Church & Dwight - Q2 2023

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to Church & Dwight's Second Quarter 2023 Earnings Conference Call. Before we begin, I have been asked to remind you that on this call, the company's management may make forward-looking statements regarding, among other things, the company's financial objectives and forecasts. These statements are subject to risks and uncertainties and other factors that are described in details in the company's SEC filings. I would now like to introduce your host for today's call, Mr. Matt Farrell, President and Chief Executive Officer of Church & Dwight. Please go ahead, sir.

Matt Farrell (President and CEO)

Thank you, operator. Okay, good morning, everyone. Thanks for joining us today. I'll begin with a review of Q2 results. Then I'll turn the call over to Rick Dierker, our CFO. When Rick is wrapped up, we'll open the call up for questions. Q2 was an excellent quarter for Church & Dwight. Reported revenue was up 9.7%, exceeding our 7% outlook. This is thanks to strong results from several brands, including our two most recent acquisitions, Hero and TheraBreath. Organic sales grew 5.4%. This exceeded our 3% Q2 outlook. Gross margin expanded 270 basis points. Marketing as a percentage of sales increased 130 basis points. Two items that are worthy of note.

First one is 18% of our global sales were purchased online, compared to 17.5% in the year ago quarter. And second, private label is stable in our categories, both in the U.S. and internationally. Adjusted EPS was $0.92, and this was $0.14 higher than our $0.78 EPS outlook. And that result was driven by higher sales, higher than expected gross margin, and a lower tax rate. Now, I'm going to comment on each business. First up is the U.S. The U.S. consumer business had 6.3% organic sales growth, and 6 of our 14 power brands held or gained market share in the quarter. And for context, the brands that grew share represent 65% of our U.S. sales.

I want to look at a few of the more important categories in the U.S., starting with laundry. Laundry is a real success story in Q2. Church & Dwight closed out the quarter as the fastest-growing overall laundry detergent, liquid detergent, unit dose detergent, and scent booster manufacturer in both dollar and unit share. Arm & Hammer liquid laundry continues to see strong consumption growth, driven in part by the continued trade down to value brands and in part by media support behind our new Give It the Hammer master brand advertising campaign. Arm & Hammer liquid laundry detergent grew share by 90 basis points in the quarter, so we're now at 14.5% share, and Xtra, which is in the extreme value segment of the category, grew consumption 7.2% and gained 20 basis points of share in Q2.

Arm & Hammer Litter also continues to perform extremely well, with 12.6% growth, outpacing the category and growing share. Consumers continue to choose Arm & Hammer Litter offerings, and our orange box, in particular, offers great value for the cost-constrained cat owner. Turning now to personal care. Batiste grew consumption 12% in the quarter as we continue to build dry shampoo awareness and drive household penetration. While Trojan delivered share growth and increased share to 68.3% in Q2. Hero, which was acquired last October, grew year-over-year consumption by 66%, gaining 4.7 share points to achieve a 17.2% market share in the total acne treatment category. The number of retail distribution points has tripled since we acquired the brand, and we still have room to run as we expand across all classes of trade.

The Hero team is doing a spectacular job growing this business, and there continues to be a great deal of excitement at Church & Dwight about the Hero brand. Similarly, TheraBreath, which was acquired in 2021, is performing extremely well with 100% year-over-year consumption growth in the quarter. TheraBreath grew share 5.6 points year-over-year to a 13% share of the mouthwash category. The mouthwash category grew 14% in the quarter, TheraBreath accounted for 50% of the category growth. Distribution of TheraBreath has more than doubled since the acquisition date. TheraBreath is now the number two non-alcohol mouthwash brand and the clear number three in total mouthwash, and we expect this brand to be a long-term grower for Church & Dwight.

Regarding a couple of businesses that depressed our 2022 results, Waterpik is stabilizing, with Q2 coming in close to plan, and this is similar to Q1. While Vitafusion was close to our plan in the first half, our consumption was down in Q2, 9%, partly due to distribution losses at some retailers due to our supply issues in 2022. The good news is the gummy category was up 1% in Q2 after three successive down quarters, and our job now is to win back retailer confidence and regain lapsed consumers. We expect both businesses, this is Waterpik and Vitafusion, year-over-year to be flat net sales, so they're not hurting us in 2023 versus 2022. Next up is international.

Our international team is doing a great job, delivering organic sales growth of 6.1% in Q2, driven by broad-based growth in every one of our six subsidiaries and all five regions of our Global Markets Group. Finally, Specialty Products. Specialty Products organic sales decreased 6.5%, but this is primarily due to lower volume in the dairy business as lower-priced imports return to the U.S. market. I'm gonna wrap up my comments right now by saying consumption on our consumer products businesses are strong. A return to volume growth is expected in the second half. In fact, July is off to a very strong start. Our value offerings are performing well, as are our premium offerings.

Acquisitions are on track, and because we had an excellent first half, and we have a strong outlook for the second half, we are in a position to significantly increase our marketing spend. Last year, we pulled back on marketing due to our fill rate issues. When we started 2023, we intended to increase our marketing from 10% of sales in 2022 to 10.5% of sales in 2023, and then 11% in 2024. We now intend to ramp up marketing to 11% of sales this year in 2023 in support of our brands and new product launches as business gets back to normal. Now I'm gonna turn it over to Rick to give you some color on Q2 and the full year and other investments that we'll be making in the second half.

