Church & Dwight Q2 2024 Earnings Call Transcript

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 liquid laundry detergent sold on deal from Q1 to Q2, it actually was down 190 basis points year-over-year. It was down a 200 basis points sequentially. And you might scratch your head about, why would that be? But you guys probably have this in your circana 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 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% [Phonetic] and Q2 was a little over 18.3%[Phonetic]. 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, we 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 -- that's give you a little bit of color on promotions.

Unit doses, it's kind of the same story as well, Q1 to Q2, just round numbers went from 26% to 31%. That's year-over-year, I'm sorry. But sequentially, it was -- went from 26% to 36%. So there's a lot of big changes happening in each of the categories, but I would say if you're just looking at the second quarter, you wouldn't say it's any more promotional. It's just an anomaly with one brand in queue in liquid laundry and one brand in litter swinging the numbers.

Yeah, well, I can give you some color on that. We look at the commentary of food companies. And we see callouts like, hey, the consumers being price conscious, we'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 Circana 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 -- 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. It's a 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 balancing the household budget, making choices to satisfy their needs. We have three things going for us. One is the strength of the brand. So you saw in the release 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 that's strength of the brands to be number one.

Two is innovation. 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. It's 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, May was around 2%, June flat and then July down 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, you see how the categories are kind of trending down. And I can give you other examples, but that's where we come out and say, based on everything we're hearing from other industries, unemployment, what we've seen in in the Circana and Nielsen data, it seems pretty obvious to us that 3% makes a lot of sense for the next six months.

Yeah, and Rupesh, this is Rick. I would just -- to tack on to that, it's not just one category. That's kind of what Matt is going through. If you take the weighted average and you look at every category individually, there is a slight deceleration in most.

Hey Chris.

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 are just -- 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 heard us talk about the success we're having in so many categories with our new products and that's where we've concentrated our promotions, displays, etc., not just in the household but also in our personal care products. And we got the marketing coming behind it, too. We've got a lot more marketing in the second half behind those brands. So we definitely like our chances regardless of the slowing categories.

Framing the vitamin business [Speech Overlap].

Yeah, yeah well, the category, I gave some numbers there before about May, June, July for a bunch of different categories. Vitamins, if you do May, June, July, category dollars down 1 [Phonetic], down 2 [Phonetic], down 1 [Phonetic] at May, June, July. So it's more us than the category. And we have not been able to renovate our portfolio as fast as we had hoped. And some of it is the retailers how much additional shelf space will it change your shelf position, etc. And some of it is us, the speed at which we can renovate the portfolio. So I'd say, it's more on us, frankly, than the external environment. But we know we need to do and I think we think about how good we would be, if we could get them and turn it around considering how all the other businesses are doing well. But yeah, it's more work to do there, Chris.

Yeah, well look, the categories has slowed down. Some of them, for example, laundry and litter, you get to July pretty much flattish. So when you have flat categories, the only way you're going to grow is you have to take share. And we -- obviously, was like our chances because that's what we've been doing so far this year with -- especially driven by our new products. A lot of our share growth in litter was driven by Hardball, our new launch there. So now we're not saying, hey, this is going to -- this graph, if you're going to graph it, is going to continue to go 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 it will stay this way to 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 3% for 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 organic growth grower in the last four quarters, and that will continue, we think, for the next two.

Yeah, so this might help you too. If you look at dry shampoo, dry shampoo first five months of the year was double digits; May was 12%. And if you look at June, July, it's more like 6%, 7%. So 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.

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.

Yeah, so we said there were two reasons why Circana would say, 6%; and domestic, organic was 3.8%. So the 200 basis points of a disconnect, it was, one, we had talked about before, which was we had a HERO pipe a year ago. And then the second one, which actually was more of a surprise for us was retail inventory adjustment in the quarter. That was primarily on laundry, but I would tell you, there's more noise in the system these days as 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.

Yeah, if 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. Our algorithm is international is going to grow 8% on an annual basis, and they're tracking above that right now. Before I give you some remarks with respect to the US 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 US than international, but still it's something to keep an eye on, Peter. But right now, 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.

Yeah, at this point in time, we don't have any, I mean there are different classes of trade always talk about store closures or rightsizing. And so all that's kind of baked into our outlook. It's a little noisier than normal, I'd say. We've 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 organic.

Yeah, so drug and dollar are the two classes of trade that a little bit turbulent, I guess, right way to say it, looking ahead, but we 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.

