Church & Dwight Co. Inc (CHD) — Q1 2024 Earnings Call Transcript

Good morning, everyone. Thanks for joining us today. I'll begin with a review of the Q1 results. And then I'll turn the call over to Rick Dierker, our CFO. And when Rick is done, we'll open the call up for questions. Q1 was another solid quarter for Church & Dwight. Reported sales growth was 5.1%, beating our outlook of 4%, thanks to stronger results across the board from domestic, international, and specialty products. Organic sales grew 5.2%, which exceeded our 4% Q1 outlook, with volume accounting for a very healthy 70% of our growth. Gross margin expanded 220 basis points. At the same time, we increased marketing spending in the quarter and gained market share in the majority of our categories. Adjusted EPS was $0.96, which was $0.11 higher than our $0.85 outlook. The results were driven by higher-than-expected sales growth, gross margin expansion, and a lower tax rate. We continue to grow in the online class of trade, with online sales as a percentage of global sales now reaching 20.5%. In March, we signed a definitive agreement to acquire GRAPHICO, our Japanese distributor, for approximately $35 million. We expect the acquisition to close later this year. GRAPHICO's annual sales are approximately $38 million. The business is based in Tokyo and has 59 employees. Since 2008, GRAPHICO has partnered with Church & Dwight and driven OXICLEAN to be the #1 powder prewash additive in Japan. The acquisition is expected to contribute to greater expansion of our business in Japan and the greater APAC region. We intend to leverage the capabilities of the GRAPHICO team to bring additional Church & Dwight brands to Japanese consumers. Now I'm going to turn my comments to each of the three businesses. First up is the U.S. The U.S. consumer business had 4.3% organic sales growth, 3.3% that was volume driven, making this the third consecutive quarter of U.S. volume growth. Five of our seven power brands gained market share in the quarter, and private label market share in our categories remained relatively stable. Now let's look at a few important categories in the U.S., starting with laundry. ARM & HAMMER liquid laundry detergent consumption was flat, while the category grew 2%. Many of you may recall, we had pulled back on promotional activity in Q4, and that continued into early Q1. As our promotional activity normalized, ARM & HAMMER liquid laundry saw share gains late in the quarter, and the brand has continued to perform well in April. Now, elsewhere in laundry, ARM & HAMMER unit dose and ARM & HAMMER scent boosters both grew faster than their categories and gained share in the quarter. Our XTRA liquid laundry brand, which is our extreme value offering, grew consumption 6.3% and increased market share to 3.8%. Regarding new products, we have launched two new products into the detergent category, ARM & HAMMER Deep Clean and ARM & HAMMER Power Sheets. The first ARM & HAMMER Deep Clean is our most premium ARM & HAMMER laundry detergent entering the mid-tier of liquid laundry and delivering a superior clean at a price consumers can afford. The second new product is ARM & HAMMER Power Sheets laundry detergent, which was launched online in August 2023. ARM & HAMMER was the first major brand to offer this new unit dose form in the U.S. Now, due to its online success, Power Sheets are now available in select brick-and-mortar retailers. Power Sheets continues to grow online; it now has 9,000 reviews with a 4.5 rating, and both Deep Clean and Power Sheets are off to a great start in 2024, and we're excited about the early results we are seeing. Now, over in Litter, ARM & HAMMER Litter grew consumption 5% in Q1, which was in line with category growth. Our new lightweight ARM & HAMMER Hardball Clumping Litter is now expanding nationally after a successful in-market test in 2023. We expect this new litter to help ARM & HAMMER capture a greater share of the lightweight litter category. To give you a couple of facts here, lightweight litter today accounts for 16% of the clumping litter category. Our share of lightweight clumping litter has grown from 4% to 6% since year-end 2023, but that compares to our 29% share in regular weight litter, so still a long way to go. Turning to Personal Care, BATISTE continues to see strong consumption growth with consumption up 19% in Q1, growing share to 47.5%. BATISTE continues to be the global leader in dry shampoo. We are meeting consumers' desire for long-lasting results with the launch of BATISTE Sweat Activated and BATISTE Touch Activated dry shampoos. And so far, consumers are posting excellent reviews for both of these new innovations. Now our mouthwash, THERABREATH mouthwash and HERO continue to perform extremely well. THERABREATH is the #1 alcohol-free mouthwash brand and is now the #3 brand in total mouthwash with a 16% share. THERABREATH recently entered the antiseptic segment of the category with the launch of TheraBreath Deep Clean Oral Rinse, which represents 30% of the category. HERO continues to drive the majority of growth in the acne category and has grown to become the #1 brand in the larger acne category with a 19% share. HERO continues to launch innovative solutions in patches combined with adjacent consumer needs, such as the recently launched Dissolve Away Daily Cleansing Balm. Now, there are two businesses, Gummy Vitamins and WATERPIK, that created a drag on total company organic growth in Q1. First, WATERPIK. The good news for WATERPIK is consumption for our water flosser business is healthy. However, flosser shipments were affected by retailer inventory adjustments in the first quarter. This, combined with lower shower head consumption, accounted for a 1% negative drag on organic revenue growth, but we expect this to be transient. The second is gummies, which also created a 1% drag. The Gummy Vitamin category declined 5% in Q1, which was actually worse than our expectations for the category, and our consumption was down even greater, down 12%. We continue to move forward with our plans to stabilize our vitamin business through changes in packaging, messaging, and greater marketing investments that we've talked about with you in the past. I will close my comments on the U.S. by saying that overcoming the drag from these businesses and still posting a 5% organic sales growth for the total company just illuminates the strength of our portfolio. Turning now to international and Specialty Products. Our international business delivered organic growth of 8.8% in Q1. This was driven by strong growth in the subsidiaries, especially Mexico, Germany, the U.K., and France. We also had growth from our Global Markets Group. And finally, Specialty Products. Specialty Products organic sales increased 7.2%, primarily due to record sales in our Eurasia business, as SPD continues to expand globally. I want to wrap up my remarks by reiterating that the company is performing well with all three divisions delivering strong growth. I want to thank our global employees for their great efforts each and every day. Now, we rarely raise our full-year outlook after only one quarter, but given our fast start, we raised our outlook for gross margin and EPS growth, and we have confidence in our new full-year forecast. And now I'm going to turn it over to Rick to give you some more color around the quarter.