Rick Dierker (EVP and CFO)

Thank you, Matt. Good morning, everybody. We'll start with EPS. Second quarter adjusted EPS was up $0.92, up 21% to the prior year. As Matt mentioned, the $0.92 was better than our $0.78 outlook, primarily due to continued strong consumer demand for many of our products and higher than expected gross margins, as well as a lower tax rate. Net sales was up 9.7%, and organic sales were up 5.4%. Almost half of the reported revenue growth year-over-year was zero. Organic sales were once again driven by pricing in Q2, with volume slightly down. That slight decline was better than expected, and turning to the second half, we continue to expect a return to volume growth.

Our second quarter gross margin was 43.9%, a 270 basis point increase from a year ago, primarily due to productivity pricing and strong contributions from higher margin acquisitions that are offsetting inflation. This result exceeded our expectations for the quarter as we saw a greater impact from productivity programs, a better product mix driven by our recent acquisitions. Let me walk you through the Q2 bridge. Gross margin was made up of the following: Positive 280 basis points impact from price volume mix, positive 120 basis points from acquisitions, a positive 160 basis point impact from productivity, 10 basis points from currency, partially offset by a drag of 300 basis points due to higher manufacturing costs. For the balance of the year, we expect this trend to continue. Moving to marketing.

Marketing was $29 million, up year-over-year. Marketing expense as a percentage of net sales was 9.1%, or 130 basis points higher than Q2 of last year. For SG&A, Q2 adjusted SG&A increased 60 basis points year-over-year. Other expense all in was $24 million, a $9.1 million increase due to higher average interest rates. For the full year, we now expect other expense of approximately $100 million. We do not have any looming long-term debt refinancing. In fact, other than the $200 million left in our term loan, August of 2027 is the timing of our next maturity.

For income tax, our effective rate for the quarter was 17.9%, compared to 24.1% in 2022, a decrease of 620 basis points, driven by a higher tax benefit from stock option exercises. We now expect the full year rate to be approximately 22%. Now to cash. For the first six months of 2023, cash from operating activities increased to $509 million due to higher cash earnings and improvements in working capital. Turning to the full year outlook. Given the strength of our Q2 results and our confidence for the remainder of the year, we're raising our outlook for sales, gross margin, EPS, and cash flow. We now expect the full year 2023 reported sales growth to be approximately 8% and organic sales growth to be approximately 5%.

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 200 basis points. Compared to our previous outlook, we see commodity cost favorability, higher productivity, and faster growth from our higher margin recent acquisitions. While we have seen some pockets of lower inflationary pressure since our prior outlook, we continue to expect net inflation for the year. For perspective, we expect $120 million of manufacturing cost increases in 2023. Much better than the $290 million we saw in 2021 and the $250 million in 2022, but still elevated from historical levels. Speaking of history, if we look back at history from 2010 to 2019, we typically had 2% of COGS as inflation.

During the COVID impacted years of 2020 to 2022, we saw an 8% of COGS impact, and in 2023, we're seeing about a 4% inflation rate. Currently, we see commodities like ethylene down 20% year-over-year. However, going the other way, we see soda ash up 50%. Soda ash is now used with lithium for lithium carbonate, which is then used in lithium batteries and solar panels. This demand spike, combined with pressure on the supply side, so for example, China is the largest supplier of soda ash globally and has had intermittent supply issues, and that's causing upwards pressure on price. The point is, we're not in a def- deflationary period as of yet. Wrapping up gross margins, we have made a lot of progress.

However, for the full year, we still expect to be about 200 basis points below our pre-COVID margin levels. It's a lot of opportunity over the next few years. We intend to increase marketing as a % of net sales to 11%. This is great news, as we previously anticipated getting back up to 11% in 2024. The fact that we're able to get there sooner than initially anticipated will position the business well for the future. We expect SG&A, both in dollars and as a % of sales, to increase compared to 2022. The increase in SG&A is expected to be larger than what was assumed in our prior outlook.

Matt Farrell (President and CEO)

As a strong business performance increases incentive compensation and as we make strategic investments. As in past years, when we have strong business performance, we're investing for the future. These investments are focused in two areas. First, growth, with higher marketing investments and R&D investments around NPD, as well as accelerating product registrations in international markets. Second, would be efficiency, investments in automation and technology. We now expect full year EPS to be approximately 6%. As a reminder, our EPS guidance includes a step-up of marketing that we've talking about in higher SG&A. We now expect full year cash flow from operations to be approximately $1 billion. Previously, we expected to be $950 million. The $50 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. We expect to return to historical levels of 2% of sales by 2025. Strong performance in the first half of the year drove 12% EPS growth. As a result of accelerating investments, we expect second half EPS growth to be flat. For Q3 specifically, we have a strong outlook and expect reported sales growth of 8%, approximately 4% for organic and gross margin expansion. We also expect a significant, significant increase year-over-year in marketing spend, as well as SG&A. Adjusted EPS is expected to be $0.66 per share, a 13% decrease from last year's adjusted Q3, as investment spending is weighted more towards Q3.

To summarize, a strong six months of the year are behind us, a return to volume growth in the back part of the year, and a lot of momentum as we move into 2024. With that, Matt and I would be happy to take questions.

