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Edited Transcript of CHD earnings conference call or presentation 2-May-19 2:00pm GMT

Q1 2019 Church & Dwight Co Inc Earnings Call

PRINCETON Jun 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Church & Dwight Co Inc earnings conference call or presentation Thursday, May 2, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Matthew Thomas Farrell

Church & Dwight Co., Inc. - President, CEO & Chairman

* Richard A. Dierker

Church & Dwight Co., Inc. - CFO & Executive VP

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Conference Call Participants

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* Andrea Faria Teixeira

JP Morgan Chase & Co, Research Division - MD

* Bonnie Lee Herzog

Wells Fargo Securities, LLC, Research Division - MD and Senior Beverage & Tobacco Analyst

* Cody T. Ross

Goldman Sachs Group Inc., Research Division - Associate

* Erica A Eiler

Oppenheimer & Co. Inc., Research Division - Equity Research Associate

* Joseph Nicholas Altobello

Raymond James & Associates, Inc., Research Division - MD & Senior Analyst

* Lauren Rae Lieberman

Barclays Bank PLC, Research Division - MD & Senior Research Analyst

* Mark Stiefel Astrachan

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Olivia Tong

BofA Merrill Lynch, Research Division - Director

* Stephen Robert R. Powers

Deutsche Bank AG, Research Division - Research Analyst

* Steven A. Strycula

UBS Investment Bank, Research Division - Director and Equity Research Analyst

* William Bates Chappell

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Church & Dwight First Quarter 2019 Earnings Conference Call. Before we begin, I've been asked to remind you that on this call, the company's management may make forward-looking statements regarding, among other things, the company's financial objectives and forecasts. These statements are subject to risks and uncertainties and other factors that are described in detail in the company's SEC filings.

I would now like to introduce your host for today's conference, Mr. Matt Farrell, Chief Executive Officer of Church & Dwight. Please go ahead, sir.

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Matthew Thomas Farrell, Church & Dwight Co., Inc. - President, CEO & Chairman [2]

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Good morning, everyone. Thanks for joining us today. I'll begin with a few comments on the quarter, then I'll turn the call over to Rick Dierker, our CFO. When Rick is finished, we'll open up the call for questions.

Q1 was an outstanding quarter for our company as we saw strong organic sales growth and gross margin expansion. Q1 reported sales grew 3.8%. Organic sales growth was 4.5%, which exceeded our outlook of 3.5% to 4%. Earnings per share was $0.70, which exceeded our outlook by $0.04.

In the U.S., organic sales grew 4.5% with volume growth and positive price. Our categories are growing and our market shares are healthy. 10 of our 14 domestic categories grew during the quarter. And beyond category growth, our share results were solid, with 8 out of 11 power brands growing share. We continue to have success in the online class of trade, global consumer online sales continues to grow rapidly, and we expect it to exceed 8% of our sales in 2019.

Our International Consumer business delivered another terrific quarter with 8.5% organic growth. International is a growth driver and a bright spot for Church & Dwight. Unlike many of our peers, Canada, Germany and our global markets group, which we formally refer to as export, had particularly strong quarters. Our new partnership with Shanghai Jahwa is off to a good start and it is clear that the investment that we've made in our international business continue to pay off.

Now turning to Specialty Products. Q1 was a challenging quarter for us with a 4.2% decline in organic sales. We are seeing lower demand for animal productivity products from our dairy customers who continue to be hurt by low milk prices. So in the short-term, we are less optimistic about a sales recovery in 2019. However, we still feel good about our long-term 5% organic sales algorithm as a result of our acquisitions of businesses serving other species, like poultry, cattle and swine.

Now let's go back to the U.S. business for a moment and call out a couple of the bright lights in the quarter. In household, the laundry category grew 1.7%. ARM & HAMMER laundry consumption was up 8.2% and gained 0.7 share points. As anticipated, the promotional environment moderated a bit in Q1. We reduced ARM & HAMMER laundry percentage sold on promotion by 110 basis points while maintaining growth. And we plan to reduce promotional levels more in the coming quarters.

Over in personal care. BATISTE continued to gain share with a 28% consumption growth in the dry shampoo category, nearly doubling the category growth of 15%. BATISTE is the #1 dry shampoo for the 13th consecutive quarter.

Now let's have an update on pricing. Late last year, we raised price in several of our household categories in the high single-digit range. The impact on volumes so far has been better than expected. Over the last few months, we have had additional conversations with our retail partners regarding price increases in personal care category such as dry shampoo and condoms. These products are currently shipping with the new pricing.

And finally, we closed the FLAWLESS acquisition yesterday. We're excited to own the market leader in women's electric hair removal products. FLAWLESS is a fast-growing brand which complements our specialty hair care business. We expect it to contribute to our long-term growth, both domestically and internationally, and Rick will comment more on the impact of FLAWLESS to our 2019 outlook in a moment. So in conclusion, we had a terrific quarter. We're feeling really good about the rest of the year and our evergreen business model is helping.