Thank you, Matt, and good morning, everybody. We'll start with EPS. First quarter adjusted EPS was $0.96, up 12.9% from the prior year. The $0.96 was better than our $0.85 outlook, primarily driven by higher-than-expected sales growth, gross margin expansion, and a lower tax rate. Reported revenue was up 5.1%, and organic sales were up 5.2%. Organic sales were driven by volume of 3.7% and positive product mix and pricing of 1.5%. Seventy percent of our organic growth was volume driven. As Matt mentioned earlier, this makes three consecutive quarters of U.S. volume growth. Our first quarter gross margin was 45.7%, a 220 basis point increase from a year ago, primarily due to productivity, volume, mix, and pricing, net of the impact of higher manufacturing costs. Let me walk you through the Q1 bridge. Gross margin was made up of the following: positive 130 basis points impact from price volume mix and a positive 130 basis points from productivity. This was partially offset by 10 basis points from currency and 30 basis points from inflation. Moving to marketing. Marketing was up $29.7 million year-over-year. Marketing expense as a percentage of net sales was 10.1%, or 150 basis points higher than Q1 of last year and led to share gains. For SG&A, Q1 adjusted SG&A increased 80 basis points year-over-year. Other expense all-in was $20.9 million, a $2.2 million decrease primarily due to lower outstanding debt and higher interest income. We now expect other expense for 2024 to be approximately $80 million. For income tax, our effective rate for the quarter was 19.9% compared to 24.4% in 2023, a decrease of 450 basis points due to a high level of stock option exercises in Q1 of 2024. We continue to expect the full-year rate to be approximately 23%. And now to cash. For the first three months of 2024, cash from operating activities increased to $263 million, a decrease of $10.1 million with higher cash earnings, offset by higher working capital. We now expect full-year cash flow from operations to be approximately $1.050 billion, up slightly from our previous $1 billion outlook. Capital expenditures for the first three months were $46.3 million, a $21 million increase from the prior year as capacity expansion projects proceed as planned. We expect 2024 CapEx of approximately $180 million as we complete the major capacity investments that were initiated in 2023, and we expect capital spending to return to historical levels of 2% of sales in 2025. And now for the full-year outlook. We continue to expect the full-year 2024 reported organic sales growth to be approximately 4% to 5%. We now expect full-year EPS in the range of 8% to 9% growth. This is up from our previous 7% to 9% and is inclusive of costs related to the exit of the MEGALAC business as well as GRAPHICO transaction costs. We now expect full-year gross margin to expand approximately 75 basis points, up from a previous range of 50 to 75 basis points. Given our outstanding Q1 margin expansion of 220 basis points, this outlook implies moderate gross margin expansion for the remainder of the year. We continue to expect an increase in manufacturing costs to be more than offset through productivity, mix, higher volume, and carryover pricing. We continue to expect marketing as a percentage of net sales to be approximately 11%. SG&A is now expected to be flat as a percentage of net sales compared to 2023, reflecting the investments we are making in our international, e-commerce, infrastructure, and costs related to the GRAPHICO acquisition Matt discussed earlier. For Q2, we have a strong outlook and expect reported sales growth of approximately 3.5%, organic sales growth of approximately 4%. We had a really strong April from a consumption perspective, so some might be expecting a higher organic growth outlook. Our 4% outlook reflects higher coupons and trade promotion in support of new products. We're fully lapping 2023 price increases and we're lapping a year ago distribution gains for HERO. Moving on to the rest of the P&L, we expect moderate gross margin expansion in the quarter in Q2 as we have less of an impact from carryover pricing, increased marketing spending to support our innovation pipeline, higher SG&A expense, and a significantly higher tax rate of 24% compared to the prior year of 17.9%, which benefited from a high level of stock option exercises. This represents roughly a $0.07 drag on EPS. As a result, we expect adjusted EPS of $0.83 per share, down 10% versus last year's adjusted Q2 EPS. And with that, Matt and I would be happy to take any questions.