Operator (participant)

Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the 1 on your touchtone phone. If you'd like to withdraw your question, please press the star followed by the 2. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Chris Carey from Wells Fargo Securities. Please go ahead.

Chris Carey (Senior Equity Analyst - Head of Consumer Staples Research)

Hey, good morning.

Matt Farrell (President and CEO)

Hey, Chris.

Chris Carey (Senior Equity Analyst - Head of Consumer Staples Research)

On my math, this is the first return to organic sales growth, you know, in personal care, since the beginning of 2021, unless I'm calculating that wrong. Clearly there was some commentary around Waterpik and vitamins being on plan. Nevertheless, does feel like a bit of a step change on this important area of the P&L. I wonder if you could just frame what's going on an underlying basis in that business to drive this re-acceleration. I know comps are getting easier, but we hear it so much about Waterpik and Flawless, and sometimes not the rest of the underlying drivers of organic sales here.

I'm just trying to get a sense of the full delivery of this personal care portfolio into the back half of the year, specifically as, as Hero comes into the base.

Matt Farrell (President and CEO)

Okay, I'll start. This is Matt, Chris, and then Rick can pile on. I mentioned Waterpik and vitamins. That we said on a full-year basis that they would be flattish in net sales. First half, they're both down year-over-year, and the expectation is up in the second half. You're right about that. They're gonna start contributing to the inflection of personal care starting to grow. Internationally, we have Batiste and Sterimar, where we've been somewhat capacity constrained, and that's abating right now, too. That's gonna help us on the international side. Batiste continues to grow in the U.S., continued to be able to expand, as I mentioned in my remarks, awareness and also household penetration.

TheraBreath is a juggernaut, and we bought that business, probably had around $100 million in sales. Our ambition, long term, is for that to be a $500 million business, globally. That's gonna continue to grow. We've got lots of distribution gains already this year and more ahead of us. The same is true for Hero. Hero we just bought last October. We got a fantastic team driving that business that they, by and large, have all stuck around with us, and we want them to stay for a, for a long time because we have so much success and so much runway ahead of us.

They give you a little sense for a half a dozen brands here that are contributing to the growth.

Rick Dierker (EVP and CFO)

I would probably just add, Chris Carey, it's Rick Dierker, that Matt Farrell's exactly right. Batiste, TheraBreath, all those things are, are, are happening. You're right, your math is correct. Q1, organically for personal care was negative. Q2 is positive. We expect Q3, Q4 to be positive. We do see the inflection point as well.

Matt Farrell (President and CEO)

The good news here, that's the high-margin part of the business, is personal care.

Chris Carey (Senior Equity Analyst - Head of Consumer Staples Research)

That's just one thing I wanted to confirm that mix, should become a bit more of a tailwind for gross margins in the back half as well. You took care of that. The one other, then I'll get back in. We saw some incremental pricing in the Nielsen data around laundry.

Just wanted to confirm that, if that's true or not said in the way, if there was pricing taken in the business, and then maybe just, you know, contextualize, you know, if that was the case, you know, why it happened and how you're thinking about maintaining value and volume share in the laundry business in the US going forward. Thanks so much.

Rick Dierker (EVP and CFO)

We haven't taken any incremental pricing, on laundry. I mean, there's still the impact of concentration as an example, but that's not really pricing. We have not taken any incremental pricing.

Matt Farrell (President and CEO)

Yeah, Chris, the only area where we have announced an increase in price to retailers is in baking soda, for the obvious reasons, with the 50% increase in soda ash that Rick, made reference to.

Rick Dierker (EVP and CFO)

Okay, thanks so much.

Operator (participant)

Your next question comes from Rupesh Parikh from Oppenheimer. Please go ahead.

Rupesh Parikh (Managing Director and Senior Analyst - Food, Grocery, and Consumer Products)

Good morning. Thanks for taking my question. Also, congrats on a really nice quarter.

Just going to your comment here on the U.S. consumer business, where I think you gained or maintained share in six out of your 14 power brands category. How are you thinking about this for the balance of the year? Do you expect that metric to improve as we get to Q3 and Q4, especially as maybe some of your advertising picks up?

Rick Dierker (EVP and CFO)

Hey, Rupesh, we do think we're going to improve that as we go through the year, as our marketing investments behind it, as our fill level, levels comp year-over-year are comparable. You know, I think, even a better metric is instead of 6-14, we've been talking about 65% of our net sales have gained share. That's, our large brands are winning.

Matt Farrell (President and CEO)

Rupesh, some of the categories in personal care that are down are like battery, pregnancy test kits, cold shortening. These are small categories, so but they count as one of the 14. We're trying to to get the focus more on the big brands and how they're performing.

Rupesh Parikh (Managing Director and Senior Analyst - Food, Grocery, and Consumer Products)

Okay, great. Given we've seen margin to improve, not only for you guys, but also other players out there, just curious what you're seeing the competitive promotional backdrop right now, and then just how you think about the promotional environment for the balance of the year?

