Church & Dwight Company, Inc.

Good morning, ladies and gentlemen, and welcome to the Church and Dwight's first quarter 2025 earnings conference call. Before we begin, I have been asked to remind you that on this call, the company's management may make forward-looking statements regarding, among other things, the company's financial objectives and forecasts. These statements are subject to risks and uncertainties and other factors that are described in detail in the company's SEC filings. I would now like to introduce your host for today's call, Mr. Rick Durker, President and Chief Executive Officer of Church and Dwight. Please go ahead, sir.

All right. Good morning, everyone. Thanks for joining us today. I'll begin with some thoughts on the macro environment and review our Q1 results, and then I'll turn the call over to Lee McChesney, our new CFO. When Lee is done, we'll open the call up for questions. As you read in the release, we have several topics to discuss this morning, including Q1 results, portfolio changes, tariff management, U.S. consumer spending, and a revised full-year outlook. With that, let's turn to how we performed in Q1. During our presentation at CAGNI in February, we stated we expected our organic sales growth to be at the low end of 0 to 2 percent range due to retail Destocking and weakening consumer demand. As it turned out, organic sales decreased 1.2%, falling short of our outlook. Retailer destocking accounted for a drag of approximately 300 basis points on organic growth. The good news is our strong brand performance. We gained share in nine of our 14 major brands as our consumption outpaced category growth. 80% plus of our business grew volume share in the quarter. Contributing to our Q1 results is our success in the online class of trade, with online sales as a percentage of global sales now reaching close to 23%. In a few minutes, I'll contrast our Q1 consumption with category growth when I comment on the major categories. Regarding earnings per share, adjusted EPS was $0.91, beating our outlook by a penny. Now let's discuss the strategic actions we outlined in the press release. Each year, our management team reviews our brand portfolio with the board of directors, and in concert with that review, the company completes a valuation exercise for each and every brand. As a result of that review, the company is pursuing strategic alternatives for the Flawless, SpinBrush, and Waterpik showerhead business, which means we'll be shutting down or selling these businesses. These businesses generate $150 million of net sales, or around 2% of our total net sales, with below average profitability. We expect to take a charge in Q2 relative to this decision. This decision will prune our portfolio, sharpen our focus on core brands, and mitigate a significant tariff exposure, which is the next topic I would like to discuss. Turning to tariffs, while the tariff situation remains fluid, the company is currently projecting a gross 12-month run rate tariff exposure of $190 million. The net impact of the portfolio decisions and a series of supply chain actions is expected to reduce our tariff exposure by approximately 80%. The supply chain actions include no longer sourcing water pick flossers from China for the U.S. market. Our ability to move with urgency to execute these changes is a testament to the Church and Dwight culture. I'm very proud of the company and the reaction that we've done here. Now I'm going to turn my comments to each of the three businesses. First up is the U.S. Consumption was positive in the quarter for the U.S. business, while organic sales declined 3%, entirely driven by negative volume from retail destocking. So let's look at the trend line. In the U.S., consumer spending continues to sequentially weaken. For context, it's instructive to look back at our U.S. year-over-year category growth since around mid-2024. In the second half of 2024, category growth averaged 2.5%. In Q1, our categories grew around 1.5%. March was flat, and April was negative 1%. And remember, for context, over the last 10 years or so, category growth is typically around 3%. In addition to the consumer, retailers took inventory actions, which impacted our top line. Now I'm going to provide a bit of color for a few of our important categories. Let's start off with laundry detergent. Arm & Hammer liquid laundry detergent consumption grew 3.4%, in contrast to zero category growth. Arm & Hammer share in the quarter reached 14.7%. There's a similar story on unit dose. Arm & Hammer unit dose saw consumption growth of 26.9%. which drove 120 basis point share gain to reach a 5.5 share. This is in contrast to a weak unit dose category, which declined 1.1%. Now moving to litter, similar story as to laundry. The category was up 1.9%, while Arm & Hammer Litter Conception grew 2.3%, which outpaced the category, and share reached 24.9%. The gummy vitamin business continues to be a drag on the company's organic growth. The gummy vitamin category grew 4.8%, which is the second consecutive quarter of growth, the bad news is our consumption was down 19%. The plans that we shared with you on previous calls will begin to be visible in the market starting in May. Those actions include new products, an enhanced taste profile, and new creative marketing. We'll update you on our progress on the Q2 call. Next up is Batiste. Consumption was down 5% in the quarter, with share declining 3.4%. There are a couple of contributing factors. One is we were experiencing some supply chain issues that have since been resolved. In addition, a competitor had a significant price increase that impacted our dollar share. On a positive note, Batiste continues to be the global leader in dry shampoo, and this year we're launching Batiste Light. As a leading brand, our innovations continue to attract new users to the category and increase household penetration. Over at Mouthwash, TheraBreath continues to perform extremely well. While the mouthwash category was flat in Q1, TheraBreath consumption grew 26%. It is now the number two mouthwash with a 20.3% share. Remember, we believe there's a lot of runway here as our household penetration for TheraBreath currently sits around 10.5% versus the category of 65%. Hero is the number one brand in acne care with a 22% share and continues to drive growth. Hero grew consumption by 13%. outpacing a 1.1% decline in the category. Hero market share grew 280 basis points in the quarter. And similar to the TheraBreath story, we believe household penetration growth is key for this brand. Currently, it sits at 8.7% versus the category of 25%. Hero continues to launch innovative solutions and patches and is entering the growing body care segment in 2025 with the Mighty Patch Body. Looking ahead, we're excited about our pipeline of new products, which remain a key driver of our success. In 2025, we expect continued innovation to power our growth and build on our momentum, especially in several core categories where we're leading the way. And we spoke about many of these at our analyst day in New York. Now turning to international and SPD. Our international business delivered sales growth of 2.7% in the quarter. Organic sales increased 5.8%, largely due to higher volume. Growth was led by Hero, TheraBreath, and Waterpik, and was broad-based with all of our subs delivering growth. Finally, SPD organic sales increased 3.2% due to a combination of higher price and product mix and higher volume. This business continues to deliver, and we continue to be excited about the future. Looking ahead, our full-year organic growth outlook is now 0 to 2%, driven by a weaker U.S. consumer. We expect our Q1 brand share momentum to continue. bolstered by our new product launches, our distribution gains, and sustained full-year investment in marketing. After considering the trend line that I shared with you, we do not see a catalyst for improvement in the US consumer. Our outlook also reflects no bounce back from Q1 retailer destocking. For adjusted EPS, we now expect 0% to 2% growth, which reflects the impact of lower sales and the impact of tariffs. I'll close by saying that despite a slowdown in category consumption, our brands are strong. They're doing well. We're gaining both dollar and volume share across much of the portfolio with a healthy mix of value and premium offerings, and we're well equipped to navigate the current environment. The strategic actions we announced today will position the company well for the future, and we continue to be on the hunt for the right acquisitions. I'd like to thank all the Church & Dwight employees for executing well in a volatile environment, and now I'll hand it over to Lee for more detail on the quarter.