Regarding the Q4 outlook for organic sales being below the current scanner trends, Rick, you mentioned the trade promotion effects from HERO or possibly THERABREATH distribution gains. Can you confirm that? How would you explain the impact of those two factors on the organic sales outlook for Q2 being lower than what we observe in the consumption trends? I have a follow-up question as well.

Yes, thank you for the question, Chris. You are correct that April saw approximately 6.5% growth in consumption, which is quite strong. We have identified three main factors that are contributing to a lower organic outlook of about 4%. The first factor is the impact of lapping last year's distribution gains for HERO as we expanded nationally, which is likely the most significant. The second factor is that we are not benefiting from pricing, as we have fully lapped our pricing actions from 2023 as we entered the second quarter. Lastly, the third factor is the increased coupons and trade promotions aimed at supporting our new products, as this is shaping up to be one of our best years for innovation.

Okay. That's helpful. The second thing would just be we're seeing an improvement sequentially in laundry volumes. Obviously, there's been some noise in this category with compaction with stepped-up promotional activity in the year-ago base. How would you characterize your expectation for laundry sequentially from here? Clearly, we're seeing the improvement as those lapse normalize, would you expect to continue to see that improvement going forward? And do you just have any expectation for how volumes might shape up in laundry specifically over the next couple of quarters? And if I could sneak in, are you starting to see any competitive activity in your litter business, which is what we're hearing from one of your competitors?

Yes, Chris, you raised quite a few questions. In the laundry category, there's plenty happening. We have liquid laundry, unit dose, and scent boosters. Over the last three quarters, liquid laundry has shown a year-over-year growth deceleration, with increases of 5%, 2%, and 2% in Q3, Q4, and Q1 respectively. Despite this deceleration, we feel confident about our current position because we lost some market share early in the quarter but have since normalized our trade spending. We're planning more couponing and promotions going forward because we launched Deep Clean nationally, which we believe could sustain long-term growth, especially in the mid-tier market. Therefore, Deep Clean is the key focus for us in the laundry sector this year. On the other hand, unit dose and scent boosters have also seen a slowdown in growth over the last three quarters. However, our unit dose has grown 34% this quarter, benefiting from successful trade-down initiatives. Scent boosters, which are discretionary purchases, have experienced year-over-year growth rates of 2%, 1%, and 1% in the last three quarters. We managed to grow 7% in this category due to our strong value proposition. Regarding promotions, liquid laundry has seen a slight increase of about 70 basis points when comparing Q4 to Q1, especially in measured channels. While coupons are less visible, we're optimistic about data from IRI and Nielsen. The sold-on deal has sequentially risen from 33.2% to 33.9%. Although this may not seem significant, it represents an 180 basis point increase year-over-year from Q1 to Q1. Historically, in pre-COVID times around 2018, the sold-on deal was about 40%, indicating we still have a long way to go. However, if you analyze the trend over the last six to eight quarters, it's gradually improving. Regarding litter, the sold-on deal in Q1 and Q4 stands at 15.3%, which is up 40 basis points year-over-year, but still short of the 20% level we saw in the past. One of our competitors has experienced stock issues and will likely need to ramp up promotions to regain market share. For us, the focus remains on Hardball as we see strong potential in the lightweight litter category. I hope that covers your questions, Chris.

Also congrats on the nice quarter. So just going back to the vitamin category. Just curious what continues to weigh in the category? And then how should we think about expectations for the balance of the year versus, I guess, the double-digit consumption decline we just saw in Q1?

Yes. Well, if you look at the category, Q4 and Q1 just round numbers are both down 5%, down 5%, down 5%. And normally, you would expect New Year's resolutions and people wanting to get healthy, that would be a boost to the category. We didn't see it in Q1. So it was two things. It still is probably the tail from post-COVID. But also, you could also argue that for many people, it's discretionary. The third thing, though, is that people are moving from gummies to other forms, and that is powders and also things like chewables. We're launching a chewable this year. So we could see some of that shift to other forms. But I would say those are the dynamics that we're looking at. Now as far as our performance, yes, we've had double-digit decline in Q4 and Q1. So obviously, not happy about that. Takes a while to turn that around. You're probably starting to see new packaging in-store. Not only new packaging but higher marketing spend as well. We are seeing signs of retailer support with respect to shelf placement and facings pre and post resets. So we hope that this is the year we're going to stabilize. We're really hoping that in the second half of this year, this business will inflect and start to grow. But we've been down Q4 and Q1, as I said.

Great. I have a quick follow-up for Rick. You raised the bottom line guidance but kept the same top line guidance despite strong momentum in April. I'm curious whether this is due to a conservative approach in reaffirming the guidance or if it's still early in the year.

Yes. I think Matt's comment was spot on in his prepared remarks. Usually, after Q1, we don't touch the outlook. Gross margin was so strong in Q1, we felt like we had to reflect that. As a result, earnings were very strong as well. So that's why we adjusted it. I think 4 to 5 is a great guide. I know we said 4.5 pretty much throughout the year. So I would expect us to talk more about the outlook in July.

So first, just a clarification on WATERPIK. The 100 basis point issue you mentioned in Q1, is that something that fully comes back in the balance of the year? Is that embedded in the Q2 guidance? Is it more spread out in the balance of the year? And was that just a shipment issue? Or is there some form of retail sales weakness also? And then maybe just broader, Matt, on the U.S. business, you're obviously excited about innovation this year. You mentioned the couponing in Q2. Can you talk about the level of contribution you're expecting from innovation this year? And maybe on some of the key early ones, the reception you're seeing so far from a trade and consumer standpoint?

Okay. A multi-parter. Well let's pick WATERPIK first. I'll make a few comments about that, and Rick can build on that, and we'll come back to what we're expecting for the U.S. As far as WATERPIK goes, yes, it was down in the first quarter, but we still expect on a full-year basis, this business to be up and to hit its plan. So I wouldn't be completely alarmed about the WATERPIK activity in Q1. The fact that the flosser consumption is healthy is a real positive for us. That's a really strong way to start the year.

Yes, consumption for WATERPIK is high, showing an increase in the high single digits to low double digits. The consumption levels are strong. We had some excess inventory to manage at retail, which has now been addressed. We believe it is now in a good position as we move forward.

Yes. For our expectations this year, we anticipate 4% to 5% organic growth. We believe that approximately 2% of this will come from new product launches, which is significant. We have the Deep Clean product launching in laundry, and we’re taking ARM & HAMMER Litter and Hardball national. These are our major products on the household side. In personal care, THERABREATH is introducing an antiseptic that accounts for 30% of the category, which is impressive. We're just beginning to tap into that market. Additionally, BATISTE, the leading dry shampoo globally, includes BATISTE Touch and BATISTE Sweat. The early ratings and sales velocities for nearly everything we've launched are either meeting or surpassing our expectations. This indicates our confidence that we'll meet the 2% target for organic sales growth in 2024, likely making it one of our strongest years for organic sales contributions from new products.

So I was hoping if you can talk about the dynamics as you set up shelves. If there is anything you would call out in terms of any pull forward in shipments and consumption? I understand that obviously, you had a very strong quarter, but you're guiding more conservatively into the second quarter. Just trying to understand the puts and takes or anything that you see the lapse, and I appreciate when you gave us the lapse on some of the components last year. But also, if you're seeing your competitors being more, I would say, more aggressive in litter or things like that, that some of them had suffered from, obviously, the cyber attack and all of that. How are the dynamics in terms of market share as we think into the second quarter and the balance of the year?

Andrea, it's Rick. I'll share a few comments, and Matt can add if he wants. Regarding the Q2 call, I've touched on some details already. Essentially, new product couponing and trade promotions have either decreased or increased slightly in Q2, which is affecting net sales. We experienced HERO gains last year when we went national, which I've mentioned previously. Additionally, we are now comparing against some price increases. Nearly all of our volume and organic growth moving forward will be nearly 100% volume driven. We had 70% in Q1, but going ahead, it's closer to 100%. As for litter, Matt discussed the amounts sold on deal, which have increased slightly. Private label has risen a bit more, spending has also gone up, but overall, our market share in litter remains strong.

Yes. And as far as you mentioned supply difficulties of other competitors, of course, we and other brands in the category can benefit and have benefited from that difficulty. When you have repeat purchases over and over again, oftentimes, so changes stick. Naturally, that's our expectation that, yes, we're going to hang on to some of those new consumers that moved our way, but some will be tempted back by promotions.

Just two quick questions. Rick, maybe on just the marketing guidance. I guess based on our math, the rest of the year would imply kind of reduced marketing, of course, off of very big increases from a year ago. But just wanted to get kind of philosophically, do you kind of see the upside? Would you have a bias to reinvest more given the consumer environment or would it be more flowing through to the bottom line? And then the second question is really around reinflation, right? We're starting to see some commodities across the energy complex reinflate. I would just be curious on kind of how you think about managing that against this consumer backdrop in terms of pricing?

