Q2 2025 Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to Church & Dwight Second Quarter 2025 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 call, Mr.

Richard Dierker, President and Chief Executive Officer of Church & Dwight. Please go ahead, sir.

All right. Thank you. Good morning, everyone. Thanks for joining the call.

I'll begin with a review of Q2 results. I'll speak the Touchland closing, strategic actions and some thoughts on the macro environment. Then I'll turn the call over to Lee McChesney, our CFO. When Lee is done, we'll open the call up for questions.

First, I'll begin with Q2 results. Organic sales grew 0.1%, exceeding our outlook of minus 2% to flat. Adjusted gross margin was down 40 basis points, also exceeding our outlook range. Adjusted EPS was $0.94, which was $0.09 higher than our $0.85 outlook.

Lee will take you through the rest of the numbers shortly, but first, some highlights from the quarter. When we gave our outlook back in May, we were seeing category consumption data that was shown a deceleration from strong growth early in the year to turning negative in early April. The good news is that since then, things have begun to improve with categories finishing positive in April and Q2 category consumption for our largest categories, finishing around 2.5%. The macro environment has been volatile and uncertain with tariff policies changing frequently.

The consumer uncertainty showed up in early Q2 when consumer confidence hit a 12-year low. Since then, consumer confidence levels have started to recover as tariff policy appeared to stabilize. Not surprisingly, given that backdrop, our second quarter sales finished slightly ahead of our outlook, which gives us confidence in achieving our full year organic outlook of 0% to 2%. Our brands continue to perform well in this dynamic environment.

We continue to drive both dollar and volume share gains across most of our brands. Our balanced portfolio of value and premium products and our relentless focus on innovation continues to position us well for the future. International continues to take share across the globe. Further, we continue to grow the online class of trade with online sales as a percentage of global sales now reaching 23%.

In July, we closed our most recent acquisition, Touchland. Touchland is the fastest-growing brand in the hand sanitizer category in the U.S. and is the #2 hand sanitizer in the category. Touchland experienced strong growth in Q2, outpacing the category and gaining share. We're excited to add Touchland as our eighth power brand and even more so excited to officially welcome the Touchland team to Church & Dwight.

Now let's discuss the strategic actions we outlined last quarter. To drive shareholder value, management team assessed each of our brands on a regular basis. As a result of these reviews, we often accelerate and increased investments in our strongest brands and move the speed to address opportunities for value creation. That review is what led to the strategic decision to exit FLAWLESS, SPINBRUSH and WATERPIK showerhead business.

Today, we'll provide an update on our vitamin business. We remain focused on our revitalization efforts with multiple innovation and branding programs underway in 2025. While it's still too early to fully evaluate results, we can share at this time that we're seeing mixed results. There are some green shoots. We see our multivitamin business improving week over week, and our innovation has seen strong consumer reviews, and of course, we remain focused on executing our improvement actions.

In addition, we are undertaking a strategic review of the business, including streamlining our supply chain to strengthen our core business, potential JV and partnership opportunities and divestiture options. The gummy vitamin business continues to be a drag on the company's organic growth. The good news is the gummy vitamin category grew almost 4%, which is the third consecutive quarter of growth. The bad news is our consumption was down around 25% as our TDPs declined.

Now I'm going to turn my comments to each of the 3 businesses and the improved results from our teams in the second quarter. First up is the U.S. consumer business. Organic sales declined 1% with volume growth being offset by negative price mix. Volume growth was muted by continued retail destocking in Q2. We continue to expect slight impacts moving forward.

Consumption was positive in the quarter for the U.S. business with momentum improving and we grew share in 5 of our 7 power brands. Let me provide a bit of color for a few of our important categories. First, with laundry detergent, ARM & HAMMER liquid laundry detergent consumption grew 3.2% in contrast to 1.3% category growth. ARM & HAMMER share in the quarter reached 15%.

Moving to Litter, ARM & HAMMER Litter consumption grew 3.4%, while the category was up 4.1% as we saw heightened competitive promotions. Next is BATISTE, BATISTE continues to be the global leader in dry shampoo. And while consumption was down almost 7% in the quarter, we're confident in BATISTE return to consumption growth in the future. There are a couple of factors contributing to consumption decline, such as competitive price increases, economic pressure driving trade down, and we had some supply issues that are now resolved.

This year, we're launching BATISTE Light as a leading brand, our innovations continue to attract new users to the category and increase household penetration. Over mouthwash, THERABREATH continues to perform extremely well. While the mouthwash category was down in Q2, THERABREATH consumption grew 22.5% and continues to be the #2 mouthwash with a 21% share. Remember, we believe there's a lot of runway here.

Our household penetration for THERABREATH currently sits around 11% versus the category of 65%. HERO once again outpaced the category with consumption growth of 11.4% compared to the acne category growth of 1.5% and remains the #1 brand in acne care with a 22% share. Equally important as HERO continues to gain share in acne patches. And similar to the THERABREATH story, we believe household penetration growth is key for this brand.

It sits at 9% versus the category of 28%. HERO continues to launch innovative solutions and patches and is entering the growing body care segment in 2025 with the Mighty Patch Body. Looking ahead, we're excited about our pipeline of new products, which remain a key driver of our success. In 2025, we expect continued innovation to power our growth and build on momentum, especially in several core categories where we're leading the way.

Now turning to international SPD. Our International business delivered sales growth of 5.3% in the quarter, organic increased 4.8% due to a combination of higher volume, price and mix. Growth was led by HERO, THERABREATH and FEMFRESH and was broad- based with all of our subs delivering growth. We were able to grow share in all of our power brands in the quarter, which is a great achievement.

Finally, SPD organic sales increased 0.1% due to a combination of higher price and product mix offset by volume. We continue to be excited about the growth opportunities in this business. Looking ahead, our full year organic growth outlook continues to be 0% to 2%, while category consumption has improved. There remains uncertainty around the U.S. consumer and global economy.

We expect our Q2 brand share momentum to continue, supported by our new product launches, our distribution gains and sustained full year investment in marketing. Adjusted EPS, we continue to expect 0% to 2% growth, which includes the Touchland acquisition, the cost of the product recall and the wind down of the 3 exited businesses. I'll close by saying that category consumption is looking a bit better than 3 months ago, and our brands are strong. They're doing well.

We're gaining both dollar and volume share across much of the portfolio. We have a healthy mix of value and premium offerings. We're well equipped to navigate the current environment. The strategic actions we're taking will position the company well for the future, and we continue to be on the hunt for the right acquisitions.

I'd like to thank all the Church & Dwight employees for executing well in a volatile environment. And now I'll hand it over to Lee for more detail on the quarter.

Thank you, Rick, and good day to everyone. Well, as Rick just mentioned, we've just concluded a very productive quarter from our teams across the globe. As we shared during our first quarter call, we remain focused on what we control in the second quarter, and this positions us well as we look forward to the second half of 2025. Let's dive into the second quarter and our outlook. We'll start with EPS.

Second quarter adjusted EPS was $0.94, up 1% from the prior year. The $0.94 was better than our $0.85 outlook, driven by a stronger sales performance and some good resiliency with gross margin. Reported revenue was down 0.3% and organic sales were up 0.1%. The organic sales were on the high side of our May 1 outlook, and it reflects the improvements we saw in category growth and the strength of our brands.

Our second quarter adjusted gross margin was 45.0%, a 40 basis point decrease from a year ago. Productivity and higher-margin acquisition, business mix drove 170 basis points of margin growth and offset a negative 140 basis points from inflation and tariffs, 40 basis points from the combination of volume, price and mix and 30 basis points from the ZICAM/Orajel swab recall. I'd also note that a portion of our original tariff estimate about 20 to 30 basis points we expected in the second quarter shifted to the third quarter as the tariff rates and the shipment timing evolved. Moving to marketing.

Our marketing expense as a percentage of sales was 10.4% or 30 basis points higher than 2Q of last year. And for the year, we continue to target 11% of net sales, in line with our evergreen model. We are encouraged with our share results in the first half of the year. For SG&A, Q2 adjusted SG&A decreased 80 basis points year-over-year.

And other expense decreased by $5.2 million due to higher interest income. And we now expect other expense for the full year to be approximately $65 million on an adjusted basis, reflecting the lower investment income following the Touchland acquisition. In 2Q, our effective tax rate was 23.8% compared to 24% in Q2 of 2024, a 20 basis point year-over-year decrease. The expected adjusted effective tax rate for the full year continues to be 23%.

And now to cash. For the first 6 months of 2025, cash from operating activities was $416.5 million, a decrease of $83 million versus last year due to working capital timing and lower cash earnings. Now capital expenditures for the first 6 months were $39 million, a $37.6 million decrease from the prior year. And we continue to expect CapEx of approximately $130 million as we return to historical levels of 2% of sales in 2025. And in the second quarter, the company executed a $300 million share repurchase via open market transactions through an accelerated share repurchases program.

Okay. Let's now turn -- spend a few minutes on our outlook. For the full year, we expect reported sales growth of approximately 0% to 2%, and which includes the addition of a Touchland acquisition and the impact of lower sales from the businesses we are exiting. To quantify that for you, that's about $70 million to $80 million of Touchland coming in and $78 million going out for the businesses being exited.

We continue to expect organic revenue growth of approximately 0% to 2%. The sales outlook reflects our brand and category growth momentum and reflects a balanced macro view around the uncertainty in the U.S. and global economies. We continue to expect full year gross margin to contract 60 basis points versus 2024 from elevated input costs and tariffs, the recall expense, unfavorable price and mix to outpace incremental productivity and higher-margin acquisition impacts. And looking forward, Touchland is margin rate positive, but for this year, the business exits mitigate that benefit.

And we're maintaining our adjusted EPS outlook for 2025. We expect full year adjusted EPS to be 0% to 2%, which includes the key elements we highlighted after the first quarter, but also includes a Touchland, which is neutral EPS for 2025, the wind down of the 3 business exits, in the cost of the product recall. And for 3Q, we expect reported organic sales growth of approximately 1% to 2%, adjusted gross margin contraction of approximately 100 basis points, primarily from inflation and tariff costs, and the lower margins of the exited businesses. Marketing will be higher sequentially compared to last year.

And as a result, we expect adjusted EPS of $0.72 per share, which is a decrease of 9% versus last year adjusted EPS. Cash flow from operations for the full year remains $1.05 billion. In July, we also expanded our revolver facility from $1.5 billion to $2 billion. In a combination of this cash flow and the expanded credit facilities provides us excellent flexibility.

Our M&A team accordingly continues to pursue accretive acquisitions that meet our strict criteria, with an emphasis on fast-moving consumable products, similar to our recent acquisitions. To conclude, back on May 1, we communicated our proactive set of actions to navigate 2025. And as Rick and I just highlighted, we've made great progress and we're focused on sustained execution for the remainder of the year. So with that, we're happy to take your questions. So Eric, we'll turn it to you.

[Operator Instructions] Your first question comes from the line of Chris Carey with Wells Fargo.

Can I start on vitamins and the strategic review you're undergoing. Can you just give a bit of context on what might push you one way versus the other. That could be feasibility of outcomes? Obviously, you need to partner on the other side of the equation but that could also be the potential dilution of an outright divestiture and perhaps how you think about Touchland given the fast growth and margin accretion as a potential offset to such an outright dilutive divestiture.

So can you just give us a little bit more insight on where you -- how those different decisions could come out and kind of the netting out impact if we were to look out 12 to 18 months? And I have a follow-up.

Yes. Sure, Chris. Look, we were pretty clear in the release that we've put 3 different options out there, and there's some option in no particular order would be a divestiture. That's probably the cleanest option.

The second one would be a joint venture partnership with a partner. We've seen that happen in the industry a few times as well. And the third one is to radically shrink that business and make it even more profitable. And that would have supply chain reorganization that would have kind of the way we manage that business implications to enable speed and even faster decision-making because I think everyone sees it, but it's not just Church & Dwight.

It's the vitamin businesses that were put into all these CPG companies. These businesses need to be run and managed a little bit differently. And I think we have the ability to do that. It just has to change the organization around it and the structure we would have.

So we need a few months to go through that. I think the good news is some of the activity sets that we have started on are working. I was kind of clear about that in the green shoot comment. For example, we've been putting a lot of focus on multivits, on innovation.

And we've been stair stepping up an improvement. We were probably, on average, down 24%, 25% for April and May. And as we look at June, we're were down in the teens. And then the last couple of weeks, we're down single digits.

And for the first time ever, our units were actually positive. So there are things that are working. It's just a speed and urgency type of mindset.

Okay. Fair enough. And then just from a category perspective, we've seen good consumption trends in your Laundry business. Can you just expand on what's going right and some of the strategies that you're implementing to put up some nice market share performance?

There's a great market share performance. 5 of 7 of our brands, power brands gained share in the quarter. We continue to do well. July also looks good. I would say, a lot of confidence in our growth in the back half.

I'm incrementally even more positive today than I thought 90 days ago. Category growth is improving, our share gains are working. A lot of confidence in the 2.5% back half number. And even July, I would say, came in above that number.

So a lot of good work and efforts across many of our brands with Laundry. It's -- you want to have the right -- the sizing strategy, right? A lot of consumers are trading up into larger sizes, make sure the price points on those sizes are correct, so you can promote them correctly at times. And then Laundry and Litter are very similar.

They're -- it's a pricing sizing value equation that we're really good at and we can move quickly on. So that's -- we've been successful across many of our brands for that reason.

Your next question comes from the line of Rupesh Parikh with Oppenheimer.

I guess just going back to retailer destocking comment. Is there a way to quantify the magnitude of that headwind and then whether it was broad-based across retailers and categories. And then I have one follow-up question.

Yes. Rakesh, it's Rick. We talked in Q1 that it was around a 300 basis point drag to our net sales versus the consumption numbers. I think we would ballpark it to be around 100 basis points in Q2. And in my comments, I said maybe it's slightly there in Q3 and Q4 as we go forward.

But inventory levels are pretty good. The only impact -- and you've heard this from other competitors is as sales grow faster at club or online or at mass, it does have a little bit of a mix component to it that there's just not as much inventory needed in the system. And as you would expect, when category growth is a little bit lower than historical averages. You don't need as much inventory either.

And so I think it's just a -- it's kind of a slight impact, but I wouldn't call it a material impact going forward.

Great. And then my follow-up question, just on Touchland. Now that the acquisition is closed, I would be just curious on what you see as, I guess, the bigger priorities for the balance of the year for that business.

Yes, yes. We're super excited about Touchland. I think again, like you can't track that business as well because it's sold largely at Sephora and Ulta and Amazon. But when we look at our kind of numerator data or even the Amazon data, it's driving category growth.

Like half of all category growth is coming from Touchland. New users, household penetration is still a great story, a lot of runway there. 6% household penetration for Touchland versus the category at 37%. They have incremental kind of near-term innovation on different fragrances and whatnot for hand sanitizer. The body mist is still off to a good start.

Going to international is off to a good start, more to come later on, on other categories of innovation, but it is just a pleasant surprise is what I would say. And the team is energized, the connections that we're making within Church & Dwight and Touchland are helping enable them move with speed as they go after new opportunities, whether it's a different class of trade or a different distributor or whatnot. So really happy with that growth rate.

The next question comes from the line of Peter Grom with UBS.

I kind of wanted to follow up on the organic sales outlook. But just in the context of what you're seeing from a category standpoint, you touched on it to Chris' question, the consumption is improved, and we can see that in the data. But I guess the commentary seems to be at odds with a lot of what your HPC peers are kind of discussing here in the last 12 hours or so. So I know everyone has different subcategories and regions.

But can you just talk about what you're seeing and maybe why it could be different? And how you see that evolving through the balance of the year?

Yes. And you got to remember, I think we were kind of early like we normally are about calling what was happening last quarter. And I think some of our peers called that kind of this quarter. Back when I talked in May, I was a little bit more cautious and because we were seeing negative category growth for those first few weeks of April.

And so we were calling category growth at like 1% or 1.5% was our kind of our outlook embedded when we were discussing it. And then as we -- time goes by, the category growth for our largest category, is not all of our categories, but the largest categories was closer to 2.5% for the third quarter. And we've talked about this before as well, just the [indiscernible] that was happening, the University of Michigan Consumer confidence, all the turmoil in the world on tariffs and that bread uncertainty. Well, some of that -- some of that has been mitigated.

There has been a little bit more confidence, I think, and category growth as we think, is going to be closer to 1.5% to 2% as we move forward for the year. It matters what categories you're in. I think that's the most concrete answer I can give you. Some of our competitors are in different categories than we are.

They have other risk to private label. They have other pricing risks. But for us, we see that more often than not, our categories are growing 3% over a long period of time. They're growing slower than that this year, but better than what we expected maybe 90 days ago.

And meanwhile, our tactics and strategies on innovation and pricing and promotion, and all those things are helping in our marketing spend is helping to gain share.

Peter, all I would add is to your point, to Rick's point, we tried to lay out for the rest of the year back in May 1 and here today, there are steps to our improvement. And the second quarter really hit those marks actually a bit higher and then obviously, for the back half, we got 2.5% organic implied and we have steps to that in 3Q and 4Q. We feel very comfortable with the back half just based on everything we see today.

Makes sense. And I guess just a point of clarification, Rick. I mean on that 2.5%, I think you mentioned before that it's running ahead of that in July. So I just wanted to clarify that's a total company organic comment.

And I guess, if that's the case, is there any sort of reason why you would anticipate organic growth kind of decelerating to the 1% to 2% guidance that you framed for the quarter?

Well, there's always a comp. And I would just say that our month of July, it was the easiest comp that we had if you look at the quarter. But it just gives us confidence because you have 1 month behind us and it had a great -- had a great month. So maybe it's conservative, but it's what we think the environment is right now.

It's so volatile that there's no reason to take the full year up after another 3 months. So we'll see how the next 90 days ago, and I'm just trying to convey that we're off to a strong start.

Next question comes from the line of Anna Lizzul with Bank of America.