Thank you, Rick, and good day to everyone. Before I jump into the quarter, I do want to say thank you to Rick and the entire CHD team for the warm welcome. I've only been here for a month or so. I've already seen what makes this company such a strong performer as a team is focused on execution. We're acting swiftly to address the challenging macro environment that nearly every company is facing today. With that, let's dive into the first quarter and our outlook. We'll start with EPS. First quarter adjusted EPS was 91 cents. down 5.2% from the prior year. The 91 cents was slightly better than our 90 cent outlook. Reported revenue was down 2.4%, and organic sales was down 1.2%. The organic sales decline was due to lower volume of 1.4%, partially offset by positive pricing and mix of 0.2%. Our first quarter adjusted gross margin was 45.1%, a 60 basis points decrease from a year ago, with improved productivity, positive mix, and higher margin acquisitions being offset by the impact of commodity inflation, higher manufacturing costs, and lower volume. Let me walk you through our Q1 gross margin bridge. We saw 160 basis points from productivity, a favorable 10 basis points from the combination of mix and price, and a positive 10 basis points related to the acquisitions. Those factors were offset by the headwinds I just mentioned above, and 20 basis points related to FX. Moving to marketing, our marketing expense as a percentage of sales was 9.3%, where 80 basis points lower than one Q of last year. For the year, we are targeting 11% of net sales. And accordingly, we expect to continue our first quarter momentum in gaining market share. For SG&A, Q1 adjusted SG&A increased 40 basis points year over year, primarily due to the year over year volume change. Other expense decreased by $7.7 million, inclusive of lower interest expense and higher interest income. We continue to expect other expense for the full year to be approximately $50 million on an adjusted basis. In Q1, our effective tax rate was 22% compared to 19.9 in Q1 of 24, a 210 basis point year-over-year increase. The expected adjusted effective tax rate for the full year continues to be 23%. And now to cash. For the three months of 2025, cash from operating activities was $185.7 million, a decrease of $77.3 million versus last year due to lower cash earnings and the sales time impact on working capital. Capital expenditures for the first three months was $16.5 million, a $29.8 million decrease from the prior year. We expect 2025 CapEx of approximately 130 million as we return to historical levels of 2% of sales in 2025. Let's now take a few minutes to walk through our outlook. For the full year, we now expect our organic revenue outlook to be approximately zero to 2%. Previously, that was three to four. The sales outlook now reflects the slower category growth and the retailer inventory reductions that we don't expect to recover. Full year gross margin is now expected to contract 60 basis points versus 2024. Previously, that was a positive 25 basis points outlook. As we expect the tariff impacts, persistent commodity input inflation costs to offset the incremental productivity. We now expect full year adjusted EPS to be 0 to 2%, down from our previous view of 7 to 8. This is primarily due to the lower sales outlook and the tariff pressures. Cash flow from operations for the full year is now estimated to be approximately $1.05 billion due to the impact of our lower EPS and the one-time charges. For 2Q, we expect organic sales of approximately negative two to flat. And as a result, we expect adjusted EPS of 85 cents per share, a decrease of 9% versus last year's adjusted Q2 EPS. As our outlook implies, we expect EPS growth to be weighted towards the back half of 25 to the marketing investment timing versus last year. And finally, as we noted in the release, this adjusted outlook as of April 1st, 2025, excludes charges and the ongoing results for the Flawless, Spinbrush, and Waterpik showerhead business. Those charges are expected to be between $60 and $80 million, larger recorded in 2Q, and two thirds is expected to be non-cash. With that, Rick and I would be happy to take any questions.

We will now begin the question and answer session. If you would like to ask a question, please press start, followed by the number one on your telephone keypad. Your first question comes from the line of Rupesh Parikh with Oppenheimer. Please go ahead.

Good morning. Thanks for taking a question. So obviously a lot of areas to cover, but maybe I'll just start out just, you know, as we look at your update organic sales growth guide, is there any way to get updated expectations by segment? And it's related to the international play out with your expectations for Q1.

Yeah, sure, Rupesh. Yeah, Q1 was spot on for international. Lee, do you have the division that you can share?

Sure. So, you know, international, as we talked about, had good growth in the first quarter and organically about 6%. SPD was about 3%. As we look forward, you know, we expect international to, you know, to be in that zone, maybe a little bit of pressures, some of the macro pressures spread across the globe. SPD, you know, will be maybe slightly better than it was in the first quarter. The domestic business, you know, obviously you can apply in the outlook. We had negative three in the first quarter. We're looking for a similar performance here in 2Q and then an improvement in the back half. Still be slightly negative to get to the overall outlook of still 0 to 2% organic for us in total.