Thank you for the question, Nick. In the first quarter, our marketing efforts increased by 150 basis points, and we expect similar growth in the second quarter, with a likely increase in the third quarter and a decrease in the fourth. This shift is due to our significant marketing investment in the fourth quarter last year, which we aimed to allocate more towards the first half to support our new products. We feel good about this strategic move. Although our absolute marketing spend in the fourth quarter will still be considerable, we believe it effectively supports our brand. If we exceed our targets and gain momentum, we usually plan to reinvest in marketing since it helps drive market share and organic growth, creating a virtuous cycle. Regarding inflation, our situation remains mostly stable, with inflation expectations not changing significantly. Ethylene prices are slightly down, while HDPE prices have seen a slight increase. Overall, we are essentially in the same position as we were three months ago. Therefore, there's no immediate concern; if inflation were to become an issue, our productivity program is currently robust and we believe it will remain effective in the long run.

Yes. Just to add to that, Nick, as you know, we got a portfolio of value brands. So to the extent that interest rates stay where they are, we have some defense against that. We have found that HERO and THERABREATH are really high-ranking products, but we've really been unaffected by any decline in consumer sentiment over the past few quarters. They seem to be somewhat resilient, and those are some of our bigger growers right now. So we still think we're pretty well positioned, at least for the remainder of 2024.

I was hoping to just follow up on the 2Q organic sales outlook. Rick, you mentioned fully lapping pricing. You touched on the couponing many times throughout this call. So within that 4%, can you maybe unpack what we should expect from a price versus volume perspective? And then kind of the same question for the full year. I think previously, the expectation was that volumes would be kind of 2/3 of the full-year organic sales growth. Has that changed? Or is that still the right expectation?

Thanks, Peter. In Q1, it was 70% volume and 30% price. I just made the comment that on a go-forward basis, Q2, Q3, Q4 they'll likely be closer to 100% volume and minimal price, if anything. And if you rewind the clock, pre-COVID, you go back 10 years ago, and that was our track record: 100% volume-driven growth. Actually, sometimes in the past, it was maybe 110% volume-driven growth and a little bit more trade as we went national for some of our brands. So that's the expectation as we look forward. And so for the full year, I probably wouldn't change the outlook we gave you on the mix.

Great. And then maybe just a quick follow-up on Dara's question. Just kind of on WATERPIK and the fact that you expect it to kind of reverse and grow for the year, a pretty nice rebound. So just maybe thinking about the sales benefit from a brand perspective? Just in that you overdelivered versus the full-year outlook despite that drag? What really gets worse from here? Is it simply just cycling the tough comps and moderating growth of HERO and THERABREATH or are there other brands where you're kind of expecting things to slow sequentially?

No. We believe not much has changed from our original outlook. We exceeded our expectations for organic sales growth despite some challenges. It is still early in the year to predict any additional upside, and we usually refrain from doing so. We will see how consumption trends develop, and we continue to perform well in terms of market share. Overall, we are quite optimistic about the year and our revenue prospects.

What's the solid volume growth that you saw in Q1? I was wondering if you're seeing a more significant benefit from trade down. I think you mentioned some in laundry in response to Chris' question, but wondering if you're seeing this elsewhere as well? And then we've been hearing from some companies during earnings season that the lower-income consumer appears to be more challenged. I was wondering how you're thinking about sort of the broad health of the consumer across your different income tiers in relation to your categories and volume growth?

Regarding the consumer, as we've mentioned in previous calls, our primary indicator is always unemployment, which has remained low. Although interest rates have increased, they have been at this level for some time, and we don't anticipate any significant change aside from potential disappointment that they are not lowering quickly. Additionally, the resumption of student loan payments is contributing to pressures on consumers. We are observing rising credit card debt and delinquencies. We are all analyzing the same data, and these factors will likely impact consumption of our products. The first four months of this year reflect various trends that require examination by category and brand. Overall, I believe we are well positioned for the rest of the year. What was the first part of your question?

Just wondering if you're seeing broad trade down. You mentioned some in laundry, any other categories?

