mix and a positive 120 basis points from productivity. This was partially offset by a 10 basis point drag from currency. and at 40 basis points dragged from inflation. Moving to marketing, marketing was up 20.2 million year-over-year. Marketing expense as a percent of net sales was 10.1%, or 100 basis points higher than Q2 of last year, and led to share gains. For SG&A, Q2 adjusted SG&A increased 20 basis points year-over-year, primarily due to international R&D and costs related to the Grafico acquisition. Other expense decreased by 7.8 million, primarily due to lower outstanding debt and higher interest income. For income tax, our effective rate for the quarter was 24%, compared to 17.9% in 2023, which is significantly higher than a year ago due to a high level of stock options exercised in Q2 of 23. We continue to expect the full year rate to be approximately 23%. And now to cash. For the first six months of 2024, cash from operating activities was $499 million, almost $500 million. A decrease of $9 million with higher cash earnings offset by higher working capital. We now expect full year cash flow from operations to be approximately $1.8 billion. Capital expenditures for the first six months was $76.6 million, a $13.4 million increase from the prior year as capacity expansion projects proceeded as planned. We expect 2024 capex of approximately $180 million as we complete the majority of those investments that were initiated in 2023. And we continue to expect capex to return to historical levels of 2% of sales in 2025 and beyond. And now for the full year outlook. As Matt mentioned, strong financial performance in the first half of the year and strong categories and share gains. As we move into the second half, consumption growth has moderated in many categories as the consumer remains under pressure. Consequently, we are tightening our organic revenue outlook and now expect organic sales growth to be approximately 4%, the low end of our prior 4% to 5% range. Reported sales growth is expected to be approximately 3.5%, which also reflects a drag from currency and the impact from divestitures. We continue to expect full-year adjusted EPS in the range of 8% to 9% growth, but now at the low end of the range. In round numbers, the sales call down would normally be offset by the gross margin raised at the EPS line. However, we have two other factors for the change. Number one, as you saw in the release, full-year SG&A is now expected to increase as a result of higher spend for Grafico. That drag went from a penny to two pennies as we make incremental investments. And then number two is dry powder in the event categories get more promotional in the second half. Turning to gross margin, we now expect expansion of approximately 100 to 110 basis points, up from our previous outlook of 75 basis points of expansion. We continue to expect an increase in manufacturing costs to be more than offset through productivity, mix, and higher volume. We continue to expect marketing as a percentage of net sales to be approximately 11% as we continue to grow share across many of our brands. And with that, Matt and I would be happy to take any questions.

Ladies and gentlemen, at this time, if you would like to ask questions, simply press star and one on your telephone keypad. Pressing star and one will place your line into a queue and we'll take your questions one at a time. Once again, ladies and gentlemen, that is star and one on your telephone keypad. We'll hear first today from Rupesh Parikh at Oppenheimer.

Good morning and thanks for taking my question. So, Rick, I just want to, I guess, go back to your comments on the promotional backdrop. So we'd love to hear about what you guys are seeing right now in the promotional backdrop and then, you know, what your expectations are for the balance of the year.

Yeah, let me give you a sense for what's going on promotionally, Rupesh. And as everybody knows, household is far more promotional than personal care. But if you look at the liquid laundry detergent sold on deal from Q1 to Q2, it actually was down. 190 basis points year-over-year. It was down 200 basis points sequentially. And you might be scratching your head about, you know, why would that be? But, you know, you guys probably have this in your Sercana data as well, but a large premium brand is actually down 900 basis points sequentially and 600 basis points year-over-year. Of course, that's not the whole story. Couponing is not tracked. It's not in the in the consumption numbers, but that would explain how you went from 33.5 sold on deal in Q1 to 31.6 in Q2. So it's largely driven by a large brand. If you look at litter, Q1 versus Q2, that's a different story. Q1 sold on deal was about 15.5, and Q2 was a little over 18, like 18.3. So it's up sequentially, but that was generally driven by one competitor. They're sold on deal Q1 versus Q2 almost doubled. It's 24% for this other brand in Q2. So I would say as far as our brands go, as I said, we had an all-time high share in the quarter in liquid laundry. and also very close to an all-time high share for litter in Q2. But that's to give you a little bit of color on promotions. Unit doses, it's kind of the same story as well. You know, Q1 to Q2, just round numbers went from 26 percent to 31. That's year over year, I'm sorry, but sequentially it was Dave Kuntz, or from 26 to. Dave Kuntz, 36 so there's a there's a lot of big changes happening in in in each of the categories, but I would, I would say, if you just looking at the at the second quarter you wouldn't say it's. Dave Kuntz, Any any more promotional it's just an anomaly, with one brand in queue and liquid laundry and one brand and litter swinging the numbers.