Matt Farrell (President and CEO)

Yeah. Well, look, as far as promotions go, generally the conversation goes around household. If you look at the laundry category in total, it's sequentially, it's up about 80, 90 basis points from Q1 to Q2. If you look at liquid laundry detergent, that's up a couple of 100 basis points and sold on deal from Q1 to Q2. On the other hand, if you look at unit dose, sequentially, it's down 340 basis points from Q1 to Q2. All in, I, I'd say if you look at the laundry category in total, it's not significantly more promotional in Q2 than Q1. If you look at laundry, pardon me, litter, sold on deal, just the last few quarters, it's been pretty steady.

It's been around, you know, 15% sold on deal. I would the last one would be vitamin business, VMS. That actually is, it's less promotional in Q2 than Q1. I would say that, from where we sit, and we look at our most promotional categories, we think it's things are pretty steady.

Rupesh Parikh (Managing Director and Senior Analyst - Food, Grocery, and Consumer Products)

Okay, great. Thank you. I'll pass it along.

Matt Farrell (President and CEO)

Okay.

Operator (participant)

Your next question comes from Peter Grom, from UBS. Please go ahead.

Bryan Adams (Director, Equity Research - Household Personal Care, Beauty, US Beverages, and Packaged Food)

Good morning, guys. This is Bryan Adams on for Peter. Thanks for taking the question. Just looking at the implied, I think you said up to, or the back half, it implies around up to 2.2% or a little over 2% growth in volumes in the second half. Should we be thinking about that as a sequential build, or is it more just looking at the year-ago comparisons with how challenging 3Q was? Is it reasonable to expect that 3Q volumes might be on par or even above that of 4Q?

Rick Dierker (EVP and CFO)

Yeah. Hey, Brian, you know, we've kind of said, you know, about up to 50% in the second half is going to be volume-driven, and we think that is impactful. It inflects positively, I think, because of the comp, you know, maybe Q3 is a little bit better than Q4.

Bryan Adams (Director, Equity Research - Household Personal Care, Beauty, US Beverages, and Packaged Food)

Okay, great. Just one more quick one on Specialty Products. I think entering the quarter, the expectation was for that business to be slightly negative this year, and you've had another choppy quarter here. I know you called out the reasons why with the lower price imports. I for one, am far from an expert on the puts and takes of the business here, just looking ahead, should we expect kind of a imilarly challenged backdrop as we head into the second half? Are you expecting any improvement here?

Rick Dierker (EVP and CFO)

I'll give you the division, kind of organic, outlook. Here we are in July. Approximately 5% for domestic, 6%-7% for international. Negative for SPD. That gets us to approximately 5%. We continue to think, we'll have the same issue that we experienced in Q2 for the balance of the year.

Bryan Adams (Director, Equity Research - Household Personal Care, Beauty, US Beverages, and Packaged Food)

Awesome. Thanks, Rick. Thanks, guys.

Operator (participant)

Your next question comes from Lauren Lieberman, from Barclays. Please go ahead.

Lauren Lieberman (Equity Research Analyst - Beverages, Household, and Personal Care)

Great, thanks. Good morning. I just want to maybe try to ask a bit of a longer-term question, which is that now, you know, it feels you've got really good visibility into gross margin recovery, you know, to pre-COVID levels, through the worst in terms of kind of the discretionary-driven volatility on, on top line, you know, and with all of that reinvestment set up to get back to, you know, not quite 12%, but a huge step change this year. Now that things are kind of more settled, if you will, you also talked about some incremental investments in, you know, in efficiency.

I was wondering if we could just hear a little bit about kind of longer range planning as you think about investments in capabilities, in supply chain, which I know we've talked about in pieces, but as you kind of think over a multi-year view, perhaps, how you think about investments that you may want to be making, more in kind of infrastructure to support the business, with the hindsight being 20/20 of some of the operational headwinds that you ultimately faced during, you know, the global pandemic that nobody could have planned for? Thanks.

Matt Farrell (President and CEO)

It's a, it's a good question. You've heard us say in the past that we think that sales per employee is an underappreciated measurement of a company's performance. We focus on that quite a bit. Rick can kind of chime in with some details, but we look at how do we make our people in the plants more efficient through automation, and how do we do the same with respect to the white-collar office workers? We're gonna be close to $6 billion in sales next year. We have around 5,000-5,300 employees.

The goal here is, can you continue to grow your top line without necessarily growing the number of plants that you have or the number of employees that you have to make, make the team far more efficient? Rick can give you a couple of examples of RPA, and the number of projects we've done in the past, how many we plan to do this year and in the future, as an example of how you try to make, your, certainly your office workers more productive. Of course, we so many other companies out there, are now looking to, AI and chat and say, "Well, how can we leverage that to make everybody more productive?" Rick, you can throw a few examples on the table.

Rick Dierker (EVP and CFO)

It's all in the backdrop of making sure that our evergreen model of 25 basis points of SG&A leverage each and every year is, you know, is solid for the next 5, 10 years. 2 examples, like one Matt mentioned, is like RPA. one of the investments we're making right now with automation and technology is, we have 20 or 30 projects that represents thousands and thousands of hours that we're automating. That, that way, that our people have more capacity to do other work, which is really impactful as we build the company, and we have more and more brands every day. The second one we're doing is we're making significant technology investments.

I think you've heard us talk about before, we put an ERP system into China, as an example. We're, we're investing into an ERP system for our GMG business, which is our fastest-growing international business. We're putting technology, we're putting enabling technology so that we can scale and grow. We have SG&A investments for people and regulatory and R&D, so that the business can continue to grow at the rate it's been growing at.