Next up is Rick to give you details on the first quarter and the outlook for Q2 and the full year.

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Richard A. Dierker, Church & Dwight Co., Inc. - CFO & Executive VP [3]

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Thank you, Matt, and good morning, everybody. We'll start with EPS. First quarter EPS was $0.70 per share compared to $0.63 in 2018, up 11%. The $0.70 was better than our $0.66 outlook primarily due to higher gross margin. Reported revenue were up -- was up 3.8%. Organic sales were up 4.5%, exceeding our Q1 outlook of approximately 3.5% to 4%. The organic sales beat was driven by our global consumer growth of 5.2%. We're extremely pleased with our results. This is the third consecutive quarter of global consumer product growth in excess of 5%.

Now let's review the segments. First, Consumer Domestic. Organic sales increased by 4.5% due to higher volume and positive price and product mix as we see the benefit of our price increases flowing through. Growth was led by ARM & HAMMER liquid, unit dose laundry detergent, ARM & HAMMER clumping cat litter, TROJAN condoms, XTRA liquid laundry detergent, L’IL CRITTERS gummy vitamins and BATISTE dry shampoo. ARM & HAMMER liquid detergent continues to grow sales and gain share while decreasing the amount sold on promotion.

International organic growth was up 8.5%, driven largely by FEMFRESH, BATISTE, STERIMAR and ARM & HAMMER liquid laundry detergent in the global markets group. ARM & HAMMER clumping cat litter and liquid laundry detergent in Canada, BATISTE in Germany and WATERPIK in several countries. For our Specialty Products Division, organic sales declined 4.2%. Although demand for our products continue to grow in the poultry industry, demand in the dairy industry continues to be challenged.

Turning now to gross margin. Our first quarter gross margin was 45.1%, a 20 basis point increase from a year ago due to price increases, volume growth and productivity programs, partially offset by higher commodity and manufacturing costs. This exceeded our expectations, and you will hear later that we are raising the full year gross margin outlook.

Moving now to marketing. Marketing was down $1.8 million year-over-year. Marketing expense as a percentage of net sales decreased 50 basis points to 9.4%, largely due to timing. But as you heard from Matt, both our share performance and net sales are strong. For SG&A, Q1 SG&A decreased 50 basis points year-over-year. And net operating profit -- the operating margin for the quarter was 23.1%. This represents 120 basis point increase over Q1 2018. Other expense all in was $17.4 million primarily driven by interest expense. And for income tax, our effective rate for the quarter was 21.9% compared to 21.4% in 2018, an increase of 50 basis points.

And now to cash. For the first 3 months of 2019, net cash from operating activities was $137.6 million (sic) [$137.9 million], a $17.6 million decrease from the prior year as higher cash earnings were more than offset by an increase in working capital that's largely timing-related.

I'd like to take a minute and talk about our FLAWLESS acquisition and the accounting treatment. As you know, typically when we do deals, we buy the inventory on day 1. Based on the agreement, FLAWLESS will continue to operate the business during the transition period with their systems which will last approximately 4 months. During this period, operating results will be recorded in the company's net sales line, impacting many of our metrics, as we detailed in the earnings release.

For the remaining 4 months, FLAWLESS results will be consolidated within specific P&L line items. So the total FLAWLESS impact on the company is, net sales is expected to increase by 200 basis points; gross margin increases by 20 basis points; marketing decreases by 10 basis points; and SG&A increases by 50 basis points. From a cash perspective, the expected increase in cash earnings, 4% accretion, is offset by a onetime inventory purchase at the end of the transition period and a onetime working capital build which will be approximately $30 million in total. As a result, the full year effect of the acquisition on 2019 operating cash flow is neutral.

Additionally, as previously discussed, there will be quarterly adjustments to the FLAWLESS earnout which will impact the P&L. These will be excluded from our adjusted results but will impact the reported numbers. Now turning to the second quarter outlook. We expect Q2 organic sales growth of approximately 3.5%. We expect second quarter earnings per share of approximately $0.52, 6% increase over last year's quarter.

And now for the full year. We continue to expect organic sales to be approximately 3.5%. In terms of organic outlook by division, we now expect 3% for the domestic business, 7% from international and flat for SPD. We now expect reported sales growth of approximately 5% to 6%. We now expect full year gross margin to be up 50 basis points. This represents a 40 basis point increase from our previous guidance of plus 10. Half of the increase is driven by the previously discussed FLAWLESS impact and the other half is a combination of Q1 gross margin coming in better as well as the additional pricing actions which will impact the second half of the year.

While we were pleased to see first quarter gross margins above prior year, we still anticipate the impact of commodities, transportation and manufacturing cost to negatively impact gross margin. One example of this is surfactants where we saw a market pricing below prior year in Q1 with a forecast for double-digit increases for the balance of the year. As a result of the amortization and transition expenses related to the FLAWLESS acquisition, SG&A as a percentage of sales is expected to be approximately 13.8%.