Okay, great. And maybe just one follow-up question. Just going back to the slowdown in June and July, it sounds like it's across categories, but I don't know if there's any more color you can probably put between your discretionary offerings and maybe some of your more essential categories.

Yeah, well, I can give you some color on that. You know, we look at the commentary of food companies, and we see call-outs like, hey, the consumer is being price conscious, right? You've got value seekers out there. And then we look at fast food chains, and we see spending is less per trip. Then we look at our data. You look at Staples, and you see decelerating consumption in a lot of categories. I mean, if you just look at the Shekinah and Nielsen data, you can see it. And I guess the last thing here today is unemployment has ticked up a little bit. And as I said on the call, the expected You know, the dollar growth year over year, we expected it to peel back as a result of price increases lapping. But we're also looking at volume. I would say year over year volume growth is also decelerating in the categories. We're doing better than the categories as evidenced by our brand success. But we would say the consumer is likely a bit weary of balancing the household budget, making choices to satisfy their needs. We have three things going for us. One is the strength of the brands. So you saw in the release, you know, five out of seven brands grew share. If you went back to our old standard, 10 out of 14 of our major brands grew share in Q1 and in Q2. And so that's strength of the brands would be number one. Two is innovation. You know, you heard the proof points in my opening remarks. And number three, you know, the split we have, 60-40 between premium and value. So Therefore, we said, hey, given the category movement in June and July, we concluded 3% organic in the second half is probably a sensible outlook. But I can give you just some round numbers. So if you look at the laundry detergent category, May, June, and the first few weeks of July, you know, May was around 2%, June flat, and then July down, you know, close to a point. And that's just in dollars. And then, again, the litter category, Round numbers, May was 3% up, June flat, and then July up slightly. And if you look at another category like non-alcohol mouthwash, it goes 14, 13, 11, May, June, July. So you see how the categories are kind of trending down? And I could give you other examples, but that's where we come out and say, you know, Based on everything we hear from other industries, unemployment, what we've seen in the Sirkahn and Nielsen data, it seems pretty obvious to us that 3% makes a lot of sense for the next six months.

Yeah, and we're passionate as Rick. I would just, you know, just to tack onto that, it's not just one category. That's kind of what Matt's going through. If you take the weighted average and you look at every category individually, there is slight deceleration in most, okay?

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

Okay.

Our next question today comes from Chris Carey at Wells Fargo.

Hey, Chris. Hey, guys. Rick, you mentioned potentially keeping some dry powder for additional spending. Is that additional spending now factored into the outlook for the year, or are you saying that you're now – guarding a bit more of that dry powder should you need to deploy it in certain categories. And then what are the categories that you have your eye on specifically? I think the litter category, well taken, the step up in promotional spending, I think we heard enough last night to corroborate that. But can you just expand a bit on the dry powder piece and just what you're kind of preparing for?

Yeah, no worries. I would say it's really the second in your example. Dry powder is if categories further decline, if the promotional environment heats up because volume growth gets harder to come by, we're saying we're ready for it. We're prepared if that happens. We haven't deployed it yet, but if it happens, we will. And that's really primarily around our household businesses like laundry and litter. And then, of course, as the category is down for vitamins, that would be applicable as well.

Yeah. And the other thing is, you know, you heard us talk about, um, the success we're having in so many categories with our, our new products and that's where we've concentrated our, um, our promotions displays, et cetera. Um, not just in a household, but also in our personal care products. And we got the marketing coming behind it too. You know, we've got a lot more marketing in the second half behind those, behind those brands. So we definitely like our chances, uh, regardless of, um, you know, the slowing categories.