Great. And then I guess maybe it's just my follow-up question. Just given a softer category outlook and a backdrop that you're seeing right now, what do you see on the promotional backdrop for the quarter? And then do you expect the promotional backdrop to intensify from here?

That's a fair question. For the quarter, when we talk about promotional, we really talk about laundry. And laundry in Q1 was 34% amount sold on deal. Very similar to what Q4 was, very similar to what Q3 was. So not a huge step up right now a lot of things happening on the laundry category you know there's concentration happening um from one of the peers there's some price increases on another part of the peers as they switch out different offerings and so it looks like there's a little bit more promotional going on right now as they work through those old uh inventory you know and transitions you know litter is the other example litter um promotion was around 18.8 percent and a quarter Sorry, 17.8% in the quarter. It was 18.8% last time. So again, stable. As categories are flat, though, people tend to increase their promotional spend. I'd say we're well positioned for what we think is the right level of promotion. Our assumption for category growth used to be around 2.5% for the year. It's closer to 1, 1.5% these days.

Oh, great. Thank you, Apostol.

Your next question comes from the line of Anna Lizole with Bank of America. Please go ahead.

Hi. Good morning, and thank you so much for the question. Yeah. Hi, Anna. I was wondering... Hi, Rick. I was wondering if you could just discuss maybe your expectations for the category relative to market share growth, since you did mention softer trends in April. Are you seeing a significant difference here across the premium and value segments of the business in terms of a slowdown? And just on the value side, are you trying to see any benefit here from trade down or anticipating a benefit as we're moving through the year? Thank you.

Yeah. So, you know, if you take a big step back and you look at our outlook, organically, we're saying the midpoint's around 1%. And we saw minus 1 in Q1. We're saying Q2 looks a lot like that, so maybe minus 1. And then that implies something closer to around 2 in the back half. And like I just told Rupesh, the categories themselves, we used to think we're going to grow 2.5%, and we were going to grow faster than that. We think the categories are going to grow maybe 1% to 1.5%, and we grow a little bit faster than that. In terms of trade-downs, know surprisingly we're still not seeing the amount of trade down that we would expect if this type of environment perpetuates so orange box still isn't growing faster than black box on litter as an example the value part of the laundry category is not growing as fast as the mid-tier. And the mid-tier, again, is growing a lot behind deed clean, our new innovation. But when trade down happens, those two things will be a trigger. And I expect our extra business as well will do better. It's just we have to be down like this for a period of time. So I believe that we're in early days of this type of environment, and we're well-positioned for when we stay here.

Okay, thanks very much.

Your next question comes from the line of Chris Carey with Wells Fargo. Please go ahead.

Hey, good morning, everyone. Can you guys frame within the reduction in earnings for the year, how much was the revenue call down versus tariffs And maybe just, you know, simply put, you know, what is the tariff impact that you're embedding for this year? And can you help give us a bit of clarity on, you know, the wraparound tariff impact in the 2026 unmitigated for some of the sourcing changes you're making? And then perhaps how you're thinking about your 2026 absolute tariff exposure? I mean, effectively, there's this $190 million number But what we're going to end up seeing in the P&L is substantially lower. So how does that look in 2025 and 2026? Then I have a follow-up.

Yeah, sure. I'll give you my thoughts. And if Lee has anything to add, he can do it. Just taking a big step back on the tariffs, I really do think this is a great example of Church and Dwight moving with speed and urgency. A gross impact of around $190 million on a 12-month run rate basis. And I just want to be clear, we're not taking those strategic actions because of tariffs. We've been discussing internally for some time, and they've been on the list of businesses that we believe either have a better owner elsewhere or we're going to shut down. And even as recently as this past summer, we went through those details with the board. And so those three businesses, though, at marginal profit levels, at $150 million of sales, are really hit extremely hard by tariffs. So it made sense to kind of fast forward that discussion and that decision. So that $190 million goes down to $100 million when those three businesses have strategic options around it. And then it goes down to around $40 million after we've made the manufacturing decisions for Waterpik Flossers as we've moved that business out of China over time. And so to be able to go from 190 gross to kind of a $40 million number is fantastic. And then we're going to continue to be working through supply chain activities and maybe nuanced pricing over time to reduce that even further. So in the P&L for 2025, to answer your question, there's a net number of around $30 million in our outlook If you do the wraparound at 2026, that's why we say it takes 12 months to do some of the rest of the supply chain activities. We won't go through all the detail, but we expect to further mitigate that number over time. Is it an issue? Yes, but after all that work, that's a manageable issue that we feel pretty confident on being able to mitigate over the next 12 months or so.

Thank you. From the connected, in a way, what you were saying about some of these businesses that, you know, you had presented to the board and, you know, had thought about strategic alternatives. Conscious, the vitamin business, you know, how to plan for this year on a performance to category, you know, is widening. You know, at what point does patients with TLAN you know, run out. I'm conscious you have, you know, a strong balance sheet, which gives you a lot of options to do many things. And so maybe give us updated thoughts on, you know, where vitamin sits within your medium to long-term plans and maybe what's happening this year that hasn't gone as well as maybe what you would have hoped relative to your, you know, go-in plans. Thanks so much.