The majority of our portfolio value comes from laundry and litter. In laundry, we have ARM & HAMMER as well as XTRA, which I mentioned in my earlier remarks. We're optimistic about this. The growth of the deep-value brand may indicate more pressure on consumers. In the litter category, we offer both premium and value products, which keeps customers within our brand. Even if consumers choose to spend less, they are likely to switch to ARM & HAMMER, which can still benefit our revenue. As I mentioned earlier, we have positive dynamics in these two major categories that we believe will support us throughout the year.

I had a quick follow-up on Laundry. I'm interested in how you approach balancing share growth and profitability, particularly as you increase trade spending and consider reducing some of the ineffective promotions you mentioned earlier.

Bonnie, it's Rick. I just want to be really, really clear. In Q4 of last year, we didn't repeat some bad promotions. That carried over a little bit into January, and then we were pretty transparent about that. We have a great balance between what we think the right trade spending is and the right growth. We're just getting back to what we would say was normal before we kind of called some of those bad promotions.

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

I wanted to ask you about the GRAPHICO acquisition and what attracted you to it. Are there other markets where you have distributor relationships? Is this an area where you might consider pursuing additional deals? Additionally, what are your thoughts on the overall M&A environment, especially in goods, and what trends or interest are you observing there?

Yes, a few years ago, we started our presence in Germany through a small distributor who introduced BATISTE. This led to the establishment of a small subsidiary that has since grown. The situation with GRAPHICO is different, as it is a public company in Japan and has worked with OXICLEAN for 25 years, even before Church & Dwight acquired the business in 2008. They have a strong team that has made the brand the leading prewash additive and powder in Japan. This partnership allows us to gain significant talent in Japan and introduce our other products there. Typically, we have multiple distributors in a country, specializing in various areas, which allows us to focus our brands through one subsidiary. While there could be other distributors in Japan, this will serve as our operational base. Given Japan's economy and population, we expect this to be a substantial business for us, and it provides a strong foothold in Southeast Asia for future growth. We are very excited about this opportunity and have a great team joining us as a result of the acquisition.

And then just thinking through the M&A environment overall?

Well, look, you know we're always on a hunt. It's the highest and best use of cash for the company, where we have a disproportionate amount of our cash that goes towards acquisitions. There's always something for sale, but that's about as far as I can go right now.

Great. I want to follow up on Bonnie's question regarding promotions. You mentioned that promotions are gradually increasing but are still significantly below pre-COVID levels. Do you expect them to return to those levels, or will they just continue to grow slightly throughout the year? Additionally, regarding couponing, could you clarify whether this is above the usual levels or primarily due to the timing of new product launches and the associated trial-building couponing?

Yes. That's related to your second question. It's about incremental couponing to support the introduction of more and higher-quality products. Regarding your first question about the level of promotion and trade spend, it's similar to what we told Bonnie. The outlook for laundry promotions depends on the growth of the category. If category growth remains stable, promotions typically align with it. Currently, category growth is strong.

One thing to keep in mind, Bonnie, is that all the price increases that occurred over the last couple of years were quite unusual for all consumer packaged goods and food companies. While these increases do make the product more expensive, they haven't necessarily led to higher gross margins for everyone. As Rick mentioned, we must respond to changes in the category, so we cannot predict or disclose our plans for the rest of the year.

I am interested in understanding how the gross margin will progress from now and for the rest of the year. You mentioned that sales are expected to slow down, particularly starting next quarter, due to the comparison with distribution gains from HERO. In looking at the Nielsen data, which may not fully represent the brand's overall distribution, it seems like same-store sales remain very strong. However, could the slowdown related to HERO also affect the gross margin forecast moving forward? Since we know HERO is highly beneficial, I would like to discuss its contribution to the gross margin increase as we move ahead and begin to compare against past distribution gains.

Yes. No problem, Lauren; this is Rick. That isn't really in our thinking as we move forward. The two things that are driving gross margin to maybe not grow as fast would be less carryover pricing, and I know what I talked about from the organic revenue side, too. We're fully through all the carryover pricing. And then number two, we talked about it during our Analyst Day in January. We're adding more fixed cost to the system for capacity reasons, like new distribution centers; those are coming online as we move through the year. So those are the two things.