Okay. Makes sense. One quick follow-up is just on the 3% and kind of thinking that's the right range for the next six months. Did I hear you correctly? It's a bit above category, which makes sense. You're gaining share. Where, you know, just given the trend line, where are you, you know, keeping a particular eye on regarding whether You know, maybe by 2.4, we're talking about 2% or something of the sort. I suppose your dry powder would help you, you know, counteract that. But, you know, any call outs on just, you know, the categories that you really have your eye on where things are developing a bit differently relative to your expectations. And then, you know, just connected to that, can you just frame, you know, the BMS business? whether you're just seeing stabilization or whether there's any kind of sequential worsening. Not really a VMS question, to be clear, but just given that's the business that feels, you know, less predictable, I just wanted to make sure I got a specific comment on that.

Thank you. Yeah, well, you know, we're in, you know, 16, 17 categories. If you just graphed those categories and you just see pretty much across the board, you know, a softening. and so it's it's not just hey it's just one one one or two big categories uh we think it's really broad-based so uh consequently you know they're all on the table you know for keep an eye on uh for the second half you're framing the vitamin business oh yeah it was just yeah yeah just invite are you just are you stable or you know is it faster than than other businesses you know just maybe trying to ring fence

vitamins versus everything else where you're clearly, you clearly have a lot of relative momentum versus categories. Thanks.

Yeah, yeah. Well, the category, you know, I gave some numbers there before about May, June, July for, you know, a bunch of different categories. Vitamins, if you do May, June, July, category dollars, down one, down two, down one, that May, June, July. So you'd say it's more us than the category. And, you know, we have not been able to uh, renovate our portfolio as fast as we had hoped. And, uh, you know, some of it is, um, you know, the retailers, um, you know, how much additional shelf space will they change your, your shelf position, et cetera. Um, and some of it is us, the speed at which we can renovate the portfolio. So, um, I'd say it's more, um, more on us, um, frankly, than, um, than the external, the external environment. But, um, you know, we, uh, we know what we need to do and, um, You know, we think about how good we would be if we could get that one turned around, considering how all the other businesses are doing well. But, yeah, there's more work to do there, Chris. Okay.

All right. Thanks so much.

All right.

Our next question comes from Bonnie Herzog at Goldman Sachs.

Thank you. Good morning. I had a question on your organic growth guidance. You know, Matt, I believe you mentioned that your guidance assumes the underlying category growth remains pressured, but Did your guidance also assume, you know, further slowdown from here? Just trying to understand, you know, potential downside risk. And then how do you see the balance of price mix and volumes playing out, especially in the context of the category slowdown?

Yeah. Well, look, the categories have slowed down. You know, some of them, for example, you know, laundry and litter, you get to July and they're pretty much, you know, flattish. So, you know, when you have flat categories, the only way you're going to grow is you have to take share. And, you know, we obviously like our chances because that's what we've been doing so far this year, especially driven by our new products. You know, a lot of our share growth in litter was driven by hardball, you know, our new launch there. So, no, we're not saying, hey, this is going to, this graph, if you're going to graph it, it's going to continue to go

down down down the rest of the year we're just saying it looks like a step change from the first five months of the year to where we are now and I think it's more likely than not that'll stay this way the rest of the year yeah we still think categories are going to grow and we're going to take share so that's how we get to our three percent from the back half and then in terms of price volume mix it's kind of unchanged from what we've said before we're primarily a volume driven

um organic growth grower in the last four quarters and that'll continue we think for the next two yeah so here is this might help you too if you look at dry shampoo the dry shampoo um you know first five months of the year was um uh double digits uh so it's may was 12 percent um and if you look at june july it's more like six seven percent so you know the category is still growing just not growing as fast so it looks like it's just kind of a notch down And this is where innovation is really going to matter, I think, going forward.

All right. That's helpful. And then my second question is on your marketing investment that you called out for Q3. I guess I'm curious to understand how much of that step up that you expect in Q3. Is it essentially new, incremental, or is it really just a shift coming out of Q2 where your spend levels were a little bit below what we had anticipated? And then should we expect sustained spending levels into Q4? And I'm thinking about that in the context of some of your new launches.

Yeah, I'll take that, Bonnie. So our Q2 marketing spend was right where we expected it to be. We were at 10.1%. If you take a big step back, we spent quite a bit of marketing in Q4 in 2023. And we had one of our best new product years ever this year on par. And so we're taking hundreds of basis points out of the marketing spending that would be naturally in Q4 if you kept it flat and putting that throughout the year. And so Q1 was up 150. Q2 was up 100. Q3 is going to be up significantly, more like Q1 than Q2. And then Q4 will be down significantly because we just want to get that phasing correct to support new products.

Okay. All right. Thank you for that.