Yeah, fair question. I think right now we're kind of in that a little bit of that circle where you have negative consumption that leads to lower TDP growth. Lower TDP growth distribution points leads to lower consumption. What we're laser focused on is the innovation, the best tasting reformulation, change in marketing to reach the right consumer, and to do some couponing to go drive trial, loyalty rate is actually very low in the vitamin category. I think it was like 8 or 9%. So if we can go get those consumers to retry our best tasting formulas, and again, the new innovation is Power Plus, our most powerful vitamins, then I think we have a good chance to have some green shoots and inflection points in that business. That business is not meeting expectations. We said last call that we needed from April through July to see if this innovation turnaround and investment is working. And so that's why in my prepared remarks, I said, we'll talk more about that after Q2. Okay.

Thanks, Rob. The next question comes from the line of Andrea Texera. JP Morgan, please go ahead.

Thank you, operator, and good morning, everyone, and welcome, Lee, to the call. I wanted to just go back. You called out, in terms of consumption, you called out the 300 basis points reduction in consumer domestic for the inventory stocking. But if you can comment also on Hero, it was a big motor of growth, and I understand all the actions you're taking. and the brand continues to be strong, but I'm assuming it is hitting a very tough comp. And as you said, for vitamins, it's obviously a completely different story between Hero and the vitamin side, but talk about the distribution points and how we can think about that brand continue to grow as you lap the growth. And then on the commentary, just an clarification on the promo side, I understand the depth and how the percentages are. I still don't promo, but if you can comment on the depth of the promotions, if there is a, to your point, some of these categories, litter and laundry, perhaps having a little bit more depth and for how long you think that's going to normalize. Thank you.

Yeah, thanks for that question, Andrea. I would say for Hero, we are still really pleased with consumption. You know, it's double-digit consumption, up 13% in a quarter. I think the nuance that's happening in Hero is, remember, it's overexposed to a few retailers. You know, it started at a few that are having foot traffic issues. And so it's doing great growth almost everywhere, apples to apples. uh but foot traffic declined at a few different retailers uh it kind of over indexes to hero but overall you know with that said double digit consumption is fantastic we still think we have tdp growth uh we believe we you know with our share of market we're under indexed at shelf in many places so not only just going to new retailers and new distribution but just being able to spread out on shelf. It still happens that by Sunday or Monday, the shelf could be empty. And I think we gave the example at a few of our conferences that at a few retailers, at times, especially at tentpole events, but at times, the top three units or dollar sales at any retailer is water, paper towels, and Hero. So it's doing really, really well, and it still is, and we have some great distribution gains ahead of us. Moving to sold-on promo, you're right. The percentages kind of tell you the frequency. Depth is a different story. You know, most of the – I would say it's a little opaque out there, but different concentration moves and different pricing moves and some of this being spent back on promotion. And I would say right now we view that as transitory. because of size changes and skew changes and whatnot. If that extends for a period of time, we'll talk more about that in Q2. But for now, I would say pretty much in line with what we were expecting.

Thank you.

The next question comes from the line of Steve Powers with Deutsche Bank. Please go ahead.

Good morning, and welcome, Lee, as well. um i guess rick the um the guidance implies i think your expectations are explicit about about back half improvement in organic growth and i'm just juxtaposing that against your your expectation you're not really expecting consumption to improve and we've seen this step down in in april so um you know acknowledging that the d stocking in one cube is you know probably doesn't continue as a base case just what what's the bridge to back half improvement

Yeah, I think it's a fair question. I think positive category growth, I think it is kind of unique for us to have – I went through it in the release, but I'll say it in my script, but I'll say it again, right? Two and a half percent growth in the back half of 2024, one and a half percent growth in the quarter. March was flat. April was down one percent. It is extremely odd for these categories to be negative. That – That is just not something that we have seen, and we don't expect that to continue for a very long period of time. They tend to grow around 3%. I get that we're in a volatile environment, weak consumer confidence, a more volatile world than ever. But these categories, over time, we still expect to return to growth. And then we have distribution gains happening in the back half. We have innovation, even incremental innovation that we didn't necessarily share in New York. We have strong marketing. We're going to keep our marketing where it's at. The long term strength of the business is to drive share over time. We did that well in Q1. We expect that to happen throughout the year.

OK, fair enough. And then just back to your commentary on vitamins and the initiatives you're putting in place between now and July. As we follow along from the outside, what does success look like in terms of monitoring things as we go? And then ultimately, what is the expectation? The ambition is to be winning and growing, but what's the expectation as you think about the initiatives you're putting in place and the returns you're likely to get in the back half and as we exit 25?

Yeah. Look, the green shoots or the inflection points that we want to see are things like, and they're going to be very obvious, like part of it's going to be our weekly POS on our multivite business, right? And given all the reformulation work and the advertising and the trial that we're pushing, we need to see the trends inflect higher. I would say customer and consumer reviews are a big deal. Are we taking a step up and are we hitting the mark on what the consumer needs and wants? That's a big deal. Are we getting... Have we stopped the decline in TDPs because the retailers believe in the story of our innovation? Because we're not just launching a new multivite. We're doing a reformulation across the entire lineup. We're doing a new PowerPlus vitamin. We're doing... sugar-free variants we're doing a GLP offering so it's a holistic innovation and is that enough to give it a shot on shelf so those are some of the the tactical things that we're going to be looking for over the next few months I would say I would say probably the the most important one for me is are we growing from here? Like we've made and are making some strategic decisions that we don't need to be in all classes of trade. We don't need to be in every subsegment of vitamins. We want to make sure we're retrenched a bit, but we can grow and are confident of growth from here. And so that's what, again, over the next three months, we're going to make that call.

Okay, perfect. Thanks for the context. Appreciate it.

Yep. The next question comes from the line of Olivia Tong with Raymond James. Please go ahead.

Great. Thanks, and welcome, Lee. You guys mentioned the potential for pricing, realizing it will be very surgical, but given the macros and declining categories, how do you layer in price, and what's your view on the promotional environment going forward? And then given this backdrop, how do you think you can continue – could you talk about how you continue to drive penetration in your newer categories, like uro and thoroughbreds, so that they can continue to contribute in the outsized way that they have? Thank you.

Yeah, good questions, Olivia. Now, on pricing, I'm actually really pleased with, again, the commercial organization here at Church and Dwight, and we're handling this just like we did COVID, really, the first few weeks. We have stand-up meetings every week, sometimes multiple times a day, and we're doing all types of actions. Because in this environment, you're exactly right. The last thing you want to do when categories are flattened down is try to go take price. And It's not good for the consumer. It's not good for the brand. And so we've worked really hard to mitigate 80% in the short term and probably more than that over the medium term. And so that's going to enable us not to take price. There might be a couple examples where we do. And again, that's going to evolve based on how the external environment evolves because things change from Thursday to next Tuesday. So I'm just happy and pleased with the culture of this company and how quickly we can move when we need to. But I would say overall, so far, we've been able to not have to lean in and take price. The second one was on penetration, especially for some of our new businesses like Hero and TheraBreath. And that is the story in my mind. We are so under indexed still on household penetration. And I think I gave you the numbers in the – in the prepared comments, but around 9% for Hero and 25% for Acne. And TheraBreath is a much bigger opportunity for sure. And so that means in an environment like this, we should be doing a couple of things. One, we're reallocating media where needed to higher and best use. And those two brands have a higher and best use for sure. We're committed to spending at the 11% of marketing clip, even in an environment like this, because we want to go drive awareness and household penetration. And that's the name of the game. And that means these two businesses have years of growth ahead of them. So combined with the marketing investment, we're going to continue to innovate with those two businesses. We have global expansion for those two businesses. And we're thrilled with kind of the growth curve that's happening.

Got it, thanks. And then just following up, can you talk about the drivers for the 85 basis point change in the gross margin guide to down 60? How much of that is deleveraged? Potentially some negative mix you talked about potential for more trade down as the year progresses versus what you've met in terms of tariffs. It seems like it's mostly tariffs, but just the flexibility within the rest of the P&L or within the operating guide. If you do start to see more trade down and that impacts the gross margin line.

Yeah. So I'll jump in there. So again, good morning. Thanks for the welcome. So, you know, I think similar to what you saw in the first quarter, right? We're down 60 basis points and we're saying that actually that's the view for the year as well. So, you know, behind that, obviously we talked about the, you know, kind of inflation operations costs being mitigated by productivity. you know, a little bit of price mix and then, um, benefit from the mix into acquisition, uh, higher margins. As you think about from a full year perspective, um, you know, productivity is still strong. We're frankly driving incremental productivity. Um, there's a, there's a bit more, you know, inflation still holding then there's even a little bit more, um, come in the marketplace versus four months ago, which is, you know, weird to think about in this macro environment, but that's the case. And then, to your point, the big driver, though, just difference-wise, is tariffs. And, you know, we talked about a little bit earlier, you know, the holistic 12-month number and just what we think will settle in into this year. And obviously, as we work through our different actions, there's obviously different timing events to those as well. That's the primary driver.

Great. Thank you.

Your next question comes from the line of Peter Grom with UBS. Please go ahead.

Great. Thanks, operator. Good morning, everyone. Welcome, Lee, as well. Lee, maybe just a quick question for you. I mean, I think you mentioned that 2Q US or domestic sales would be similar to 1Q. Could you just unpack that a bit? I think the guidance assumes market share gains, and I think Rick mentioned that category growth would be down kind of one. So I guess I'm just curious how you kind of get to that minus three.

Yeah, it's a good question. To your point, we noted what happened the first quarter with the inventory impact, and we certainly don't expect that much impact in the second quarter, but there's still a bit more. And then as Rick talked about, the category, the consumption levels have continued to slow down. And so, yeah, one should be less of a negative, and then one's going to be a new negative for us to manage. So that's what we're seeing here in April. Again, it's all about us.

driving share but you know the macro is just a bit softer so got it that makes sense and then Rick just a question for you I think you you said it's odd what you're seeing in terms of category growth you know I'm just curious why do you think this is ultimately happening why is it happening as quickly as it is and then just on the April commentary I get You have different categories, geographic exposure, but it is a bit different from what we've heard from some of your peers so far. So what do you think is causing the difference in terms of your April performance or what you're seeing versus maybe what some of your peers are seeing?

Yeah. No, Peter, it's a fair question. No, I would just say usually our categories are a good bellwether because we're going across so many different categories. We play in 18 categories. This represents most of those categories. I would just say it goes back to the core consumer feeling And I think even before tariffs, we were seeing signs of the core consumer being pressed. And we talked, I think even back in January, maybe at the end of the year, that our categories were growing 4.5%, maybe 4% or so in the first half of 2024. And then they were decelerating to 2.5%. And we had called that out and maybe it was at Barclays and everyone thought that we were being a bit of, I would say at the time, but we were just trying to be as transparent as we can and we set up. This is what we're saying. This is this is kind of the curve of what the consumer is doing, and that started going down a little bit further in Q1. And then. And then the whole tariff noise started happening, and I think that uncertainty exacerbated what was already going on. And when that uncertainty happens, it's going across many different categories, ours included. But I also think it's that type of feeling, transitory as this environment hopefully is. And while I think we have a malaise with the consumer for a period of time, maybe a year, 18 months, whatever it is, I think right now it's exacerbated. And this volatility is causing people to take a step back. And so that's what we're saying. That's what the consumer, this isn't us, this is our categories. And I think more of our peers will start saying that if they haven't already. Got it. Thanks so much. We'll pass it on.

The next question comes from the line of Lauren Lieberman with Barclays. Please go ahead.