Lauren Lieberman (Equity Research Analyst - Beverages, Household, and Personal Care)

Okay, great. Thanks so much.

Matt Farrell (President and CEO)

Thanks, Lauren.

Operator (participant)

Your next question comes from Dara Mohsenian from Morgan Stanley. Please go ahead.

Dara Mohsenian (Managing Director - US Beverage and Household Products Sectors)

Hey, good morning, guys. Just along the vein of the last question, clearly a lot of reinvestment in the back half of the year relative to original plan. Can you just talk about the level of payback you expect from those investment areas, as well as the timing of payback? Obviously, marketing is a line item that's highly visible to us, but it seems like there are a bunch of other areas in terms of higher R&D, greater registrations, technology. You just mentioned European, China, Rick. Those are more nebulous and harder to judge. Just how do you think about the payback, and are you basically pulling forward some incremental investment that would have occurred in 2024 as we think about this reinvestment in the back half of the year? Thanks.

Rick Dierker (EVP and CFO)

In terms of payback, we'll start with marketing. Marketing, we're spending $30 million more. Where are we spending that incremental marketing? Well, it's around brands like TheraBreath, like Hero, the Arm & Hammer campaign, Give It The Hammer, which has been great in the recessionary time. All those things are driving the top line, we're seeing an immediate payback, right? We, we talked about distribution gains for TheraBreath and Hero. You know, sometimes these are the first national campaigns they've ever experienced, and consumption is on fire, and that's as a result of marketing and distribution gains. The payback there is rapid. On the SG&A, you know, 2/3 of that SG&A number is incentive comp year-over-year, as our results are outperforming, and then maybe a 1/3 is the investments.

Those investments are more one-time in nature. And yeah, like for registrations we've pulled forward two years of registrations. We may do that again in terms of, getting us ready to grow even faster, and it gives you more optionality to expand in different countries around the world. Anything, Matt, you would add?

Matt Farrell (President and CEO)

Just to say, Dara, we're very consistent. We had a long-standing practice that when the business is performing well, we look at that as an opportunity to reinvest. Things and initiatives we might have had next year or the year after, we're going to say, "Hey, we can fund it now. Let's do it." As with respect to marketing, that's really a no-brainer, 'cause marketing correlates with the with the health of, a brands and the strength of your brand equity, and you can't live at 10% of sales. You know, there's another example of something we were gonna ramp up in 2024, that's, we got ahead of it now, so that is not gonna be a drag year-over-year in 2024 versus 2023.

You know, that ramp up to 11%. I think these are all, these are all good things.

Dara Mohsenian (Managing Director - US Beverage and Household Products Sectors)

That's helpful. Thanks, guys.

Operator (participant)

Your next question comes from Andrea Teixeira, from JPMorgan. Please go ahead.

Andrea Teixeira (Executive Director)

Thank you. Good morning. I wanted to ask more about your point on volumes for the more discretionary categories. Not, not to take away from, obviously, the improvement in the other areas in the down trade that you benefit, but some of these categories, of course, the 20%, I, I believe, is still around what they represent in your revenues. I understand that you're comping very easy comparisons, but, you know, consumption-wise, I wonder why customers will go back to Flawless and Waterpik, given the headwinds in the category? In general, I think we've heard all companies talk about like, well, we, we will see volumes rebounding, and it's not like your volumes were relatively outperforming. I wonder ex, you know, ex those two or those three categories, including VMS.

What makes you comfortable with the rebounding volumes that is predicated in your guidance? Thank you.

Matt Farrell (President and CEO)

Yeah. Well, let's start with Flawless. We haven't said a word about Flawless, nor will we. You know, it's really a small brand for us now. As far as Waterpik, just remember, when, when we entered the year, if you go back six months, we said, "Hey, the first six months, we're gonna be choppy here." We had inventory in the channel that we had to work through. We had an imbalance out there. That's behind us now. That obviously has a direct impact on our sales in the second half. Same with vitamins. You know, that was our biggest problem child when it came to supply in 2022. We got punished for that by suppliers where we lost displays, some cases lost distribution.

Consequently, we took that on the chin in the first half, but that started to improve in the second half as far as the number of displays we're able to get in. Some of the variants that we weren't able to make last year, that we're gonna start introducing back in, example a magnesium gummy, for example. For those two businesses, we would say, "Hey, you know, there's, there's reasons to believe that there's gonna start inflecting in the second half.

Rick Dierker (EVP and CFO)

Yeah, I'll just give you a couple comments too, Andrea. In the back half of 2022, you know, those businesses were down. We expect those businesses to be really, like Matt said earlier, a little positive in the back half and really flat for the year. When you add up all those 3 businesses and the impact they've had on the company, I've quoted it a couple of times, but in Q4, it was a 4% drag. In Q1, they were a 3% drag. In Q2, they were only a 1% drag, and we expect them to be flat in the second half. It's already improved, I guess, is what we're saying.

Andrea Teixeira (Executive Director)

Okay. Thank you.

Operator (participant)

Your next question comes from Steve Powers from Deutsche Bank. Please go ahead.