Next up, we'll hear from Peter Grom at UBS. Please go ahead. Your line is open.

Thanks, operator. Good morning, everyone. Hope you're doing well. Maybe just one quick housekeeping. I think the release mentioned domestic consumption outpacing sales primarily due to some retail inventory reductions. Can you maybe just talk about that? Where did you see

uh the reductions what categories specifically yeah so we said it uh there were two reasons why you know circana would say six percent and domestic organic was 3.8 percent so the 200 basis points of the disconnect it was uh one we had talked about before which was uh we had a hero pipe in a year ago and then the second one which actually was more of a surprise for us was retail inventory adjustment uh in the quarter that was primarily on laundry uh but i would tell you You know, there's more noise in the system these days as, you know, categories start to move around from retailers on how they manage inventory. We are at good levels across the chain and we're set up for success.

That's helpful, Rick. And then, you know, kind of going back to the category discussion, but maybe shifting gears to kind of international, can you just talk about what you're seeing from an international perspective? both from an underlying category standpoint, but also when we think about the 3% implied back half growth on a total company basis, what do you expect to see from your international business? Thanks.

Yeah, well, you know, our international business had a very strong first half, so we expect them to still punch above their weight for the full year. You know, our algorithm is international. It's going to grow 8% on an annual basis, and they're tracking above that right now. If I give you some remarks with respect to the U.S. consumer, we're still keeping an eye on the international consumer as well. So far, things have been holding up pretty well. They've been more resilient, at least in our markets and in our categories so far. But I think the commentary that I had before is more focused on the U.S. than international. But still, it's something to keep an eye on, Peter. But right now, it's not... It's not a worry.

And to just give you a little bit more granularity, if our full year call for international is 8%, we saw around 9% for the first half, so that would mean we think it's around 7% in the back half.

Great. Thanks so much. I'll pass it on. Okay.

Steve Powers at Deutsche Bank, your line is open for our next question.

Okay. That was very enthusiastic. I'm happy that you're here, Steve. Yes, me too. I'm happy to be here. Hey, so the shipments versus consumption discussion that Peter just started, just to extend it, I guess I'm curious whether you have visibility of any known timing differences, favorable or unfavorable, as we go into 3Q, 4Q?

Yeah, at this point in time, we don't have any – I mean, different classes of trade always talk about store closures or right sizing, and so all that's kind of baked into our outlook. It's a little noisier than normal, I would say. We got caught by surprise a little bit on the one in Q2, but the good thing is we still – despite that, we still met or beat our outlook on organics.

Yeah, so drug and dollar are the two classes of trade that are a little bit turbulent, I guess is the right way to say it, looking ahead. But we've got a pretty good handle on what we have out there and how we think that will move around as a result of store closures.

Okay, great. And this is, I guess, it's on the topic we've all been talking about in terms of the flowing and the kind of promotional environment. I guess it's more just a philosophical question in this moment. There's so many companies as we've gone through this second quarter earnings season that are exiting the first half with higher gross margins than expected, yourselves included. Does that, from your perspective, raise the risk even more that seemingly rational levels of competition and what have you devolve alongside the slowing? It just seems like we're in a pretty precarious moment where um so many companies have been calling for volume improvement or volume sustainability where things have been good now things are slowing abruptly but at the same time they're they're carrying more gross profit into that moment and i just am questioning whether you think that elevates the risk versus what you've seen historically that things do get you know more competitive more quickly yeah well look um i think if people look back through history and you say you know what what what

When do people start promoting? And yeah, you're right, when you have slowing categories. So that's why Rick said it's probably prudent to say, hey, you got to have a top line call and a bottom line call that kind of bakes that in. And so you have some dry powder if that were to happen. But that's why we spent so much time this morning talking about innovation. We've got an innovation beyond the categories that we described, so I think that's going to be really important to share growth and consumption growth in the next six to 12 months.

One thought to add to that, normally if you look back at history, really hyper promotional environments happen when categories are negative or volumes are negative. Neither of those things are happening. In general, it's still positive growth from a dollar perspective and still positive growth from a a volume perspective. So that's context, right? Private label shares are still relatively stable. I know all those things are still true, but we're just trying to give a heads up to say there is something going on.

Yeah. So Steve, that's sort of our MO. You know, we were always palms up and then we say what we're seeing. So that's what we're doing today.

Okay. I appreciate it. Thank you very much.