We continue to expect 2019 adjusted EPS range of $2.43 to $2.47 per share or adjusted EPS growth of 7% to 9%. And as we discussed a month ago, the FLAWLESS impact to EPS in 2019 is neutral. The gross margin expansion on the base business is being offset by a reduction on our share buyback activity as we stated we would do with a larger acquisition.

And with that, Matt and I would be happy to take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Rupesh Parikh with Oppenheimer.

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Erica A Eiler, Oppenheimer & Co. Inc., Research Division - Equity Research Associate [2]

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This is actually Erica Eiler on for Rupesh. So I actually had wanted to touch on the promotional backdrop. I was just curious if you could elaborate a little bit more about what you're seeing right now on the promotional front. And do you still expect promotion activity to abate further this year?

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Matthew Thomas Farrell, Church & Dwight Co., Inc. - President, CEO & Chairman [3]

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Okay. In thinking about the promotional environment, we're generally talking about household categories. So if you look at the laundry category and look at what the percentage sold on deal was year-over-year, it was down about 340 basis points. So it went from like 40.3% down to 36.9%, so it's quite a drop. So the average for the category is 36.9%.

Where we right now for ARM & HAMMER liquid laundry is 34%. So we were down 100 basis points year-over-year. So I -- it's quite a move down year-over-year, so I would expect that to be sustained for the rest of the year. And as I said in my opening remarks, we expect also to reduce more in the next 3 quarters.

The other category to pay attention to is litter. So on the litter category, you've Tidy Cats, you've Clorox and Church & Dwight and all of those brands are down year-over-year as a percentage sold on deal. So the category is down 400 basis points. It went from 21.9% to 17.7%. So down quite a bit.

So as expected, all -- it seems all the manufacturers have pulled back quite a bit on promotions. Recall that last year that everybody has experienced commodity increases and transportation increases, big jump from '17 going to '18, '18 going to '19 not as bad, but still up. So this behavior was consistent with the ability of the suppliers to offset those cost increases.

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Operator [4]

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Our next question comes from Bill Chappell with SunTrust.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [5]

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Can you talk a little bit just about what you're seeing on the commodity front? We've heard some kind of improvement on freight logistics, I mean though I know you still have some kind of lagging inflation that's going to hit you. I mean is the outlook getting any better there? Or is it pretty status quo?

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Richard A. Dierker, Church & Dwight Co., Inc. - CFO & Executive VP [6]

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Yes. This is Rick. Bill, I would say that transportation, as an example, status quo. I think we said mid-single-digit increases for us last time we talked back in February, and that's still our expectation. Like we've touched on many times, we are largely hedged, about 75% hedged for a lot of our commodities. That piece that does float, we have some favorability in Q1, right.

And I think I alluded to in my remarks that ethylene, as an example, was actually down year-over-year in Q1. Now the forecast has it going up in Q2, Q3 and Q4. But so far, April looks lot like Q1. So I think we're optimistic that for the first time in a long time, commodities were actually abating.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [7]

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Got it. And just a second question. Trying to understand the liquid laundry environment. I mean are you still seeing -- I mean do you expect it to abate throughout the year in terms of promotional levels? Do you expect -- I mean there's certainly one player in Europe that kind of comes back time and time again. So I'm just trying to understand how long you think this lasts.

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Matthew Thomas Farrell, Church & Dwight Co., Inc. - President, CEO & Chairman [8]

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Yes. Look, in the first quarter, even the company you referred to that's in Europe was down sold on deal. We can't predict what the competition is going to do, but this isn't just 1 quarter, Bill. We've kind of started to see this trend in the second half of 2018 that's continued into '19. So it's not obvious that, that is just going to turn around very quickly.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [9]

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Okay. And then last one for me. Just I mean I'm actually surprised that litter is -- everybody is down on promotion because it seems to be a kind of a major battlefront for all the players with new introductions in pricing and promotion and advertising. Is that starting to abate?

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Matthew Thomas Farrell, Church & Dwight Co., Inc. - President, CEO & Chairman [10]

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When you have all these price increases, you also have to keep in mind that people aren't going to dealing it back, right. So it's somewhat consistent that you're not going to see as much sold on deal. People want to see the price increases take hold and be able to drop it down to gross profit.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [11]

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Got it. But you're not seeing any real change in the competitive environment on litter?

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Matthew Thomas Farrell, Church & Dwight Co., Inc. - President, CEO & Chairman [12]

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No. No. We're not.

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Operator [13]

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Our next question comes from Steve Powers with Deutsche Bank.

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Stephen Robert R. Powers, Deutsche Bank AG, Research Division - Research Analyst [14]

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Yes. Great. So I missed some of the statistics that you opened with, Matt, on the number of categories and brands that are growing or gaining share. Maybe just run through those again briefly and just talk about some of the categories or brands that aren't in the green. Obviously, great results overall. But are there any surprises or disappointments that you'd call out at the category brand level? And if so, are they kind of according to plan more or less? Or are there pockets where you could actually see incremental improvement?