Steve Powers (Equity Research Analyst - US Household and Personal Care, Beverages, and Food)

Hey, thanks. On Vitafusion, just to maybe a little bit more detail on your visibility into stabilization and winning back those, those retailers and consumers, just where you are in the process and how long you think it will take?

Matt Farrell (President and CEO)

Yeah, well, a lot of work's been gone into this business. You know, we're relooking at our packaging, our graphics our messaging. You know, it's the black eye we got last year gave us a chance to stand down and take a hard look at the brand and look ahead. I think over the next 12 months, you're gonna start seeing some changes on shelf and how we go to market. I wouldn't disclose any more than that right now. Anything to add, Rick?

Rick Dierker (EVP and CFO)

For vitamins, I think it's, you know, when we have our TDPs get impacted a little bit, because we're in the penalty box for supply, you know, we got to do what Matt alluded to. We're gonna get we've gotten more displays, we've we're adding advertising, we're looking at our messaging, and then it takes, you know, nine months or so to, to make that case, for the retailer so you can get the distribution, back into a leading position.

Steve Powers (Equity Research Analyst - US Household and Personal Care, Beverages, and Food)

Okay, thanks. Thanks for that. You know, I guess just going back to maybe kind of the question Dara raised and that Lauren brought up on the reinvestment rates. I think the reinvestments you're doing now were very well telegraphed, and as you've articulated necessary for lots of reasons. The idea, Matt, as you outlined it, that the history of the business has been when things are good, you reinvest to kind of get ahead. I guess to me, there's like a little bit of tension between that, that dynamic, and then the other side of it, trying to catch up from sort of a lost year in 2022.

As you go forward is the philosophy to run the business as you have from here forward, which effectively means we're kind of getting back to more of an evergreen mentality off of this newly established base, or is there more of a desire at some point, you know, to recoup some of these upfront investments and kind of return to trend off of maybe a 2021 base? Like, how do you think about, think about that from just how you're managing the business from here?

Matt Farrell (President and CEO)

I've been here for a, for a long time, since 2006, and we've lived with our evergreen model for many, many years, and it served us well. Last year was an anomaly for us. We said: Okay, we got to get back to our algorithm. We aid we had a big step up in 2023, and, by virtue of what we've shown in the first half, we're gonna get to 6% EPS growth in 2023. We're gonna get marketing back up to 11% of sales, which is how we wanna run the railroad. We're still 200 basis points light versus what our gross margins were, you know, pre-COVID.

When we get to the end of 2023, that's ahead of us. It's gonna take us a few years to get back there, but it'll, as we improve our gross margin in 2024 and 2025, that's obviously gonna throw off, you know, a fair amount of profit. If you look at just the first half of this year, we had double-digit gross profit growth. That's a great trend. You know, I'd say that the short story is, is that the success we've had in the first 6 months, the strength we see in the second half, certainly on sales and gross profit growth, gives us greater confidence so we can re-return to our normal evergreen model algorithm in 2024.

We're not- You know, there's it's too early to be calling numbers at this point, but, I think the going to 11% of marketing as a percentage of sales this year is a big deal. It won't be a headwind in next year, 2024 versus 2023. We still have the ambition to grow gross margin significantly in the next couple of years. That's a short story about how we think about the P&L, Steve.

Steve Powers (Equity Research Analyst - US Household and Personal Care, Beverages, and Food)

Okay, thank you very much.

Operator (participant)

Your next question comes from Anna Lizzul from Bank of America. Please go ahead.

Anna Lizzul (VP, Equity Research - Household and Personal Care)

Hi, good morning. Thank you for the question. I was wondering on the distribution gains with Hero and TheraBreath, could you comment on where you're seeing the largest gains in distribution with your various retail partners? Are there any challenges to gaining distribution? Also, to what extent do you think you have more runway on distribution? Do you have any concerns from some of the larger brands that have been innovating in this space with similar offerings, that might have distribution already well established? Thanks.

Matt Farrell (President and CEO)

As I go through, you're gonna have to remind me about the question 3 and 4. As far as where the distribution is coming from, if you take Hero. Hero was built through Amazon, Target, and Ulta, and those were the mainstay re-retailers that the Hero team chose to grow their brand. Consequently, every other retailer in class of trade is an opportunity for us. we've-- that's what we've been pursuing. You know, we've been, we've been going after Mass, which would be companies like retailers like Walmart, the big drug chains, et cetera, and then, and then food. The opportunity is, A, would be distribution, and B, would be facings.

If you go to TheraBreath, TheraBreath was, was more developed as far as the throughout many classes of trade, but not with respect to facings and how many variants are, are shown. There's 2 things happening with TheraBreath. One is, yeah, we're getting more retailers, but we're spreading out more on shelf. As because of this is the actually the highest priced mouthwash, it's accounting for 50% of the category growth in mouthwash in Q2. The retailers see that their penny profit is high on TheraBreath mouthwash, consequently, they're interested in helping us grow. We can anticipate more facings in the future, particularly in 2024. I think, I think both of those brands have a big, you know, tailwind going forward.

Rick Dierker (EVP and CFO)

Yeah. I would just add, Anna, that both of those brands have a lot of runway left on TDPs. You know, even if you look at TheraBreath, for example, it's maybe third or fourth in the segment on TDPs, and the next step change maybe is another competitor that has 1,100. There's still room to run.