Next we'll hear from Dara Mosenian at Morgan Stanley. Dara?

Hey, good morning, guys. So just wanted to touch on a couple of pieces of your portfolio. Thoroughbreath obviously continues to post very strong growth. You can see that in the scanner data or your call commentary on market share. But it is a higher priced product. So just hoping you could give us a bit more detail on the brand performance and as we move through the quarter, the performance. Any signs of trade down there? Is the therapeutic benefit of the product really mitigating any impact from a weaker consumer? And just your view on growth potential for that brand as you look out over the next few quarters, given the strong momentum recently. And then just on the VMS side, understand all your points around the intervention in terms of packaging, forms, marketing. Just any more detail on when the timing of some of those things may pay off and how you guys think about that, given the progress hasn't been as strong as expected so far.

thanks yeah well look at here thoroughbreath is a is a is a big success story uh for the company as you know you know we have a we have 17 share we're number three in the category number one's listerine at uh 38 crested at 18. and um you know we we've been getting you know more facings from from different retailers and different classes of trade And the launch into antiseptic is something that we think is going to be a source of growth for us for a good long time. Because when it's 30% of the category, and we now have a 4% share of the non-alcohol. So we've got a long way to go there. So I would say we feel really good about about Thoroughbreath, and yeah, it's more highly priced, but that's not something new. We don't promote the product. I think one interesting proof point is if you look at what happened on Prime Day, that Thoroughbreath actually was the number three brand and unpromoted, and we had a really good Prime Day for Thoroughbreath. There's lots of indicators that say this brand has a lot of staying power even as a premium brand in this environment. And then with respect to vitamins, yeah, I think that's probably going to be over the next six to 12 months. We do not expect we're going to be able to stabilize that as we had planned to when we started the year. We thought that in the first half we would be down. And then by mid year things start to turn around, so we would be exiting the year with a stable business. No loss of share. Don't see that happening right now, but you know, we got lots of different irons in the fire here and you know, some are working, some aren't. We just need a little more time.

Thanks guys.

Lauren Lieberman at Barclays. Please go ahead. Your line is open.

Thanks. Good morning. So sticking with TheraBreath and also layering and Hero, if I may, both brands continue to have very, very strong growth, but they have decelerated. And we were looking at it more than anything else as kind of law of large numbers. But I was curious if you could comment on what you're seeing in the spaces in which those brands compete in terms of those category growth rates changing. And as we kind of look forward to you know, this law of large numbers, like, do we think they keep migrating down to earth to the growth isn't 30%, but it's like 20% as we move forward. Um, and how to, to frame that. Cause I think it's important in terms of the big picture, the, you know, the aggregate outlook for the company is the growth rate of those two brands actually matters a lot.

Yeah. Well, look, I'll, I'll give you some, um, um, category data, like the acne category made June, July is steady. up 8% May, June, and July. So no worries there. And we've got the number one brand in the category, not only in the category, but also in patches in a subcategory at a 54% share. So that's not a worry for us right now, either one of those brands. Of course, with the passage of time, you're not going to have 30% growth rates That's, you know, this is math, you know, as you think ahead to 2025, but we're still expecting that we're going to have really strong years next year.

Yeah, and just to add to that, you're right, like 30 or 40% growth, and as that comes down, it's because we're really lapping distribution in general, but consumption is just still extremely strong, and I would say we're not going to point to a growth rate in the future, but we still expect it to be double-digit, strong double-digit growth as we look out over the horizon.

Okay, great. And then if I can ask a second question on market share trends. So we are still on Nielsen. So I know that there are some pretty significant differences lately between Nielsen and Cercana and coverage matters a lot. So take that as preamble. But as we see it, market shares for church and aggregate were softer in June and July. So along with the categories slowing that some of the share performance wobbled a bit, particularly if you take out here on Thera. Just if you could comment on that. Again, that might be completely different than what you're seeing in your data, so I'd like to know if that's the case. If not, what is it do you think that why, if in fact shares have been more sluggish, why that is?

Yeah, thanks, Lauren. I would just say that's not what we're seeing. In Q1, I think we were 10 out of 14. If you go back to our old vernacular of all of our power brands, because this question is a little bit more detailed, so 10 out of 14. I think Q2 was 10 of 14, I think July, June, July or July was nine of 14. So no real change.