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Matthew Thomas Farrell, Church & Dwight Co., Inc. - President, CEO & Chairman [15]

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Yes. I think the one day I'm not going to get that question is when it's 14 out of 14, they're up. It was 10 out of 14, the categories were up in the first quarter. Some of the categories that are struggling would be like condoms, for example. There are secular reasons for that for the last couple of years because there are alternative contraceptives to condoms, including Plan B and intrauterine devices, et cetera. Kids is down as well year-over-year, the category.

I'd say those are -- that's also -- you could argue that, that may be also related to birth rates. But I'd say on the sexual health side of the house is where we see some weakness. So that's probably where I would spend most of my time. As far as the shares go, our power brands, 8 out of 11 grew share in the quarter. So spectacular. Last year, we had 7 out of 11 on a full year basis. So we feel great about the strength of the brands.

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Stephen Robert R. Powers, Deutsche Bank AG, Research Division - Research Analyst [16]

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Okay. Cool. And then you'd spent a lot of time at the Investor Day on that More Power To You campaign. Can you just talk a little bit about metrics, measurements that you're tracking against that campaign? And just how they are -- how you're assessing the ROI there and how that ROI is trending versus what your expectations were?

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Matthew Thomas Farrell, Church & Dwight Co., Inc. - President, CEO & Chairman [17]

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Yes. Well, think of it this way, Steve. We're just turning that campaign on right now. As I said when we're down at the Stock Exchange, that is going to be a multiyear program. Really think we've hit upon something that resonates with consumers. You're going to start seeing it hit in the next couple of months, both on television as well as in print and digital as well.

But this is something that we think is going to be a big boost for us because ARM & HAMMER is across so many different categories. So it's laundry, it's litter, it's toothpaste, underarm deodorant. It's a phenomenal brand because it trades in so many different categories. So this campaign is going to halo all of those categories. So hope to give you an update on that in future quarters to let you know how it's going, but it's only just kicking off right now.

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Richard A. Dierker, Church & Dwight Co., Inc. - CFO & Executive VP [18]

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Yes. And I would just add, Steve, this is Rick, that it's always encouraging that when we're spending our lowest quarter of the year in terms of marketing spend to have the results that we just had, so that's another good indication.

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Operator [19]

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Our next question comes from Steven Strycula with UBS.

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Steven A. Strycula, UBS Investment Bank, Research Division - Director and Equity Research Analyst [20]

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Two questions. First would be on the personal care segment. I believe last quarter WATERPIK drove about 100% of the organic sales growth. Is that the case again in the first quarter of this year?

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Richard A. Dierker, Church & Dwight Co., Inc. - CFO & Executive VP [21]

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No. It's not.

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Steven A. Strycula, UBS Investment Bank, Research Division - Director and Equity Research Analyst [22]

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Okay. So some of the other business, did they get sequentially better? Would you mind commenting? And the second piece would be, should we think about -- since you're calling out surfactant costs being escalating this quarter, is that open negotiations for another round of price increases there?

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Richard A. Dierker, Church & Dwight Co., Inc. - CFO & Executive VP [23]

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Yes. So really, we did have some strength in a couple of different personal care areas. I quoted L’IL CRITTERS, as an example. I quoted BATISTE dry shampoo in the release. So those are kind of leading the way from a PC growth perspective. I know WATERPIK was slightly positive. But the price increases and volumes kind of offset. Your second question was on surfactants and another round of price increasing.

Well, surfactants were actually -- like I said, ethylene was actually down year-over-year in the quarter. It's expected to be up in Q2, Q3, Q4, consistent to how it was 3 months ago when we gave our outlook. And we said many times that we're not going to lead with any type of price increases in that laundry category. But what you're seeing in the laundry category is promotions being peeled back and you're seeing coupon reductions, kind of what Matt was alluding to before.

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Operator [24]

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Our next question comes from Jason English with Goldman Sachs.

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Cody T. Ross, Goldman Sachs Group Inc., Research Division - Associate [25]

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This is actually Cody Ross on for Jason English this morning. Sticking with the household products segment. This segment's revenue acceleration was exceptional this period even in the wake of some of your competitors announcing increased investment in your product categories. What do you think is driving your growth in liquid laundry? Why do you think you've been able to take market share? And given your recent market share gains, are you expecting any step-up in competitive activity as the year progresses?

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Matthew Thomas Farrell, Church & Dwight Co., Inc. - President, CEO & Chairman [26]

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Yes. We've talked about this many times before, about the ARM & HAMMER liquid laundry detergent. You have to keep in mind that ARM & HAMMER liquid laundry is a value detergent. It's on the high end of the scale, but it is a value detergent. And the brands that we compete against are Purex and Sun, others, and they are unadvertised brands. So we have a distinct advantage in the way we compete in that our brand has a lot of brand equity and those resonate with the consumer.