Matt Farrell (President and CEO)

Yeah, I mean, the amount of the velocity and the sales that we have, would, would, suggest that we should have far more shelf space than we have today.

Anna Lizzul (VP, Equity Research - Household and Personal Care)

Thank you. Just any concern, I guess, from some of the larger brands that have been innovating in this space with some similar offerings, that already have some well-established distribution. Just any concern from that?

Matt Farrell (President and CEO)

Yeah. Are you referring to the acne category?

Anna Lizzul (VP, Equity Research - Household and Personal Care)

Yeah, both in the acne category and in the mouthwash category.

Matt Farrell (President and CEO)

Well, look, we welcome competition. As far as, you know, patches go, the advantage Mighty Patch has is, number one, it was first, and number two, its patch is more efficacious than other patches. I think that's what's gonna make the difference going forward. Yeah, as far as TheraBreath goes, you know, TheraBreath's got a different formula than other mouthwashes, even in the mouthwashes. No, I would say we feel advantaged with respect to our offering, not just our formulas, but also our packaging and our go-to-market strategy, and our use of social media.

Anna Lizzul (VP, Equity Research - Household and Personal Care)

Great. Thanks very much.

Operator (participant)

Your next question comes from Bill Chappell, from Truist Securities. Please go ahead.

Bill Chappell (Managing Director and Senior Analyst - Food, Grocery, and Consumer Products)

Thanks. Good morning. Hey, just a little bit more on sodium bicarbonate. I don't remember, and maybe you've said, what the % that is in terms of, of, of cost goods sold, but also, and 'cause I always enjoy the discussion on animal husbandry, I thought the key part of the specialty ingredients business was feeding sodium bicarbonate to cows to produce more milk. Why would that business not be passing off pretty meaningful price increases as well and driving sales?

Matt Farrell (President and CEO)

Yeah, yeah, sodium bicarbonate is not a big part of the animal business within SPD. As far as, we got into the animal business about 50 years ago, when we learned that, that, we were selling super sacks of baking soda to big bakers. They were selling them out the back door to some dairies. They were sort of used, putting in the feed was sort of like Alka-Seltzer for cows. That then got us into other nutritional products, prebiotic, probiotics over time. The story with respect to soda ash and sodium bicarbonate is largely on the consumer side of the business. Now, as Specialty Products business, 2/3 is animal, 1/3 is bulk sodium bicarbonate.

There you would see that we have been raising price, but, you know, this is just it's a $100 million business, so it's not a real needle mover for us, Bill, when we raise price. In bulk sodium bicarbonate.

Bill Chappell (Managing Director and Senior Analyst - Food, Grocery, and Consumer Products)

Got it. It's not enough to drive sales?

Matt Farrell (President and CEO)

Yeah, on the consumer side, it's a much bigger deal. We, we don't typically quote what percentage of our COGS is, is sodium bicarbonate or baking soda, but remember, we, we use baking soda in a lot of different products. It's in toothpaste, it's in underarm deodorant, it's in cat litter, laundry detergent. You know, we use it quite a bit, so it does matter.

Bill Chappell (Managing Director and Senior Analyst - Food, Grocery, and Consumer Products)

Okay. Then second, I mean, in terms of the strength of your results in the past couple quarters, you know, you had leaned on, or not leaned on, indicated that consumer trade down was driving it. I mean, is that still a big driver? I mean, it seems like it's more just the strength of the brands and the categories or is it really you're continuing to see a nervous consumer?

Matt Farrell (President and CEO)

We've had four quarters now, four or five quarters now of trade down. That's happening mid 2022, and it's gonna continue through mid 2023. You would say now that you're sort of starting to lap the trade down, but the Arm & Hammer brand continues to grow. Like I said, July is equally as strong as year-over-year, as Q1 and Q2. In fact, as Rick has pointed out, and we pointed out in the release, you know, a lot of the year-over-year comparisons, it's not just for Church & Dwight, but most CPGs, has been colored by price. The expectation now is we're gonna go positive in volume in Q3 and Q4.

We expect that the laundry is gonna be one of those participants for positive volume in Q3.

Bill Chappell (Managing Director and Senior Analyst - Food, Grocery, and Consumer Products)

Got it. Thanks so much.

Operator (participant)

Your next question comes from Olivia Tong from Raymond James. Please go ahead.

Olivia Tong (Managing Director, Senior Analyst - Consumer)

Great, thanks. Good morning. First question is around marketing. If you could just elaborate in terms of how much of the marketing spend is going towards maybe some more value to your products, where you are seeing some of that trade-down benefit versus some of the higher end, you know, TheraBreath, Hero, personal care type products.

Matt Farrell (President and CEO)

Well, you heard Rick mention that Hero and TheraBreath, by virtue of being part of Church & Dwight, we certainly have the wherewithal to invest quite a bit on two brands that are growing significantly and have a lot of runway ahead of them. The other place destination would be, which I mentioned briefly in my opening remarks, that's our master brand campaign, which is Give It The Hammer. The Give It The Hammer campaign is really resonating with consumers. You know, I'm just talking about your average consumer out there.