Thanks. Thanks. Good morning. Sort of boring housekeeping, I'll admit. But in the release, you talked about that as of April 1st, you'll exclude the businesses that you're going to be divesting or exiting or exclude from results. I was just curious how we should handle that as we model. Like, are we putting it in the structural line or is it in net sales or just completely gone? And will you be restating the base just so we, again, know how to model?

Yeah, this is... It's a complicated situation, so we're trying to keep it as clean as possible. Our organic outlook excludes the impact from April 1 to December 31 of those three businesses, and our adjusted earnings will exclude the profit from those businesses from April 1 to December 31. The other lines of the P&L, because it's a reported and adjusted P&L, they will have it in there. So we're going to do our best to be as clear as we can, but for those are the two lines that I think really matter. And that's how we've lit it up.

OK, so we should think about adjusted EPS. The absence of those businesses is still a headwind to EPS.

The absence of those businesses, we're going to put the in that one-time charge will be mostly the non-cash charges and as we run out those businesses there would be a lower sales and profit impact to those businesses so net sales would be down reported and We'll also have a charge partially in Q2, but for those businesses in Q3 and Q4, that represents the profit for those. So we'll try to delineate that for you.

Okay. All right. Great. All right. Thank you.

And that was not a boring question.

For me, it was. For me, it was. I appreciate it.

All right. The next question comes from the line of Corinne Wolfmeyer. with Piper Sandler. Please go ahead.

Hey, good morning. Thank you for taking the question. So I just want to go back to the retailer destocking comment and kind of what's changed between now and a couple of months ago when you were anticipating that those orders to kind of come back over the year progresses. I mean, obviously like a lot has changed with the tariff situation and consumers pulling back, but why do you think the retailers wouldn't restock if the consumption is still you know, still there. And then separately, just any updated thinking around the M&A environment. I know you've been talking a little bit more about maybe looking at some international assets to edge the portfolio. Any change in thinking with the current macro situations going on? Thank you.

Yeah, thanks, Corinne. I would say you hit it on the head. You know, the pullback of the consumer, the agita around tariffs, I think that's what's going on, and that's why categories even in the month of April so far negative, and that's why in March they were flattish for us. So retail inventory, even a few months ago, we thought would recover because it was exactly that our consumption was running ahead of our shipments. And so we said, oh, OK, well, that's just a matter of time. And we've seen that play before and no problem. But the longer it's gone on and the more uncertainty that's out there, it just feels like everyone's retrenching a bit is what I would say. And then on international M&A, international M&A is, yep, still a strategy. We've got to find the right one. We're looking at different countries. In many cases, we would love to do what we did in Japan with Graphico is you create really a subsidy infrastructure and you can bring your brands there in an easier way. So we're always on the lookout for those kind of bolt-on acquisitions. And meanwhile, the leadership team is spending an awful lot of their time looking for the right acquisition. We've had a bit of a dry spell, but we still believe the number one use of cash in capital allocation, as does the board, is M&A. And so this management team spends a large percentage of time looking for the right acquisition both here in the U.S. and outside the U.S.

Great, thanks so much.

The next question comes from the line of Komil Gajrawala with Jefferies. Please go ahead.

Hey, guys. Good morning. It'll be a follow-up on the inventory levels at retail. I guess what gives you the confidence that inventories shouldn't bounce back or that there shouldn't be a restock. Is there something you're seeing in the market? Is it channel mix? Maybe you were high on inventories towards the end of 24. But the idea of sort of consumption being ahead of inventories and then sort of staying that way for the whole of the year just feels like something that maybe we don't see that frequently. So I'm just curious what might have changed or what gives you that confidence that hey, this was a one-time step down. This is where it's going to be.

Yeah, it's a fair question. I would say it's probably the expectation that Q2 looks a lot like Q1, given what we see in orders, that there's not a bounce back coming. I think when you have negative or flat consumption across many categories, the retailer doesn't um maybe want to lean back in uh to get to what we think is is the right level and we have heard other retailers continue to talk about taking down weeks of supply now do i think there's an incremental risk for retail inventory i absolutely do not overall because there's only a certain level that the businesses can be run effectively with so i don't really feel like it's an incremental risk Maybe it's a little bit of conservatism, and maybe we'll be proven wrong. We just think there's flat to slowing consumption in the near term. And we said for the back half, we think it's closer to 1.5%, which is lower than our 3% typically. So, yeah. So, you know, just the inflection point a little bit is what's driving our thinking there.

Okay, got it. I guess in the context of everything you mentioned on the consumer, you talked a bit about promo activity being rational, but maybe how do you feel like where it's going to play out over the course of the year? If the consumer stays in the sort of condition that they might be in, would you expect promotional activity to take up, or is it not a pricing thing and there's just something else going on?

No, I think, you know, we've seen this play out before back in 08 and 09. And if categories are flat for an extended period of time, competitors tend to go after share in a bigger way. And if you look at all the transcripts, everyone's talking about how they're going to gain share. Well, not everybody can gain share. We've proven in an environment like this that we do tend to gain share because we have the right promotional strategy, the right marketing spend. We have the right products and value offering innovation. And so we're usually set up better than most. But promotional levels do tend to go up if categories are flat for a period of time. But what I just said is why we believe that we tend to take share.

John, thank you.

Your next question comes from the line of Javier Escalante with Everycore.

Hi, good morning, everyone. I managed to still have a question on the inventory issue. So if you could help us, if there is anything to learn about the categories and the type of retailers where you are seeing greater lack in terms of reorders, I'm specifically thinking about the drugstores, very important for vitamins, And there is a lot of changes there, and there is a lot of problems with traffic. Is this particularly a pressure area? And if so, how that informs the relaunch of the vitamin business, which is a category that is increasingly going online?

yeah sure javier you know gummies and the drug class of trade are very very promotional you know you walk in and you see a whole aisle full of yellow tags which are tend to tend to be you know buy one get one free as we're looking to retrench we're making decisions on what class of trades we want to play in and i would say you know the sales uh and profits are not as um in that class of trade typically. So we're kind of retrenching on what skews, what offerings, what promotion depth that we're willing to go to in that class of trade. And there is a foot traffic concern in drug, in the drug class of trade. There's also, one of the retailers is not as financially stable as some others. There is a lot of noise, I guess, going on in the direct class of trade. But again, we retrench to where we have strength and we grow from there for vitamins. But the online class of trade is interesting. Online class of trade is actually half of all vitamins. And so we've got to make sure that we're hitting the innovation and and advertising, but really also focused on the online class of trade. And so specifically, it's very fragmented, but half the category. So we are looking hard at what the right innovation strategy is, and the short-term innovation strategy is to make sure that we're going after those sub-segments appropriately online, because if that's where the growth is, that's where the focus needs to be.

And Rick, if I may, if you can expand better on the laundry detergent piece. So there was a very weak read in April, I believe is the guys in Germany. So if you can unpack a little bit, I mean, you mentioned it, but it was very briefly that there is a lot of moving pieces. But if you can unpack what is happening in detergents in the context of

your push with the clean and the trade down into mid-tier that would be very helpful thank you yeah so look the uh the laundry business is healthy uh in in q1 um you know we had 3.4 consumption growth for herman hammer I think we had 26, 27% growth for unit dose. Even for scent boosters, we had 8% plus growth. And extra had positive growth as well. So largely for us, we continue to gain share in all those subsegments. And so we think we're doing and executing really well. I kind of alluded to it. There is some noise going on in the category. One competitor is catching up on some of the concentration activities that happened. year to a year to two a year or two ago One competitor is taking price at the top end and spending a bit more I guess in the low and mid mid tiers and And then and then one major retailer introduced private label at the premium end So there's a lot of moving pieces and I would say we're better positioned than ever in this type of environment what tends to happen is in a recessionary-like environment, and that's what I would start to call this environment that we're in, consumer confidence as we look forward to the 12-year low, this turmoil. What tends to happen is folks trade down to value. And even deep clean, while it's a mid-tier to us, the consumer doesn't. know what mid-tier or premium or value really mean. They just know that it's a 20% discount to the premium tier of laundry. They know that it's more expensive than our most basic offering, but we have a good, better, best strategy so that base Arm & Hammer can do well, Arm & Hammer AHOC can do well, and now Deep Clean does as well. So we're well positioned to wherever the consumer trades up or down to.

Thank you very much.

Your next question comes from the line of Dara Mosenian with Morgan Stanley. Please go ahead. Hey, good morning.

So I just wanted to touch on U.S. share. You guys mentioned you still expect to gain share in the U.S. despite the category weakness, but the track channel data does look like it's decelerated in terms of your share so far in April. And I would assume the Q2 corporate org sales guidance when you back out which is robust as well as presumed growth in STD, that you're assuming share loss probably implicitly in that Q2 guidance. Can you just shed some light on maybe overall share trends in the U.S. as you look at April, your thoughts, and the balance of the year here on a go-forward basis also? Thanks.

Yep. Good question, Dara. I am never assuming share loss, is what I would tell you. I believe, like I talked earlier, because of our portfolio, because of our brands, because of the advertising and the innovation and the promotional program we have in place, we have a long track record of growing faster than the category. And I fully expect that to happen now. And as we have... a stretch consumer, our brands are made for this time as well. And so all that's going to help and lead to share gains. April, you're right. I think I said the category is down 1%. We gained share in Q1. I expect to gain share in Q2. Sometimes it's just promotional timing to some degree. But that's the short answer to the question.

Okay. That's helpful. And then, obviously, the external environments changed fairly significantly in recent months. You're taking decisive actions on portfolio structure. I was just hoping you could review capital allocation from here, given your strong balance sheet. Might share purchases be a greater priority? Perhaps there's more M&A opportunities from an external environment standpoint, given the difficult environment, and just how you think about those two pieces. Thanks.

Yeah, we talk about it a lot. And even though we haven't done a deal in a couple of years, it doesn't mean that's not number one on the capital allocation priority. So I know I joked at previous conferences that M&A is number one, two, three, four on the list. And that's still true. We believe that we have a competency in identifying, acquiring, integrating, and growing acquisitions. And there's no better value creator for the company than just that. we have a huge amount of firepower. The math that we showed at Cagney was around $6 billion. We could do a couple deals. And the organization can tend to do a couple deals, even sequentially. So that's the number one capital allocation in focus. And if you look back at our history, if we go a long period of time without doing acquisitions, then we tend to look at buybacks. And in some cases, given this type of um low leverage we could probably do do both but number one i want to keep the powder dry for m a and so if we don't do m a for a while we'll look at and talk more about doing maybe any buybacks uh lee anything to add to that yeah i would just add you know number one one reason i came here i completely believe in this capital allocation methodology i have a whole history of doing m a making sure you have a discipline in doing m a

And we've shown that we find the right acquisitions and we drive value, you know, value-enhancing TSR. And then, obviously, that's one, two, and three. I guess we'll do behind that is we're continuing to invest in the business, even in this environment, whether it's, you know, we talked about the marketing side, the innovation side. And then, you know, obviously, you know, things like, you know, debt and shares that Rick talked about would be on the list, too. But, you know, Every day we're focused on number one, number two, number three, which again, go find that right deal to bring to the portfolio, but we will remain very disciplined.

Your next question comes from the line of Filippo Salorni with Citi. Please go ahead.

Hey, good morning, everyone. I had two quick clarification on the guidance. First, within the organic sales guidance of 0 to 2, can you give us a sense of what you're assuming for the full year for volume and price? You mentioned price increases, some surgical price increases. Maybe can you give us some sense of timing and some magnitude there?