And what about the pace of that growth, though? You know, so not just like is it up, but is it up less?

Well, I think it's reflected in our in our second half call. Right. You know, we said we grew five percent organic in the first half, three percent in the second half. So I think that's that's all baked in. into the numbers, but we wouldn't give like mid quarter.

It's more of a, you know, that that's more of a category. We still feel really good about the share. We expect share gains in the second half and we're positioned to do that.

Okay, great. Thank you.

Our next question comes from Kamil Gajrawala at Jefferies. Go ahead. Your line is open.

Hey, if I could ask a little more on VMS, which is, uh, You know, not that long ago, you were increasing capacity for the space. I'm curious if anything has changed. Maybe there's some product changes you need to make or innovations you need to catch up on. But has your view generally about that segment changed?

Well, look, it's a very competitive category. There are well over 60 competitors. There aren't a lot of barriers to entry simply because you can find commands to make your product. So if you get an idea and a catchy brand name, you can pretty much enter. So, you know, that's that's really what we've been experiencing. And and of course, you know, we've we've definitely struggled in the in the bricks and mortar. We do have some bright lights here in on the online class of trade. So we're doing extremely well on Amazon, get a lot of growth there. But then that's a smaller piece of of the pie. You know, we mentioned before, renovating the category, meaning that this year we've been changing the formulas to improve the consumer experience, meaning that, you know, taste and bite. We're launching into chewables, different forms. But all those have gone slower than expected. And we haven't got a lot of help from the retailers.

Yeah, and remember for context, right, this category grew through COVID on a rocket ship pace. It grew probably over 50% over four or five years. And so everyone's rushing to put the capacity in to accommodate that. And the category itself is still finding its feet as it comes off of those highs. That's why we keep seeing negative growth. And then there's other forms now. It's just not hard pill and gummy. There's liquid. There's powder. There's other forms. And so that's a category story, and we're being impacted by that as well. But as Matt said, we think innovation is super important. We're trying to move the speed of light to get the right innovation out there as fast as possible.

Yeah, but we'll call it out because it has been a struggle for us.

Yeah, it's actually, you're sort of, when you first started talking about the category, it sounds quite different from how you'd like to be positioned or how you'd like a category to be positioned. Does it still make sense? We just saw Clorox divested there. VMS, I recognize it's different. It still makes sense to own.

Yeah, well, that's you know, we we evaluate all of our businesses, all of our categories annually. So obviously we put a lot of investment into this, but you know, I can't go any further than that.

Thank you.

Andrea Teixeira at JP Morgan. Please go ahead with your question.

Thank you. Good morning. I was just hoping to see if you can talk, I mean, shift a little bit of the conversation into M&A. And I know we've been looking at your analyst that you had said you had a, you know, you had looked at, you know, back last year around four potential acquisitions. None of those kind of fit your profile or were enough to be, you know, attractive. Ana de Bettencourt- So I was hoping to see what has changed anything that we should be thinking of is that more the targets are not willing or the private equity funds not. Ana de Bettencourt- coming up with with some interesting ones for you what is preventing you to to grow in organically, which is, you know, which is something that you historically have done. And then also just a housekeeping on Waterpik. I think that's the only brand that we really didn't talk about. And Waterpik and Dry Shampoo, just thinking of like how, I mean, you quoted in the first quarter, there was a 1% headwind from Waterpik and Gummies each. So I was hoping to see what was the headwind in the second quarter, if any. I'm assuming there's still headwinds there and what is embedded in the second half. Thank you.

Yeah, as far as M&A, you're correct in that last year we looked at four or five different brands. We didn't pull the trigger on any of them. But what I can tell you is that we're as busy as ever right now. We're always looking at opportunities, and they are out there, and we've just got to stick to our criteria. But we do realize it's been 18 months since we made an acquisition. We have cash building up on the balance sheet, as you'll see when we follow the queue.

um but um yeah we're we're very busy and uh you know the market is active and uh and then on on water pick um you know the good news on water pick is consumption is up uh high single low double digits so you know we really worked through that retail inventory uh issue that we talked about last quarter uh i would say water picks flattish uh for this quarter we think it's slightly down for the full year largely based on uh what happened in q1 from a sales perspective so um

not not ignoring water pick but i i tell you that the consumption looks good for water pick thank you next we'll hear from filippo falorny at city hi good morning everyone um i wanted to ask about the gross margin outlook for the second half um what have you embedded from uh pricing standpoint, your comment on dry powder, on promotional activities. And then from a commodity standpoint, are you seeing some modest reinflation? What is the commodity outlook for the second half? Thank you.

Yeah, sure. I would say inflation is maybe a little bit higher than when we talked about it three months ago. Pulp and paper are up. HTPE is up a little bit. Ethylene is up a little bit. But You know, no change from a net perspective as productivity is coming out a little bit better as well. Yeah, we do have some trade and couponing and promotional spending assumed in the back half. Again, it's dry powder. Not necessarily that we are going to do it, but we also want to spend behind our new products in terms of displays and support and whatnot. So that's kind of our assumption.

Great. Thank you. That's it all.

Kevin Grundy at BNP Paribas. Please go ahead.

Great. Thanks. Good morning, everyone. We covered a lot of ground, most of the portfolio. I wanted to take it a different direction, I guess. And maybe if you could comment at all on Barry's departure, because it's an area we've gotten a lot of questions from recently. Obviously, key executive with the company is CMO and president of your domestic business and probably one of a handful points of interface with the investment community. So Matt, maybe just comment on how high a priority it is to refill that role, maybe skill set you might be looking for. I know he's with the company through early October and whether the service is going to include both internal and external candidates. So thanks for that.

All right, Kevin, that's a multi-part question. Many of which I can't respond to. What I can say is that, you know, Barry's been here, you know, 11 years, he had an eight year stint and, international three in the U S um, big, big part of our success. And, you know, sad to see him go, um, here through early October, uh, it's business as usual here. Um, so we, we have some time to figure out, um, how we're going to fill the position, but, um, I think that's as, as detailed as we would go into on a, on a call like this.

Okay. I'll leave it there.

Thank you. Okay.

Our next question comes from Olivia Tong at Raymond James.

Great, thanks. My question is primarily around gross margin and trying to understand the upside in Q2. And then in terms of the deceleration in second half, it sounds like that 100 basis points or so is primarily around the drive pattern. But I wanted to see if there are other factors that are driving that expectation for deceleration in the second half.

Yeah, deceleration for gross margin?

Yeah, exactly.

Yeah. OK, well, in the quarter, we had favorability really because of mix. Within our personal care portfolio, we had higher margin products sell even more than we expected, and some of the lower margin personal care products not sell as much. So that was kind of a tailwind in the price volume mix line. That's what happened for the quarter. For the back half of the year, it's a couple of things. There's a little bit more inflation. It's not as favorable year-over-year personal care mix as those categories come in a little bit. But the dry powder we're talking about in terms of trade and couponing is in the back half as well. So those are probably the two or three things I'd point to in the back half.

Great. Thank you. Anna Lazul at Bank of America, you have our next question.

Thank you. This is John Kepour on the line for Anna. I also just want to say I'm glad Steve Powers is here because he opened the way for the question I have, which is, I guess on pricing, is there any risk that the promo environment gets to such a place that we see negative price in the back half and um and then follow up to that in terms of the the the innovation pipeline and like you know route to market and kind of time to market uh given where the given where the categories are stabilizing at this lower kind of growth rate and and the idea that maybe this becomes a 25 issue as well are you guys able to pivot your innovation pipeline and have new products in market by next year that cater more towards I guess, the mid or low-end consumer more than potentially what you had in the pipeline last year or expect to have in the pipeline for next year? Thank you.

Yeah, well, there's two types of innovation. One is innovation where we're identifying a pain point or a need for the consumer. Another is when it comes to pack size, which I think is what you're getting at. So, yeah, We're pretty good at pivoting quickly to create different price points in various categories in order to satisfy the consumer in a changing environment like this.

And then on your first question about volume and price mix, as we look forward, we do not expect to have negative price in the back half of the year.

Great. Thank you.

Our next question will come from Javier Escalante at Evercore.

Hey, good morning, everyone. I have a couple of clarifications on the detergent side. One is it that whether you have enough, you mentioned that DeepClean was 40% incremental. Do you have enough data to know whether this is people trading up from around Hammer or you are getting share, you are getting users from other brands? The other, I mean, we both use Turkana and shows per sale prices Do you think that that is promotional activity or that is a price correction?