Now we've been growing the ARM & HAMMER liquid laundry detergent year-over-year for years. And this is -- and we did -- again, we grew this quarter quite a bit at the same time that we reduced our promotional spend year-over-year. So it's -- and behind that, we have the More Power To You campaign coming, which is also going to help us. So I think this is largely due to brand equity more than it has to do with promotions.

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Cody T. Ross, Goldman Sachs Group Inc., Research Division - Associate [27]

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Great. And just to juxtapose that to your Personal care segment. This segment growth decelerated quite significantly despite the strength that you guys called out in BATISTE and WATERPIK. Is this all really your condoms slowdown? Or what else have you seen in the market in this segment that has caused the slowdown?

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Richard A. Dierker, Church & Dwight Co., Inc. - CFO & Executive VP [28]

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Yes. It's really 2 things. I think Matt alluded to the sexual health businesses being a slower grower. And then it's also our WATERPIK business isn't -- we took a bit price increase and so volume elasticity has happened. And so the net result is the WATERPIK business has grown a little slower. So we think that's kind of transitory as the price increase takes hold, but that's what happened in Q1.

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Operator [29]

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Our next question comes from Bonnie Herzog with Wells Fargo.

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Bonnie Lee Herzog, Wells Fargo Securities, LLC, Research Division - MD and Senior Beverage & Tobacco Analyst [30]

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I had a question on your gross margins, they inflected positive in the quarter, which is great. So hoping you guys could talk through your outlook for gross margins for the rest of the year and if any of the key drivers have changed here and just really now wondering if your guidance for gross margin could actually end up being conservative. Do you see more upside now?

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Richard A. Dierker, Church & Dwight Co., Inc. - CFO & Executive VP [31]

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Well, we hope so, Bonnie. Remember, our outlook for gross margin when we met back in February for the full year was plus 10 basis points. And the detail of that back in February was, we were counting on plus 125 from price/volume mix, right. Largely as we're getting these price increases through on, at that time, 30% of the portfolio. We said we were going to have 100 basis points of improvement from productivity. We said we were going to have minus 190 for inflation and then minus 25 for the tariff. That's how we got to the plus 10 back in February. Now I'd say there is really 2 small changes in our outlook.

The base business, we would say, is plus 30 basis points now, not plus 10, plus 30, so the 20 bps of a change. 10 comes from better price/mix and volume and then 10 comes from a little bit lower inflation. So that's how you get to plus 30 and then the other plus 20 is really from the acquisition impact and the transition accounting. So I think we're off to a great start. We feel really good about it. We have plus 20 in the first quarter. We think we'll be down slightly in the second quarter. First half is flat, second half is probably up 100. So that's how we get to our 50.

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Bonnie Lee Herzog, Wells Fargo Securities, LLC, Research Division - MD and Senior Beverage & Tobacco Analyst [32]

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Okay. That's helpful. And then my second question. I know it's a small business for you guys, but hoping you could drill down a little further on the pressures you're seeing in specialty products and then maybe what changes you're making, if any, to deal with the headwinds. And you mentioned you don't expect much recovery but you're going to be lapping easier comps in that business. So just kind of trying to understand if we should expect continued inorganic sales declines for the remainder of the year? Or do you expect some kind of recovery, possibly Q4?

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Matthew Thomas Farrell, Church & Dwight Co., Inc. - President, CEO & Chairman [33]

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Yes. Just a little bit of color on the dairy market. So dairy price, the dairy industry is influenced by the price of milk. So if you look at class 3 milk, 2018, it was pretty low. It was $14.60 per hundred weight, that's how it's sold, 100 pounds. Q1 was even less than that, it was $14.30. So dairy farmers are definitely struggling. If you look at last year, I mean '17 going to '18, there was a 7% drop in the number of licensed dairy farms in the U.S. The number of cows didn't decline so much, they only declined 1%. So all those cows got distributed around to those other dairy farms, but that was the single largest drop recorded by the USDA. So obviously, tough going right now for the dairy industry.

What we've been doing is we've been diversifying away from dairy over for the past 3 years. So last year what we said was that about 25% of our Specialty Products sales, I'll narrow that, sales of our animal productivity business, 25% was for nondairy. So absent that, we would have an even greater difficulty. If you went back 3 years, 2015, 100% of our animal productivity business was dairy. So it is a worry for us, obviously. But we think long term, and we know this is a cyclical business, so it does come back eventually. But in the meantime, we continue to expand the businesses that are directed towards cattle, swine and poultry. For a full year -- on a full year basis, we started out saying, I think we said 9% organic growth. That is not going to happen. I think it's going to be flat for the full year for Specialty Products business.

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Operator [34]

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Our next question comes from Lauren Lieberman with Barclays.

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Lauren Rae Lieberman, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [35]

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Great. Just wanted to talk a little bit about pricing again. Clearly, you're having very good flow-through, and like you commented, volumes have held in very, very well. I was just curious about, I guess, your perspective on some of the gross margin pressures that retailers are facing? And what that may mean in terms of sustainability, in terms of pricing from an industry standpoint, not just Church specific.

But given it's gone so nicely for you, I was just curious kind of how that's going, what you're seeing day-to-day. Retailers, many are opting to absorb the price increases that you guys are putting through on a cost justified basis. But I just worry about sustainability for the industry. So anything you could offer there would be really helpful.

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Richard A. Dierker, Church & Dwight Co., Inc. - CFO & Executive VP [36]

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Yes. Look, I think we all know that retailers are challenged and oftentimes retailers have to turn to suppliers for some help with respect to their profitability. And different brands are in a better position to deal with those asks than others. And the reason we focus on having #1 and #2 brands is so that when that conversation takes place that we can work, we actually have something to bring to the party. And so if the retailer should say, I need x, then we might say, hey, we need an endcap, we need to be moved up to eye level.

When you're a #1 and #2 brand, you can have those conversations with the retailers. When you are the #3, 4 and 5 brand, that's far more difficult. So I think those are the brands that are going to be far more at risk than the brands that are #1 and #2. But yes, what you described, Lauren, is something we've been dealing with for the last several years. You might say, okay, it's going to become more acute now if you raise price. But you would expect that some -- the penny profit for the retailer is also going to go up as well. So all of that profit is not winding up in our pockets.

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Lauren Rae Lieberman, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [37]

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Okay. All right. Great. And then just one more thing was on the vitamins category. There was a recent article in the Journal just about potentially increased regulation from the FDA over claims and so on. Anything that you've seen in terms of competitive activity in this space so far from some of the smaller players that might be facing increased scrutiny or changes in terms of retail shelf effect as there may be a different level of scrutiny on the category?

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Matthew Thomas Farrell, Church & Dwight Co., Inc. - President, CEO & Chairman [38]

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Yes. Hey, we'd love to see that. I can't talk specifically about the journal article, I don't remember seeing that. But when we bought the business, it had a handful of competitors and today it's got 30. So we stand to benefit to the extent that there's going to be more scrutiny regarding disclosure and content of the gummy vitamins that we compete with.

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Operator [39]

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Our next question comes from Olivia Tong with Bank of America.

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Olivia Tong, BofA Merrill Lynch, Research Division - Director [40]

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Can you talk about any change in your view on the makeup of your organic sales growth target just effectively in terms of price/mix versus volume, particularly in Consumer Domestic? And then also a little bit in terms of how much of that price/mix is lower promo versus actual list price increases? And then were there any categories where promo didn't decline? Or potentially was up?

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Richard A. Dierker, Church & Dwight Co., Inc. - CFO & Executive VP [41]

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Olivia here, Rick. A lot of questions there. First question was really just a split between volume and price/mix. For the company, we said it was for Q1 about half, 50-50. For the domestic division, it was 1% volume, 3.5% for price/mix, so maybe 25%, 75%. I would expect that trend to continue throughout the year. I think that's a good ballpark. Second question was maybe some other categories that weren't being promoted as much. Was that it?

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Olivia Tong, BofA Merrill Lynch, Research Division - Director [42]

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Yes.

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Richard A. Dierker, Church & Dwight Co., Inc. - CFO & Executive VP [43]

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What I would just say ...

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Olivia Tong, BofA Merrill Lynch, Research Division - Director [44]

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Sorry. Just if there were any categories where promo didn't go down or it was actually up?

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Matthew Thomas Farrell, Church & Dwight Co., Inc. - President, CEO & Chairman [45]

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Yes. Well, the big ones are -- we went through earlier, we did look at the liquid laundry detergent and litter, those are the big ones. Personal care side of the house is less driven by promotion, it is far more driven by a marketing. So that's generally not a topic for conversation in personal care.

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Olivia Tong, BofA Merrill Lynch, Research Division - Director [46]

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Got it. And then in terms of international, I know it's not as big. But on price/mix there, I know it's an elevated comp in Q1, but given the FX moves like, I guess I was a little surprised to see that it was down year-over-year. So can you talk about what's driving that? Is that trial building? Is it just a mix of businesses? Anything else there to call out?

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Richard A. Dierker, Church & Dwight Co., Inc. - CFO & Executive VP [47]

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Well, no, you hit it on the head. More than anything, it's a comp issue. If you look at that business, it was -- price/mix was positive 5.2% in Q1 in 2018. For the year, it was 2%. So if you just -- almost at the stack bar, if you add the stack up in Q1, 5.2% minus 1.7% is 3.5%. So that's -- 2% to 3% is right where that business is usually at for price/mix. So it's more of a comp issue back in 2018. We did have some favorable price/mix as we were exiting and had to reverse some charges from our China venture. So it's really just a comp issue.

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Olivia Tong, BofA Merrill Lynch, Research Division - Director [48]

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Got it. And then just lastly, in terms of Consumer Domestic, obviously a lot better than you had expected, specialty worse, but net-net you'll obviously not be changing -- you're maintaining your full year total company expectations. So can you just update us in terms of your expectations by segment from the full year basis?

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Richard A. Dierker, Church & Dwight Co., Inc. - CFO & Executive VP [49]

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Yes, I did it in my prepared remarks. But just to do it real quick again. Previously, we had said for the full year, back in February, we said 2.5% domestic, 6% international, 9% for SPD, that's 3.5% organic. Now we're saying 3% domestic, 7% international and flat for SPD to get to the 3.5%.

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Operator [50]

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Our next question comes from Joe Altobello with Raymond James.

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Joseph Nicholas Altobello, Raymond James & Associates, Inc., Research Division - MD & Senior Analyst [51]

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First question on the pricing that you guys took in dry shampoo and condoms. I believe that's incremental to your prior guide. So is there any EPS impact from that? And was it cost justified? Or was it more innovation-driven?

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Richard A. Dierker, Church & Dwight Co., Inc. - CFO & Executive VP [52]

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Yes, I'll take the EPS question, Joe. It's -- it was -- every single price increase that we talk about has to be cost justified in this environment. So it was cost justified, to answer the first question. In terms of gross margin, if you exclude FLAWLESS because sometimes it's just easier to think of it like that, let's just strip out all the noise in FLAWLESS, we would've raised our gross margin from 10 to 30 basis points of improvement, right. So that 30 basis points is made up of partly the new pricing that we got in the back half of the year for these personal care categories.

We would have stayed at 10 basis points down for marketing, would have stayed at 30 basis points of leverage for SG&A and we would've been 70 basis points of op margin expansion. And you say, okay, where did that flow through for EPS? Well, remember, back in February, I said, if we did a larger deal, we would take our $300 million buyback program and just do $100 million of it, and that's what we did. And so EPS is neutral but operating margin is higher.

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Joseph Nicholas Altobello, Raymond James & Associates, Inc., Research Division - MD & Senior Analyst [53]

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Okay. So it's just the lower share count effectively. Secondly, just out of curiosity, Amazon going to 1-day delivery for Prime members. Does that have an impact, you think, on the industry in terms of e-comm sales? Or do you think same-day is really the game changer that has to happen?

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Matthew Thomas Farrell, Church & Dwight Co., Inc. - President, CEO & Chairman [54]

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I think, yes, it's probably the game changer. I think everybody is going to have to move towards 1 day and maybe same-day at some point in the future. I think that Amazon just keeps turning up the heat on all the bricks and mortar retailers. So that will be a competitive advantage for them until such time as others catch up. Now it may not matter to some consumers at some point that whether you get it same day or next day. But the option -- having the option may matter to people. But it's definitely something to watch, something we're watching closely too, Joe.

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Joseph Nicholas Altobello, Raymond James & Associates, Inc., Research Division - MD & Senior Analyst [55]

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But does it help you get to 10% faster, for example?

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Matthew Thomas Farrell, Church & Dwight Co., Inc. - President, CEO & Chairman [56]

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10% of online sales?

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Joseph Nicholas Altobello, Raymond James & Associates, Inc., Research Division - MD & Senior Analyst [57]

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Of total sales, yes.

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Matthew Thomas Farrell, Church & Dwight Co., Inc. - President, CEO & Chairman [58]

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It's -- I don't know that's going to get us there, whether it's 2 day or 1 day, that's going to change consumer behavior as far as buying online. We were up 40% year-over-year in the first quarter, our online sales, we got a big jump. So we're easily going to pass the 8% for the year. So we're real happy with the direction we're going and the skills that we're developing to compete digitally and online.

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Operator [59]

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Our next question comes from Andrea Teixeira with JPMorgan.

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Andrea Faria Teixeira, JP Morgan Chase & Co, Research Division - MD [60]

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So can you comment on the performance of the nontracked channels? I believe the gap of growth had narrowed last quarter, and Rick spoke to that on the Analyst Day. But it seems that it accelerated again this quarter. How is the rate of growth for e-commerce and club? I know just in context of one of your competitors gaining more shelf space in laundry at some -- at one of the clubs. And just trying to seize the 3.5% organic that you called for the second quarter, is just be more conservative as you just printed 4.5%?

I'm just trying to -- because the tone about pricing and positioning into the second quarter has been, I think, more benign than what we heard from competitors. And also a modeling question, if I can just ask on the mechanics for the revenue recognition for FLAWLESS. Because the old operator is still operating it. So I don't want to think -- it's not going to go obviously in organic growth. I was just wondering how to account for the different divisions and how would be accounted in growth.

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Richard A. Dierker, Church & Dwight Co., Inc. - CFO & Executive VP [61]

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Okay. Let's start with the tracked and untracked channels. So if you look at our -- if you look at Nielsen, our consumption growth would have been around 4%. Unmeasured would add about 1.5% or 150 basis points. We had really strong growth in e-commerce, as Matt alluded to, and other untracked channels as well. That would get offset though by couponing of about -- around 70 basis points. And all other around 30 basis points. So that's how you get to the 4.5% organic that we're talking about.

You also alluded to just a deceleration in Q2 for organic growth and really through maybe the back half of the year. Well, remember, we are pulling back on promotions as we've talked about many times as we go through the year. So that does have an impact on volume. But we feel like we're in such a good spot that we can do that. Your third question was on FLAWLESS. And that was related to helping on the divisional breakout. We're not ready to do that yet. This is -- we just closed yesterday. We're dealing -- and I -- we tried to go into a lot of the detail on the -- kind of the transition portion of FLAWLESS for 4 months and then when it goes through every line of the P&L for 4 months and the best guide we can give you right now is plus 200 basis points or so to net sales for the company.

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Andrea Faria Teixeira, JP Morgan Chase & Co, Research Division - MD [62]

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And that is implying the 15% kind of run rate of growth for that business?

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Richard A. Dierker, Church & Dwight Co., Inc. - CFO & Executive VP [63]

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It is. It's -- we said that business was $180 million trailing. If you times that by 15%, you get low 200s. Divide that by 12 months, times it by 8 months, since we closed on May 1, that's around $140 million. That's around 300-and-some basis points. But remember, the funny accounting is that we could only recognize the operating profit and net sales for the first 4 months. And so it's really less than -- it's around half of that. So we can go through it in more detail if you like off-line. But it's -- that's why it's less than maybe what you think.

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Operator [64]

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Our next question comes from Mark Astrachan with Stifel.

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Mark Stiefel Astrachan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [65]

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Wanted to go back to the specialty segment. So I get some of the moving parts behind it. But I'm curious about just the dramatic change in expectations from February to now. What does it kind of say about the visibility that there is in the business? And does some of that incremental volatility perhaps make you, I don't know, reconsider the segment itself? Or accelerating the change away from cattle to other animals, other categories within that? And you've talked about it, but it doesn't seem like it's enough to potentially stem some of that volatility.

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Matthew Thomas Farrell, Church & Dwight Co., Inc. - President, CEO & Chairman [66]

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No, the way you should think about that business is that it's got mid- to high 30s of gross margins. And so it's moved up quite a bit over the last few years as we have made acquisitions into other categories. When you say, hey, you went into the year looking for 9% and now you're looking for flat, some of the things that informed us about 2019 were, a, that the milk prices would be recovering. There are some industry estimates that come out that predict what -- essentially what they are milk futures since they predict what milk prices are going to do in the back half of 2019. We're less optimistic that, that actually is going to happen right now. The other thing that's hurting the business is the tariff war.

So for example, China is the #1 importer of whey protein from the United States. So obviously, that's depressing milk prices. And as the NAFTA-2 still hasn't been ratified, so that -- all those changes haven't wound up helping the dairy farmers. So looking at that now in April, we're saying we feel more like it's going to be flattish for the year. But long term, we still feel good about the business because we are effectively making the move diversifying away from dairy.

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Mark Stiefel Astrachan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [67]

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Got it. That's helpful. And also wanted to go back to the prior question on the retailer dynamics and kind of the puts and takes of the pressures that they are dealing with. Perhaps help us in reminding how the businesses have trended or how the pricing dynamics have fared in historical periods where input costs are lessening as price increases are accelerating, but that the underlying inputs are actually becoming a bit more benign. So is there any chance that the retailers push back a bit more on price or that some of that is given back in the form of increased promotions going forward? So anything there, certainly based on historical views, would be helpful.

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Richard A. Dierker, Church & Dwight Co., Inc. - CFO & Executive VP [68]

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Yes, it's Rick. I'll just correct one thing. Commodities are not abating right now, right. Commodities are up year-over-year. We said Q1 for ethylene, as a example, was a little bit favorable to what our outlook was. But that's it. In general, commodities are up significantly still from '19 to '18. So that's -- in this environment -- and oil, as you guys know, is back up to around $64, $65 a barrel. So that's not what the narrative is right now. Price increases are happening because of commodity inflation that's existing out there.

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Matthew Thomas Farrell, Church & Dwight Co., Inc. - President, CEO & Chairman [69]

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Yes, abating doesn't mean going backwards. But look, these things move like glaciers kind of over time. So what you're talking about is at some point if commodities now go in a down cycle and then what happens? Well, what happens historically is it creates a price umbrella and it gives suppliers the ability to promote. But we're a long way away from that. All right. I think that's it folks. Hey, we had a great quarter, sales were up, gross margin expanded, and we'll talk to you all at the end of the second quarter.

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Operator [70]

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Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.