Yeah, well, look, I think if people look back through history and you say 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. And we had 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, right? In general, it's still positive growth from a dollar perspective and still positive growth from a volume perspective. So that's context, right? Private label shares are still relatively stable. 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. We were always palms up, and -- we are seeing. So that's what we're doing today.

Yeah, well look here, THERABREATH is a big success story for the company. As you know, we have 17% share, we're number three in the category. Number one is Listerine at 38% and Crest at 18%. And we've been getting more facings 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 THERABREATH 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, THERABREATH, actually, was the number three brand and unpromoted and we had a really good Prime Day for THERABREATH. So there's lots of indicators to 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 then that's probably going to be over the next six months 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'd be down and then by midyear, things start to turn around, so we would be exiting the year with a stable business, no loss of share. I don't see that happening right now. But we got lots of different irons in the fire here and some are working, some aren't. We just need a little more time.

Yeah, well, look, I'll give you some category data, like the acne category May, 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, subcategory at 54% share. So it's -- 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. This is just math 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, I think 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, extremely strong. And I would say, we're not going to point to a growth rate in the future, but we still have to be double digit, strong double-digit growth as we look out over the horizon.

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, these questions were bit more detail, so 10 out of 14, I think Q2 was 10 of 14. I think July -- June, July -- or July was 9 of 14. So no real change.

Well, I think it's reflected in our second half call, right? We said we grew 5% organic in the first half, 3% in the second half. So I think that's all baked in into the numbers, but we wouldn't give like mid-quarter.

It's more of a -- 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.

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 could find comans [Phonetic] to make your product. So if you get an idea and catchy brand name, you can pretty much enter. So that's really what we've been experiencing. And of course, we've definitely struggled in the bricks and mortar. We do have some bright lights here on the online class of trade. So we're doing extremely well on Amazon, we've got a lot of growth there, but then that's a smaller piece of the pie. We've mentioned before renovating the category, meaning that we're -- this year, we've been changing the formulas to improve the consumer experience, meaning that taste and bite, we're launching into chewable, 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 years or five years. And so everyone's rushing to put the capacity 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, we call it out because there has been a struggle for us.

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

Yeah, as far as M&A, you're correct in that last year, we looked at four or five different brands, and 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 are going 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 file the Q. But yeah, we're very busy and the market is active.

And then on WATERPIK, the good news on WATERPIK is consumption is up high single low double digits. So we really work through that retail inventory issue that we talked about last quarter. I would say WATERPIK flattish for this quarter. We think it's slightly down for the full year, largely based on what happened in Q1 from a sales perspective. So not ignoring WATERPIK, but I'd tell you that consumption looks good for WATERPIK.

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, HDPE is up a little bit, ethylene's up a little bit, but no change from a net perspective as productivity has come 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. And we also want to spend behind our new products in terms of displays and support and whatnot. So that's kind of our assumption.

All right, Kevin, that's a multipart question, many of which I can't respond to. What I can say is that Barry has been here 11 years, had a eight year stint international, three in the US, a big part of our success and sad to see him go here through early October. It's business as usual here. So we have some time to figure out how we're going to fill the position. But I think that's as detailed as we go into on a call like this.

Okay.

Yeah, deceleration for gross margin?

Yeah, Okay. Well, in the quarter, we had favorability, really, because of mix. Within our personal care portfolio, we had higher margin product 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 from -- 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 trading coupons in the back half as well. So those are probably the two or three things I'd point to in the back half.

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.

Yeah, on the first question, we fully anticipated when we launched the Deep Clean that you would have some ARM & HAMMER consumers trade up. So Deep Clean 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 and Deep Clean is the best. So yeah, we do have some data that as 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 Circana data about Henkel or Persil or any of those things. We would just say we continue to gain share in laundry. And as the category is slowing a bit, we continue to gain share and do better in the market.

Yeah, Javier it's a fair question. 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.

Yeah, we're not doing it in alphabetical order either.

Yeah, well, one thing I 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, 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. 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 change in consumer buying habits.

Yeah, as far as vitamins goes, yes, there's been quite a change over time. I think we bought the business in 2013, the gummies represented 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 falling back from COVID. You had several years of growth in just a couple of years. So I think household penetration is greater as a result of COVID and that's kind of plateaued and started to pull back. But no, I wouldn't say that our issues are related to the fact that there's an issue with efficacy. It's 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 what brought a portfolio of sugar free as some of our competitors. And again, that's one of the areas when I talk about renovating the portfolio. That's one of the areas we're focused on.

Okay. Operator, we are at the end of the line?

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