Yeah. I mean, I would tell you, we talked about, you know, we got a pretty quick position. We talked about price quite a bit. I mean, price has been positive. If you know this points to point two in one queue, you know, we'll just say it's going to be flattish for the rest of the year.

It's you know, our outlook is all about volume growth.

So yeah, and then the price increases that we're talking about that is overtime. If we cannot offset, you know tariffs in my mind, we're going to work like heck to to do just that, and we believe that will be a competitive advantage versus other folks.

Got it, that that makes sense. And then on the tariff front, you mentioned the 30 million net tariff impact after the mitigation. Is that what is embedded in the gross margin and EPS guidance? So should we think about somewhere around 50 basis points of negative hit on gross margin and then somewhere around like 9 cents on EPS?

It's in the 40 to 50 basis points. Obviously, the exact timing will play out depending on actions and mitigations, things like that. That's a good number.

Okay. Got it. Thank you so much, guys.

Your next question comes from the line of Kevin Grundy with BNP Powerboss. Please go ahead.

Great. Thanks. Morning, everyone. I have a couple questions. Hey, Rick. A couple for me. Rick, just getting back to the decisions around the portfolio pruning. So the business lines that you're exiting certainly make sense. Not hugely impactful at about 2% of sales. I think there might have been some sense among some in the market that the divestitures or exits could have been larger. Is this pencils down for the year, given it's an annual review process? Or would you consider further divestitures? in the future uh i'm curious what's your commitment to a business like vitamins presumably you want to exit from a position of strength so maybe that's the the reason that that is perhaps on hold for now and a quick review uh maybe just on the criteria at a high level for for hold versus an exit um and i have a question for lee thanks

Yeah, well, look, we do go through a portfolio strategy review every year. Like I said before, we value each and every brand. There's a handful that are always on the list, and then we turn to a few of them and say, can we internally improve those businesses? And some of those things are underway. And so it doesn't mean that if those businesses don't do and accomplish those KPIs that we want, that we couldn't wake up and say, yep, that's on the list to do something with. So just because we have an annual review, it doesn't mean that there aren't other things in motion that we're always working on. You know, vitamins, we want to inflect that business and turn that positive for all the reasons I gave earlier. And we'll talk more after Q2 on how we're doing with that. And so I think that's a better question to ask, you know, after that quarter.

Okay, fair enough. Lee, welcome. Quick question for you. You mentioned the M&A dynamic and the appeal of that in terms of coming on board. What are your early impressions more broadly? Any potential areas where you think your background can potentially enhance the way Church is doing things, whether this is around productivity, whether it's around revenue growth management, capital structure, et cetera. We'd love to get your early impressions and thoughts. Thanks.

No, I appreciate you asking that nice question. So, I mean, number one, I'm very impressed with the CHJ team. Obviously, I can follow everything from the outside and the track record speaks for itself, but to be inside the building and to meet the people, the culture, the mindset to execute. I think in my first five weeks, everything we're showing here, the tariff situation continued to be a bigger challenge and look at the plan we've laid out here in just less than two months as everyone's dealing with that. We're, you know, the team is very focused on, I love where I, where I see where it's going on innovation. Um, certainly the continued focus on brand development, winning share. Those are all things I fundamentally believe in. Um, you know, this business, my focus right now is to learn this business. This business has been successful. Um, and I want to understand that when you obviously get, get more time to get out and meet people and understand what goes on across the globe at our different manufacturing sites. Um, and you know, my mindset is just to contribute my experience to what we have focused here. I believe in the evergreen model, you know, as I went through the process and got to spend time with Rick and other members of leadership team, you know, we have very similar thoughts and very focused on, you know, driving share, always making decisions with that in mind, but the same token, follow the facts, um, you know, find that right balance to protect gross margin. Um, you know, there's efficiency with how we run the business. to drive, you know, this overall high level of cash return. Those are all things that, you know, frankly just match with me. That's one of the reasons why I'm here. So I can just say with now six weeks in, it's everything I thought it would be and more. So I'm optimistic as we look forward here.

Yeah, and Lee's being humble as well. Like he has a great, you know, pedigree experience on M&A, right? Decades of experience with M&A on acquiring, integrating, He has decades of experience, not just as a CFO, but as a president of different businesses. So to have somebody in the seat that's an operating CFO is exactly the culture of this place, and we're going to be better off for it.

Okay, very good. Thank you. Good luck. Thank you.

Our last question comes from the line of Robert Moscow with TD Cowan. Please go ahead.

Hi, thanks. Rick, you've talked about having the right advertising, the right promo, the right spend, but the world's changing quite a bit in the last four months. So other than vitamins, are there any categories where you've had to shift your tactics, maybe lean in a little more from a promotional standpoint, or because your market share is good, you feel like, hey, we can just keep executing the plan as it stands?

Yeah, not from a promotional perspective, really. I'll tell you, we are pivoting a little bit on our advertising. We just walked the board through it, but Stacy's our CMO. She's doing a great job, and she laid out how we're shifting our messaging more towards value in this environment. Some big steps in doing that, reminding people across the Arm & Hammer brands that we are a value, but across our other brands, too. And I think that messaging is going to be important in times like this. And so that's kind of one pivot we're making. And we're pivoting a little bit on what brands we allocate media to and where we over-index or under-index.

Okay. All right. Thank you.

I'll now turn the call back over to Rick Derzer. for closing remarks. Go ahead.

Great. Well, thank you for your time today. I'll just tell you that the company is laser-focused on growing share, launching our innovation to delight the consumer, and we're a stronger company for these portfolio actions and look forward to talking to everybody next quarter. Thanks very much.

Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.