Yeah. On the first question, we fully anticipated when we launched DeepClean that you would have some Arm & Hammer consumers trade up. So DeepClean is part of our good, better, best strategy. So good would be the basic Arm & Hammer detergent, and Arm & Hammer with OxiClean is the better deep clean is the best so yeah we do have some data that says we have people trading up and we also have consumers that are leaving other brands and migrating over to deep clean and that's why we think long-term deep clean is going to be a source of growth for the company yeah we probably wouldn't comment much on looking at this or kind of data about Henkel or Persil or any of those things we

we would just say we continue to gain share in laundry and as a category is flowing a bit, but we continue to gain share and do better than the market.

Understood. Fair. The other is curious about how fast these so-called dry power can be deployed vis-a-vis retailers and to what extent this is also continuing to supply chain the strength of the supply chain because one of your competitors continue having issues with it. Thank you.

Yeah, Javier, it's a fair question. You know, typically, as you're putting in incremental promotions, that maybe is a longer lead time. But if you want to heat up a promotion, that can be done relatively easier. And you go after incremental volume that way as well or couponing. But again, it's dry powder is the key message. All right, next question.

Thank you. Our next question will come from Robert Moscow at TD Cowen.

You have a lot of analysts covering your stock.

That's glad to be... Yeah, we're not doing an alphabetical order either.

We're just... But glad to participate. You know, this year, it just... as a newcomer, it looked like your new product pipeline was extraordinarily good. Like you have a lot of like really resonant products in a lot of different categories all at once. As you think about it for next year, do you expect it to be as strong as it is this year? And in light of a slowing category growth and maybe some more value seeking, is there anything you need to tweak in terms of the mix of premium versus more value-oriented products?

Yeah. Well, one thing you want to keep in mind about new products is, yeah, we're having a great year with all these new product ideas we came out with. But remember, we're going to have year two of these next year. So you only have a partial year. You're only building distribution this year in many cases, building awareness. So we think the products that some of the ones I talked about and others will be big drivers next year. And on top of that, we have new product ideas coming as well. So like I said, I do think that in any environment, but particularly this one, new products are going to make the difference. And then your other question was tweaking the portfolio between premium and value. You know, I've been with the company for 18 years, and the 60-40 split, it's now 63-37 premium. value has been sustained over a couple of decades. So unlikely that's going to change in the near term. And that's why we always like our chances when you have periods with changing consumer buying habits.

Okay, thank you.

And our final audience question today comes from the line of Mark Astroshan at Stiefel.

Yeah, thanks, Morni, and thanks for squeezing me in here. Two quick ones. One, just half that price is on potential lemonade. Are you seeing it come down similarly to the market? And then on vitamins, just again, you go back to when you bought the business, it was partly about adoption of the form factor of gummies. There's more press out there not saying that I agree or don't agree with the efficacy of a gummy versus some other forms. Is that partly what's impacting the consumer in your business and gummies in general? Is there an opportunity to educate the consumer or is there an opportunity in tech to make the product more effective? If not, how quickly can you pivot to some of the other stuff that you talked about in terms of chewables and potentially powders and whatnot within the brand that you have?

Yeah, as far as vitamins goes, yeah, there's been quite a change over time. I think we bought the business in 2013. The gummies reprimanded 3% of the market, and now it's in the 20s. So it's changed quite a bit. I would say as far as your comment about efficacy, I think it's more that people are moving to powders and chewables and other forms. The larger vitamin category has pulled back, but remember, it's pulling back from COVID. You had several years of growth in just a couple of years. So I think you know household penetration is greater as a result of coven and that's kind of plateaued and started to pull back, but now I wouldn't say that our issues are related to the fact that that you know there's an issue with efficacy speed more around the our own issues in house.

Yeah, the other area that folks are moving away from gummies at times are from a sugar perspective. They want to go towards sugar-free. So we're rapidly going after the sugar-free part of the portfolio. We're rapidly going after improving our taste profile so that gap widens again versus competition.

Yeah, so one of our disadvantages is we don't have as broad a portfolio of sugar-free as some of our competitors. And, again, that's one of the areas when I talk about renovating the – That's one of the areas we're focused on. Okay. Operator, I thought we were at the end of the line.

Correct. No further questions from our audience today.

Okay. Hey, thanks, everybody, for joining us. We had a kind of great first half. We're looking forward to a strong second half, and we'll talk to you all at the end of third quarter.

Ladies and gentlemen, this does conclude our conference call. We thank you all for your participation. You may now disconnect your lines.