It's really resonating with them because it really halos all of our different categories, and it's consistent. We came up with this as we entered the year, and we said: Hey, we got all this trade down going on. Arm & Hammer is the working man's brand. We said, "Let's get behind that, and let's come up with a campaign that's gonna, gonna support that, that thesis." It's working. That brand is really scoring, super high, and we continue to get behind it. We're gonna get behind it in the second half, continually.

Olivia Tong (Managing Director, Senior Analyst - Consumer)

Great. Then, just following up, in terms of your expectations for volume to turn positive in the second half and being up for the fiscal year, as you mentioned in your prepared remarks, can you talk about your view on price mix in the second half? Then, maybe on price, what's already in place that hasn't lapped yet, and whether you have incremental plans, in the second half of the year?

Matt Farrell (President and CEO)

Yeah, hey, Olivia. There's, there's most of our pricing has lapped. You know, a lot of our, you know, laundry, litter, OxiClean pricing happened in July a year ago. Most of the pricing has been lapped. There's a little bit still to come. That's why we're saying maybe 50/50 in the back half of the year. Then the only, only price action that we've talked about is baking soda. That's the only one left from a list price perspective. We always want to go optimize trade and revenue growth management, but with the 50% increase in.

Bill Chappell (Managing Director and Senior Analyst - Food, Grocery, and Consumer Products)

And Batiste would be the other one that we haven't completely lapped. All the price increases. That's gonna be part of the story for price in the second half is dry shampoo.

Olivia Tong (Managing Director, Senior Analyst - Consumer)

Great. Thank you.

Operator (participant)

Your next question comes from Filippo Falorni from Citi. Please go ahead.

Filippo Falorni (Director, Equity Research - Beverages and HPC)

Hey, good morning, guys. I wanted to ask a question on private label. I know, some of your largest categories don't have a lot of exposure, but maybe you can comment on private label performance in some of the categories that do have the exposure. Matt, your point on, consumer trade down, kind of starting to cycle that. What are you assuming in your second half guidance? Are you assuming a continuation of the trend, an acceleration of the trend towards trade down? Any color will be helpful. Thank you.

Matt Farrell (President and CEO)

Yeah, well, look, there's a, there's a half a dozen categories where we have a private label competition, and I would say litter is usually the one we've, we've talked most about. But that's been stable for the last three quarters. It's around 13%, Q4, Q1 and Q2. As far as trade down goes, in household, it's consumer is more likely to trade down. Now, we talked about trade down within laundry to Arm & Hammer. We've had four quarters of that, as I just mentioned in the previous question. We do based on how July is setting up, it looks like that's continuing to happen, although I do, I do expect it's going to abate a little bit.

One thing that's notable about trade down is, which I said in my opening remarks, is that XTRA, which is a extreme value detergent, you know, it grew 7.5% consumption in Q2, and it actually gained share. That was the first time, and that was like 14 quarters, that XTRA gained share. That would suggest that there's a, the trade down. And Q2, remember, is our most recent quarter, first time that's happened in 14 quarters. You'd say, yeah, there's still a, a tendency to trade down, particularly on, on the household side. When it comes to personal care, particularly health-related categories, far less likely to see trade down. I think it's more of a, of a household story.

Rick Dierker (EVP and CFO)

Got it. That's helpful. Thank you, guys.

Operator (participant)

Our last question for today comes from Javier Escalante, from Evercore ISI. Please go ahead.

Javier Escalante (Equity Analyst - Beauty, Personal Care, and Household Products)

Hi, good morning, everyone. Another permutation on the spending and reinvestment and what to expect from it in the second half. It feels as if... Do you guys have built a financial benefit from that spending, the higher advertising spending in the second half or not? It's just basically you are assuming that you are just rebuilding a baseline of investment.

Matt Farrell (President and CEO)

Well, look, some of it is, it's hard to parse out, well, how much is it restoring your typical spend to maintain brand health, and how much is actually gonna, gonna juice your top line? As Rick said, I think it's more likely that it's gonna help TheraBreath and Hero in the second half. You know, the brands that are already doing extremely well, just pour some gasoline on those.

Rick Dierker (EVP and CFO)

Javier, I would, I would say it also positions us well as we enter 2024. That should be taken into account as well.

Javier Escalante (Equity Analyst - Beauty, Personal Care, and Household Products)

If things continue this well, say, right, that essentially gross margin ahead, top line ahead, that upside, you'd rather, say, close the year with 12% advertising spending, or you would rather balance that out and flow some of the upside to the bottom line? Thank you.

Rick Dierker (EVP and CFO)

Our outlook is what our outlook is. That's our best forecast of results. Right now we're saying, we're extremely happy that we got to 6% EPS growth while bringing marketing back up to 11%, which we thought was gonna take 2 years. We're doing it all in 1 year and also making some investments for the future. Not really ready to talk about what we're gonna do if we have upside to that.

Matt Farrell (President and CEO)

Just to pile on, you know, gross margin expansion, gross profit growing, these, these are all great things. Volume inflecting to positive in the second half. There's a lot of up arrows right now for the company.

Javier Escalante (Equity Analyst - Beauty, Personal Care, and Household Products)

Absolutely. Thank you very much.

Operator (participant)

I will now turn the call back over to Matt Farrell for closing remarks.

Matt Farrell (President and CEO)

Yeah. Hey, thanks everybody for joining us today, and look forward to talking to you again at the end of the third quarter. Have a good one.

Operator (participant)

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines.