Church & Dwight Co. Inc (CHD) — Q1 2023 Earnings Call Transcript

Good morning, everybody. Thanks for joining us today. I'll begin with a review of the Q1 results. And then I'll turn the call over to Rick Dierker, our CFO. And when Rick is wrapped up, we'll open the call for questions. So Q1 was a solid quarter. Reported revenue was up 10.2%. Organic sales grew 5.7% and exceeded our 1% Q1 outlook. Of the 10.2% reported sales growth, we beat our outlook of 4%, thanks to stronger results from several brands, including Hero, THERABREATH, ARM & HAMMER laundry and ARM & HAMMER litter and exceptionally strong sales growth in our international business. The other good news is that the vitamin business and the WATERPIK business hit their Q1 sales plan and were right on expectations. And finally, it's also fair to say that we had a degree of conservatism in our original Q1 outlook, both top line and bottom line. Our Q1 top line growth reflects the strength of our brands, both premium and value, and also our focus on execution. The combination of consumer demand and improved case fill, which is now over 93% in the U.S., is resulting in strong revenue growth. Something else that is noteworthy: we had flat volume growth in Q1, which is an encouraging sign after declining volumes in the last six quarters, and we now expect volume growth in our full year net sales outlook. Adjusted EPS was $0.85, which was $0.10 higher than our $0.75 EPS outlook. That was driven by higher-than-expected sales in the U.S. and especially in our international business, which posted 11.6% organic growth. In Q1, global online sales as a percentage of total sales was over 16%, and we continue to expect online sales for the full year to be above 16%. Now, private label shares remained consistent with historical weighted averages. Both domestically and internationally, private label is stable in our categories. And now I'm going to comment on each business. First up is the U.S. The U.S. consumer business had 5.5% organic sales growth, and 8 of our 14 power brands held or gained market share in the quarter. Now I want to look at a few of the important categories in the U.S., and I want to start with laundry. If we look at the big picture, value laundry detergent grew 9%, while premium detergent declined 3%. So the trade down to value detergent continues into 2023. During Q1, the liquid laundry category grew 3.6%, while ARM & HAMMER grew 9.3%. ARM & HAMMER liquid laundry detergent grew share by 80 basis points in the quarter to 14.3%. So with more consumers migrating to ARM & HAMMER laundry detergent, we have the potential for a long-term benefit to the ARM & HAMMER brand similar to the last recession. Now over in litter, the category grew 12.7%, while ARM & HAMMER litter grew 13.5%. So we gained market share in the quarter. We did see a trade down from our premium ARM & HAMMER Cat Litter to our ARM & HAMMER value litter, which is in the orange box. So consumers are staying in the ARM & HAMMER franchise. And our 'Give it the Hammer' advertising campaign, which halos met the many categories that ARM & HAMMER competes in, is resonating with consumers. Now in dry shampoo, the dry shampoo category was up 11.8% in Q1, driven by BATISTE consumption, which was up 20%. We now enjoy a 46.2% market share in dry shampoo. In the condom category, the category was up 4.1% in Q1, while TROJAN consumption was up 5.3%. There again, we gained 80 basis points of market share, thanks to our new TROJAN bare skin raw condom and the success of more targeted marketing. Our most recent acquisitions, THERABREATH mouthwash and HERO, are performing extremely well. THERABREATH, which we acquired in December of 2021, had just a great quarter with 70% consumption growth. THERABREATH grew share by 6.8 points to 22.5% of the alcohol-free mouthwash. And as promised when we bought the brand, distribution of THERABREATH has doubled since we acquired it in December of 2021. THERABREATH is now the number two non-alcohol mouthwash brand and the clear number four in total mouthwash. We expect this brand to be a long-term grower for Church & Dwight. Now, ZICAM, this is a December 2020 acquisition, also delivered strong results this quarter. ZICAM is the number one brand in the cold shortening segment with a 78% share. Now to our latest acquisition, HERO, which grew year-over-year consumption by 43.5% and gained 1.6 share points to achieve a 9.1% market share in the total acne treatment category. Distribution has expanded by 50% since the October acquisition date. And as we said in the release, there continues to be a great deal of excitement around the HERO brand and especially the HERO team. From our oldest brand to our recent acquisitions, our brands are driving category growth. I'm going to give you a few examples. ARM & HAMMER liquid laundry detergent, which has a 14% share of the liquid laundry category, drove 35% of the category growth. In the dry shampoo category, BATISTE has a category-leading 46% share but contributed 75% of the category growth. And in the mouthwash category, THERABREATH makes up 11% of the total category but delivered over 50% of the growth in mouthwash. Next up is international. Our international business delivered organic growth of 11.6% in Q1, driven by strong growth in the subsidiaries and double-digit sales growth from our Global Markets Group, and that was quite balanced across all our global regions. The growth was headlined by BATISTE, vitamins, FEMFRESH, WATERPIK and gravel. And as far as the consumer goes, similar to the United States, unemployment remains low in our international countries where we have subsidiaries. However, in many of these markets, particularly in Europe, the consumer is facing inflation in energy and food, but so far, consumption has remained strong. In China, while it is a relatively small market for us, we are experiencing stronger growth in Q1 and remain optimistic about the full year apart. And finally, Specialty Products. Specialty Products' organic sales decreased 5.9% primarily due to lower volume in the dairy business as low-price imports returned to the U.S. market. I want to wrap up my remarks by saying consumption is strong. Our value offerings are performing well, as are our premium offerings. Acquisitions are on track. We're ramping up our marketing this year in support of our brands and new product launches. And we expect to have the opportunity to invest even more behind our brands in future quarters. And now, I’m going to turn it over to Rick to give you some more color on Q1.

Thank you, Matt, and good morning, everybody. We'll start with EPS. First quarter adjusted EPS was $0.85, up 2.4% from the prior year. The $0.85 was better than our $0.75 outlook, primarily due to continued strong consumer demand for many of our products and higher-than-expected gross margins. Reported revenue was up 10.2% and organic sales were up 5.7%. About half of the reported revenue growth year-over-year was HERO. Organic sales were once again driven by pricing in Q1. However, as Matt mentioned, the fact that volume was flat was encouraging and gives us confidence that we will return to volume growth later this year. Matt covered the segments, so I'll go right into gross margin. Our first quarter gross margin was 43.5%, a 90 basis point increase from a year ago, primarily due to improved pricing, productivity, and the impact of the HERO acquisition, net of the impact of higher manufacturing costs. Let me walk you through the Q1 bridge. Gross margin was made up of the following: positive 160 basis points impact from price/volume mix, positive 120 basis points from acquisitions, a positive 160 basis points from productivity, and 10 basis points from currency, partially offset by a drag of a 360 basis point impact due to higher manufacturing costs, including inventory charges related to discretionary brands, primarily FLAWLESS. For the balance of the year, we still expect sequential improvement in gross margin and year-over-year expansion throughout the year. Moving to marketing. Marketing was up $20 million year-over-year. Marketing expense as a percentage of net sales was 8.6% or 70 basis points higher than Q1 of last year. For SG&A, Q1 adjusted SG&A increased 90 basis points year-over-year. Other expense all-in was $23 million, an $8.6 million increase due to higher interest rates. Our expectations for interest rates for the remainder of the year remain unchanged from our prior guidance. We do not have any looming long-term debt refinancings. In fact, August of 2027 is the timing of our next maturity. For income tax, our effective rate for the quarter was 24.4% compared to 23.2% in 2022, an increase of 120 basis points. We continue to expect the full year rate to be approximately 23%. And now to cash. For the first three months of 2023, cash from operating activities increased to $273 million due to higher cash earnings and improvements in working capital. We now expect full year cash flow from operations to be approximately $950 million. Previously, we expected $925 million. The $25 million increase is driven by higher cash earnings and an improvement in working capital. Our full year CapEx plan continues to be approximately $250 million, as we continue to make capacity investments, and we expect to return to historical levels by 2025. And now for the full year outlook. Given the strength of our Q1 results and our confidence for the remainder of the year, we are raising our outlook for sales, EPS, gross margin, and cash flow. We now expect the full year 2023 reported sales growth to be approximately 6% to 7% and organic sales growth to be approximately 3% to 4%. We now expect full year EPS in the range of 2% to 4% growth. Given the strength of the business, we see opportunities to make incremental investments in our brands and capabilities in future quarters. We now expect full year reported gross margin to expand approximately 120 basis points, and as we expect pricing and productivity to more than offset inflation. Our full year inflation expectations remain unchanged from our previous outlook. Gross margin is expected to benefit from pricing, pack size changes, longer concentrations, and the full year impact of the higher-margin HERO business. As you read in the release, two items of note that are aiding our margin recovery are new litter pricing that went into effect on February 1 and the latest round of concentrations for laundry. We intend to increase marketing as a percent of net sales to 10.5%. We continue to expect SG&A both in dollars and as a percent of net sales to increase compared to 2022, as the company's incentive compensation plan returns to normal levels in 2023. As a reminder, our EPS guidance includes a step-up in our level of marketing investment as well as higher SG&A. For Q2, we have a strong outlook and expect reported sales growth of approximately 7%, organic sales growth of approximately 3%, and gross margin expansion with higher marketing spending. The math would show a sequential decline in sales growth, but it's easy to explain. First, distribution pipeline fill for HERO and THERABREATH accounted for 1% of growth in Q1 that will not repeat in Q2. The other is around quarterly comps and how that impacts the current year. For the domestic business, there was a large improvement in case fill in Q1 to Q2 last year, which leads to a tougher comp in Q2 of this year compared to Q1 last year. As an example, our international business in Q1 in 2022, organic growth was 0, and in Q2 it was 6.5% in 2022. As a result, adjusted EPS is expected to be $0.78 per share, a 2.6% increase from last year's adjusted Q2 EPS. And with that, Matt and I would be happy to take questions.

Hi, good morning.

Hi Chris.

So I just wanted to ask about -

Chris, you're breaking up.

Operator, why don't we go to the next question and Chris can get back in the queue.

Great. Thanks. Good morning, everyone. Can you guys hear me okay?

Yes.

Great. So I wanted to start on the gross margin outlook. Some of the key drivers there, maybe how you're seeing that a little bit differently given the strong start to the year and some of the moderation in commodities and sort of tie that in with how you're thinking about potential reinvestment. So the outlook now, up 120 basis points on gross margin year-over-year. The prior outlook was up 100 to 120. So modestly better. Rick, maybe just comment on how you're seeing the contribution from pricing, commodities, and productivity sort of the key levers? And then Matt, maybe you could want to chime in on just how you're thinking about restoring advertising and marketing levels. It was kind of a stair-step function, at least that was sort of the thinking coming into the year. Is there anything maybe accelerating that sort of within the context of advertising and marketing had been 12% of sales, down to 10% this year, the thinking is 10.5%. How should we be thinking about the potential reinvestment if gross margin exceeds expectations? And I have a follow-up.

Yes, thanks, Kevin. I'll start. We expect our gross margin to continue improving throughout the year. We performed better than anticipated in the first quarter, which is why we've raised our full-year expectations. From a pricing standpoint, we foresee a decrease in overall pricing and inflation as the year progresses, along with an increase in productivity. We believe these factors will act as tailwinds. If we exceed our gross margin goals, that's why we included investment commentary in the release. Matt?

Yes, you asked a great question about marketing. Last year, our marketing expense as a percentage of sales was 10%, which was fairly low for us due to various challenges, particularly with our fill rate. We planned to improve that and aimed for at least 11%, hoping to reach halfway there in 2023. Our first quarter showed promising results, which allowed us to adjust our earnings per share estimate from 0% to 4% and then to 2% to 4%. We maintain a long-term perspective for the company, so if we perform even better in the upcoming quarters, we might surpass a 10.5% marketing spend relative to sales. Historically, we have focused on growth during these periods, meaning we are looking to invest more in marketing, especially considering the growth potential in international markets. We could bring in third-party assistance to expedite product registrations that were planned for the future. Additionally, we have research and development projects that we could allocate resources to and are also working on enhancing efficiency through automation of repetitive tasks in the company. There are several IT investments we can make, and sustainability remains a key focus for us, with initiatives like alternative packaging that we could advance. Overall, we feel optimistic about our position and opportunities for the rest of the year.

I appreciate the comment. If I could just get one more question for Rick as well. HERO seems to be performing much better than many had anticipated. How is its performance in relation to your own expectations? Presumably it’s better, I would assume. Why is that? Is the distribution ramping up more quickly? Is the velocity improving? Is it both, and if so, why? I would also like to hear your updated thoughts on your outlook for the brand. Thank you.

Yes, I'll share a few thoughts, Kevin. It's Rick. I believe both factors are contributing to this. Velocities are even better than we anticipated, and the distribution gains and TDPs are outpacing our expectations. I think Matt mentioned the TDPs for HERO, and we've seen a 50% increase since acquiring the business.

Hi, good morning. And sorry about the technical difficulties there in the last question. So I just wanted to ask about personal care business. Clearly, we're continuing to see a little bit of sequential improvement. I guess, can you just comment on your visibility on this business relative to even a few months ago? And also just what you're seeing from a kind of gap between what we can consumption data, which remains stronger relative to what you're actually delivering from an organic sales standpoint. Just any visibility on when you think your organic sales will start to look a little bit more like what we see in the consumption data, which is a little bit better. Thanks so much.

Hello. I feel like we’re back live again. So let me return to my questions. It seems like consumer domestic was around 500 basis, which was significantly stronger than what we observed in Nielsen. I’m curious about what contributed to that. Can you share anything regarding untracked channels? Is there any rebuilding of retailer inventory? I know, Rick, you mentioned a point on HERO and THERABREATH, but I’m interested in knowing anything else that would be helpful regarding on track. Thanks.

I can hear you.

Okay. Some people are messaging me that they can hear me, but not the company.

Hello? Hello?

Okay. Well, this is our cellphone. Now we're on this way.

Rick, it's Lauren. I can hear you.

All right. Well, hey, take 3.

Okay. Did you catch my question or no? Because I can repeat it if you need me to?

Yes, I understand. The question was about how consumption compares to organic for the domestic market.

Yes. And just particularly untracked, right? Just curious about untracked channels.

We don't believe there's a significant disconnect. IRI reports consumption at 7%, which includes some HERO consumption. If you exclude that, the organic consumption is approximately 6%. Our reported figure was 5.5%. The discrepancy is mainly due to untracked channels such as WATERPIK online and similar businesses. Therefore, the disconnect is not as pronounced as it seems.

Okay. You mentioned a small 1 point benefit to the total company from the pipeline on HERO and THERABREATH. Looking ahead to the second half of the year, you've mentioned improvements in volume, which is now up for the entire year. I was wondering if you have any updated insights on what you consider the more discretionary categories and how you are forecasting shipments for WATERPIK and vitamins as we progress through the year.

Yes. And I partially thought I was answering that when I answered Chris' question. I probably got cut off. In 2022, those three businesses, we said in the release, at the end of 2022, they were about a 4% drag for the three businesses. In Q1, they were closer to a 3% drag. And I said we expect personal care organic to inflect positively in the back half. A big reason is because those businesses are not a drag. And furthermore, Matt said it in his script, but it was very encouraging that WATERPIK and vitamins hit their internal plan numbers.

So do you anticipate those specific businesses will see an increase in volumes in the second half, or is it too early to determine that?

I wouldn't call that yet. I would just say we don't expect it to be a drag in the back half.

Good morning. Thanks for taking my question. Can you also hear me right now?

We can hear you.

So I guess just continuing on just vitamins. Just curious what you're seeing right now in the category. And I believe your fill rates have now improved in vitamins. Just curious if you're starting to see progress on the share front.

Yes. The vitamin fill rate is improving sequentially month by month take November, December, January, February, March, which is a really good thing. As far as the category goes, if you look at the last few categories for gummies, you may remember in the third quarter last year, a big decline to gummies were at 8%. But then Q4 was down 10% and Q1 down, 2.3%. So I would say it's really stabilized, which is a good thing for us. Now we did lose share in the first quarter, again due to our fill rate difficulties. But we anticipated some of that. We probably benefited a bit because the category was stronger than we expected. So consequently, the vitamin business wasn't a drag on our outlook. They hit their plan for the first quarter, and we think things should improve from here for the rest of the year.

Great. And then maybe just one follow-up question. So I know at the Analyst Day, you gave expectations for organic growth expectations by segment. So it appears at least consumer domestic, a stronger international story or maybe specialty products is weaker. So just curious if you have updated views on expectations by segment for the year.

Yes, sure, Rupesh, it's Rick. Domestically, we're now calling 3% to 4%. International between 5% and 7%. SPD is actually slightly negative and that gets us to the total company organically of 3% to 4%.

Great. Thanks. Good morning. I just wanted to get a little bit of an update on your view on the U.S. consumer, particularly any early reads on the incremental pricing you took, impact of compaction and the extent that you've seen any change in promotional levels? Thank you.

That's a broad question, Olivia. I'll discuss the U.S. consumer. We are all observing the same data. The U.S. unemployment rate remains low, although job growth is clearly slowing down. Additionally, statistics indicate that the year-over-year growth of household income is decreasing. Another factor we have approaching is the resumption of student loan payments in late summer, which may not have a significant impact, but 40% of millennials and 25% of Gen X consumers carry student loan debt. I believe that all of these factors are leading consumers to be more cautious and shift from premium to value options. What was your second question, Olivia?

Sorry, it was around compaction, the pricing, any early reads on those and...

Yes, we have been increasing prices over the past couple of years. In some categories, such as litter or laundry detergent, we've raised prices by two or three times. The price differences between brands are largely similar to their levels before COVID, so I would say there isn't much of a story there at the moment.

Yes. And it's kind of early to call any impact from concentration that just rolled out late Q1, but we expect that will be positive.

Hi, guys. Good morning. So clearly, a strong Q1 that was better than you expected. The guidance for Q2 looks favorable relative to consensus also. Just trying to understand, if you look at work sales and EPS, you didn't necessarily fully flow through the upside in the quarter to the full year. Obviously, a full year raise, but more modest. So just help us understand that there are some specific limiting factors there? Or is it more just the reinvestment you talked about earlier? Conservatism in a volatile environment? And particularly on org sales, the questions on org sales and earnings, but org sales, you're not assuming a sequential acceleration in the back half, despite easier comps. So I just wanted to understand that relative to the first half expectations. Thanks.

I think you addressed my question, Dara. We are three months into the year and we monitor many companies. Therefore, we are not unique in having a strong first quarter, but we recognize that ongoing economic uncertainty exists. We now have the opportunity to take a long-term perspective and increase our marketing by 10.5%. We have various options for investment, which I discussed with Kevin, including growth, efficiency, and sustainability projects. All of these avenues are accessible to us. Thus, we feel we have considerable flexibility for the remainder of the year.

Yes. And it's very rare that if you look back at our history that we've ever raised after one quarter. Typically, we talk about that in the second quarter. So this is a bit of a positive.

Okay. That's very helpful. And then can you just give us a little more detail on some of the problem areas recently, WATERPIK, FLAWLESS, vitamins, just sequential performance in Q1 relative to recent trend. I know you mentioned a couple of them, you were on plan. But I just wanted to get a little more detail on sort of the year-over-year performance, both in terms of consumer demand as well as retailer inventory levels. If you can just give us a little more insight there. Thanks.

I'm happy to share some insights on WATERPIK. We've been pleased with their progress as they met their internal targets, which means they are not negatively impacting our outlook. However, the economy is influencing consumer behavior, leading to either reduced purchases or consumers opting for less expensive flossers. On the positive side, our lunch events are back to normal, particularly with high-volume dental offices, which is crucial for driving recommendations for initial water flosser purchases. We anticipated some challenges in the first half of the year, but we expect comparisons to be more favorable in the latter half. Regarding vitamins, the category performed unexpectedly well, only declining 2% in the first quarter. Additionally, our fill rates have improved monthly, now reaching the high 80s, which will help address some constraints on our overall company fill rate. As this improvement continues, we will be better positioned to regain market share.

Yes, those two are stabilized and expectations have been set. The third one is flawless. Retail inventories are not moving as quickly as we anticipated, which is partially affecting our inventory reserves by limiting inventory on our end. However, we believe we have adequately accounted for this going forward, and we're making progress.

Hi, good morning. Thank you so much for the question. I'm curious around volumes. Volumes were flat in the quarter, and you're now expecting volume to be positive overall for Q2 and the full year. You've commented previously on economization on volume expected in certain categories such as laundry, litter, and toothpaste. So I was wondering if you're seeing a reversal in that from consumers to maybe are more accepting of value price increases or just more benefit from trade down versus economization?

Yes, I'll begin, and then Matt may have additional comments. To clarify on volumes, they were flat in Q1, but we anticipate a positive change in the second half and for the entire year. This suggests we expect them to be negative in Q2. Initially, we forecasted a decline in Q1, a decline in Q2, followed by a positive turn in the latter half. We were encouraged by Q1 results, primarily due to significant year-over-year improvement in case fill. A year ago, Q1 case fill was 72%, while Q2 is 89%, so there's less volume to compensate for. Therefore, I would say volumes are expected to improve positively in the second half, and we are now projecting a positive year overall. That's the gist of it.

And the only thing I would add to that is that we were out of the gate early in some of our categories with respect to pricing. And so consequently, the passage of time, pricing is going to have less of an impact on us and volume, greater. So we think that the flat line is a great story for the company, and expecting positive volumes for the year, again, this is typically what investors expect from us.

Great. And then just in terms of pricing and margins, just curious how would you attribute the benefit to outright pricing versus the package size changes?

Yes. It all contributes to the price and volume mix in the gross margin analysis. Our outlook in February indicated a 180 basis point benefit, and it remains the same in April, driven by the price and volume mix. This includes increases in litter list prices as well as changes in pack sizes, and at times, it reflects the benefits from laundry concentration. It’s a combination, and we don’t separate them out individually.

Okay. Thanks very much.

Thanks. Good morning. Matt, could you elaborate on your comments regarding consumer trade down? I'm trying to grasp why you believe this is a factor for your success, as opposed to solely the strength of the ARM & HAMMER brand. For years, particularly in laundry detergent, you have been gaining market share from smaller brands, such as those previously owned by Unilever. Many of these brands have lost shelf space, while you've increased yours. I'm seeking clarity on what you're observing that leads you to attribute this to trade-down benefits rather than just the enduring strength of the brand, which might not be sustainable regardless of economic conditions.

Yes. Well, look, it's a combination of both. Yes, the ARM & HAMMER brand is a very powerful brand. We got a $5.4 billion of sales. $2 billion of it is ARM & HAMMER. So we're able to advertise ARM & HAMMER across lots of different categories. But when we look at the macro numbers, just look at value laundry detergent grew 9%, while premium laundry detergent declined 3%. That's in the category, all brands, premium, all brands, value. So it's clearly happening. That's our biggest category. And then when we look at litter, we see the same thing. We have a black box, which is our premium cat litter. And we've got a yellow box, which serves our value cat litter. And we see these consumers have traded down within the category from the black box to the yellow box. But that's where you have the power of the brand, where people stick with ARM & HAMMER as opposed to move over to a different brand. So I'd say it's probably a combination of both, Bill.

Well, and I guess just to follow up on that. Are you seeing outsized or accelerating growth for the Extra brand or for that deep value or more shelf space being given by retailers for the deep value?

Yes, yes. No, that's a good one. We said 8 out of 14 brands that gained share in the quarter. We were almost at nine. We just missed it by hair with Extra. And I would say in recent weeks, Extra has shown a lot of strength. So we think that, that one could turn positive for us as a share grower in future quarters. That's more evidence of trade down, right, Extra - catching fire.

Thanks, Operator. And, good morning, everyone. So I was hoping to get some perspective on what you're seeing from an input cost perspective, kind of building on Kevin's earlier question. Can you maybe just help us understand where you're seeing costs moderate? Where you're seeing costs be stickier? And Rick, I know you previously mentioned that you were less hedged on commodities than you typically would be heading into this year. So to the extent that commodities continue to moderate, how quickly could we see that benefit flowing through? Thanks.

Thanks, Peter, for the question. In the release, we mentioned that our inflation expectations remain largely unchanged. There are both increases and decreases in commodity costs. Transportation costs have decreased, while the outlook for resin is slightly higher. Soda-ash and sugar prices are up, though some resins and ethylene prices have fallen. It's a mixed situation, but overall, it balances out to neutral compared to our original forecast. At the start of the year, we indicated that we were less hedged this year than we have been in many years, anticipating that commodities would decline over time as a potential recession approached. It takes time for costs to decrease and remain low before these reductions impact material pricing and flow through our balance sheet; they are accounted for in the P&L when sold. Therefore, if we observe a decrease, it must remain low for several months, and it would likely take about six months for that to reflect in the P&L.

Thank you. Good morning. I have a clarification and a question. First, regarding the pricing, mix dynamics, and volume, I understand you experienced some changes in the second quarter after a boost in the first quarter. Looking ahead to the second half, as indicated by your new guidance, do you still expect to see some pricing increases? I know you're facing the same pressures with pricing as everyone else, but you implemented some increases toward the end of last year and the start of this year. I'm trying to understand if we should anticipate any price/mix impacts in the second half based on your updated guidance. Now, for my main question on ARM & HAMMER's share gains, which have been impressive. I'm curious about the liquid product segment. Your primary competitor has also lowered some prices, which could have surprised some consumers. Have you noticed any changes in market dynamics as the quarter ended, or are you continuing to gain share in the ARM & HAMMER channels? Thank you.

Yes, I'll discuss the dynamics of pricing for the first and second halves. Matt's observation is accurate; a lot of pricing does roll over. We estimate the average for the first half to be in the 160s, while we anticipate the second half to be around 180 to 190. Therefore, the full year projection is 180. We believe there is a slight increase, mainly due to our price hike in February and the concentration effect that influences the latter half as well. These factors contribute positively in the second half.

Yes. Regarding pricing, we monitor our competitors across all categories. However, it’s too soon to assess the impact of any recent price increases, not just in laundry, but in other areas as well. We will need a quarter or two before we can provide commentary on that. That said, looking at liquid laundry detergent, sold-on deal was 31% a year ago, and as of Q1 2023, it stands at 31.7%. This shows another notable year-over-year shift in promotions, with Q4 at 32% and Q1 at 31.7%, indicating stability in liquid laundry. In contrast, cat litter has seen an increase; it was 10.7% a year ago and rose to 14.9% in the first quarter of this year, which reflects a consistent quarterly increase over the last five quarters. Q4 was at 13.9%, marking an increase of another 100 basis points. Historically, litter sold on deal is higher, typically in the high teens, around 18%, 19%, or 20%. The vitamins category also saw a slight change, with sold-on deal at 38.9% last year compared to 38.5% in Q1 this year. This provides additional insight into the current trends in pricing and promotions.

But do you expect promo to continue to accelerate as we go? I mean, I appreciate it's backward-looking, but forward-looking, you're embedding that, obviously, cat litter will be one and perhaps vitamins or you think that this is going to be a similar dynamic?

Yes. No, but Andrea, we would never telegraph our plans. But typically, we're going to react to competition when it comes to trade.

Yes. And I would just say, laundry for Q1, a little lot like Q4 from a promotional perspective like that was going through.

Good morning, everyone. I hope you can hear me. I would like to focus on the increased level of conservatism in our guidance and what we anticipate in tracked channels. Firstly, we have observed positive volumes in the second half, despite some contraction in detergents. Will there be a difference between tracked channels and your reported figures due to adjustments for wash loads? Regarding HERO, it is performing very well. Does the upsized trigger lead to a higher impact from restricted stock? Lastly, concerning marketing investment, have you factored in any sales lift for the second half, or is it primarily focused on long-term investment? Thank you.

Yes. I'll address the first two questions, and Matt can handle the third. I'll start with your second question. For HERO, our adjusted EPS does not account for any amortization related to RSUs, which means it's not a consideration in our outlook or adjusted EPS. So we are comparing like with like. Firstly, we don’t anticipate a significant gap between shipments and consumption. The comparison between tracked data and Nielsen’s figures or our organic growth in the second half should align closely. In Q2, there may be a slight disconnect due to certain brands, like WATERPIK, which are still stabilizing and experiencing some decline, primarily in untracked channels. Additionally, some of HERO's growth as reported also comes from untracked channels, including online sales and a few specialty retailers. Overall, we've mentioned that we had a strong quarter, and we are increasing the full-year guidance for reported organic EPS across the board. We’ve indicated that we will invest further if we continue to exceed expectations in revenue and profits. And Matt?

Yes. Regarding marketing, our forecast reflects a 10.5% model. However, in the first quarter, we exceeded expectations by 70 basis points, and we anticipate being up 50 basis points for the full year. Our historical performance suggests that if we maintain the first quarter's results into the second quarter, we can increase that figure by more than 50 basis points. This will follow a pay-as-you-go approach.