I do have a follow-up on the gap between retail sales that we see and the reported domestic number. You flagged WATERPIK as a point of impact. But we use Ocana and I believe that you guys do too. And the retail takeaway is more about 7%, 8%. And so there is a little bit of still kind of like a 2-point gap. Do you think that it's related to a slow retailer reorders as your competitor in laundry mentioned earlier in the season? And I have a follow-up.

Yes, are you comparing it to Q1 for your question, Javier?

Correct. Yes. Correct. Exactly. Correct. Just trying to understand whether it's something of the accounting of the couponing or something weird that basically we are overstating your retail sales growth and therefore, your shipment growth?

Yes, I understand. It's an interesting point. We all have comparable databases. Our internal shipment figure is 4.3% for organic sales, while our IRI number is about 6%. Therefore, the difference is roughly 1.5%. This is partially due to couponing and also related to the WATERPIK consumption we've mentioned regarding retail inventory. Those are the key factors.

When discussing the better-than-expected gross margin, I recognize that the price mix played a role. I'm curious if the improvement was primarily driven by changes in our portfolio, specifically increased sales from HERO and THERABREATH, or if there were other factors contributing to the enhanced gross margin and earnings.

Yes, that's a good question. I think it was mainly two factors. The mix was somewhat more favorable, and volume also played a role. Price came in as anticipated, manufacturing costs were as expected, and productivity was consistent. So, it was primarily higher volumes that contributed to throughput and efficiencies, along with a slightly more favorable mix.

I want to follow up to your point of the cycling of the distribution gain for HERO and maybe extend it to THERABREATH as well. Can you comment on how much incremental shelf space are you getting this year compared to last year in the U.S.? And then I think at CAGNY, you talked about more international opportunities for those brands. So maybe can you give us some sense of the potential contribution from international?

When considering THERABREATH and HERO, we acquired THERABREATH in 2021 and HERO in 2022. For THERABREATH, we anticipate that the increase in distribution will stabilize this year as we add more doors. Future distribution growth will likely come from gaining additional facings in stores. Some existing retailers already provide good distribution but may not offer the number of facings we believe is warranted. Innovation will also play a crucial role, so we expect that both more facings and new product developments will drive future growth for THERABREATH after we hit a plateau in door counts. For HERO, as we have owned it for slightly less than a year compared to THERABREATH, we still have opportunities for distribution growth with some significant retailers. We foresee a similar trend for HERO, and we plan to expand beyond just patches and acne solutions into related consumer needs such as skincare and pre- and post-acne treatments. Regarding international expansion, we aim to launch HERO and THERABREATH in 40 countries in 2024. Sales growth from these launches will begin to materialize in the coming years. It’s important to note that both HERO and THERABREATH are strong brands. Retailers tend to favor high-ranking, growing brands, which will likely lead to increased facings and support for innovation. We believe the dynamics for both brands will support growth not just in 2024, but also in 2025.

I was hoping to dig more into the HERO business in the U.S. So distribution is up significantly, making sort of the underlying read of demand a bit difficult. So I was hoping you could click one level below and say, and talk about what we're seeing with respect to existing consumer demand, new users, trial, repeat and other drivers?

I'm sorry, I didn't catch the first part of your question.

Can you provide insights into the HERO business in the U.S.? There have been significant distribution gains, leading to considerable sales growth. I'm trying to understand the dynamics beneath the surface, particularly regarding long-standing consumers versus new users, their trial and repeat behaviors, and any other factors contributing to the sales growth.

The volumes for this business continue to grow, indicating it is not driven by price. The awareness and household penetration for this brand are still expanding. Remember, before patches became popular, people were primarily using ointments and lotions to address acne. Now, patches are leading the category. Our growth potential lies in entering related markets.

I would probably say in all channels we are growing and have positive growth even in channels that are declining because of some maybe macro or secular trends. So that bodes well for this brand.

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