I was wondering if I could follow up on Peter's question here. Just we're hearing from peers in the space to expect an acceleration in the second half. And while you don't have meaningfully different comps in the back half, I was wondering how you're looking at the consumer environment and your expectations for improvement or maybe lack thereof here. And we're also seeing a variety of strategic actions from peers as well, including increased promotional spend and marketing support.

I was wondering if you can further comment on your initiatives there.

Sure. So on the consumer, my answer is pretty much what I gave Peter, a lot of confidence in our growth. And it's not just a category story for us. It's also a share story, right?

And we're driving growth in mouthwash, even when the category is growing slower than that, we're taking share. Same thing with acne and acne patches. Same thing with Touchland many of our brands, not just 1 or 2 of them are gaining share over time. So that's why, again, we have -- if you look back at our long track record, 10 years plus, we tend to gain share and about 2/3 of the time periods we're looking at.

So that's on the consumer. In terms of -- I think your other question was just what initiatives we have in strategic initiatives. Look, we are crystal clear that we're going to be spending the marketing that we kind of always spend with our Evergreen model. We think this is the right time, that's the right amount, 11% or so, and we're protecting that.

And that's part of the reason that even when we came out in the first quarter and lowered our earnings for the year pretty early. We said that we are going to protect that marketing spend. And in Q3 is actually the highest quarter of the year between 12.5% and 13%. So that's a -- we're investing behind the business.

We're investing behind the brands. We're investing behind innovation. There's some innovations launched in the back half that we're really proud of as well that will be supported. We'll talk more about that next quarter.

So that's kind of where we're at. We're investing behind marketing. We're investing behind price pack architecture where we need to. And we feel like we're in a good spot to continue to gain share over time.

Your next question comes from the line of Dara Mohsenian with Morgan Stanley.

Maybe extending the last couple of questions a bit as we look beyond '25. Just any thoughts, Rick, on your ability to return to the Evergreen OSG targets after this year? Are you looking at this year as more of an aberration, understanding a lot of the weakness earlier in the year, things getting better sequentially, but not being all the way back to Evergreen yet. So just -- I know there's a lot of volatility, there's a lot going on but how do you think about organic sales growth as you look beyond this year, particularly with an easy comp in theory with the inventory cuts this year?

Yes. Thanks for the question, Dara. Look, it's called an Evergreen model for a reason. Our goal is to hit our Evergreen model each and every year, year after year.

And we've been a model of consistency in doing that. I think this year is an aberration. When you have categories like we said before, that all of a sudden, for the last 10 years, have grown around 3%. It started out growing in Q1, 1.5%.

And in the first couple of weeks of April negative, that gave us pause. I think with the volatility in the world today and the pressure on the consumer and the agita around the tariff situation that just moved categories in a bigger way. So I do think it's a bit of an aberration. I have a lot of confidence in the Evergreen model for not just 1 year or 2 years, but that is what we are supposed to do each and every year.

And we have some brands that are growing faster than the Evergreen model, and we have made some portfolio decisions on other brands that were growing at a lower rate than the Evergreen model. So I think that does nothing but strengthen the portfolio and the company over the long term.

Great. That's helpful. And then just on BATISTE, it's been a great growth brand in recent years, slowdown in Q2, you sound more optimistic in the back half. You touched on it a bit, but can you just give us a bit more detail on what's happened here in the last few months and sort of the plans for the back half and the optimism you have there?

Yes, sure. Well, it's never one thing. It's always multiple things. That's how life and how business is.

So Partly, we had some supply chain challenges that we're back and recovered on. So that's a piece of it. We are introducing some innovation, right? And we have to make sure the advertising and the trial generation activities for that line up appropriately.

And so that's still early days. We also had a competitor take a massive price increase and introduce different sizes as well. And so when you have that kind of changes and disrupts the category from a pricing size and perspective, so we're taking a look at that. . But meanwhile, we have to make sure we're really clear.

BATISTE is the leader in the category. It's brought innovation not for 1 year but for decades. And consumers delight in BATISTE. We have led that category with innovation.

We've led it with kind of a value as we traded people up to larger sizes. But we're in a difficult economic environment right now. So we have to make sure we have sizes that appeal to all price points. And so that's what the team is working on.

And some of those things will be dealt with immediately and some of them are kind of medium term. But I have a lot of confidence we're going to get back to share gains in BATISTE in the medium-term future.

Your next question comes from the line of Bonnie Herzog with Goldman Sachs.

I actually wanted to circle back with a question on the promotional environment. We've seen increased couponing activity across broader HPC and then scanner data is suggesting that sales on promotions have been rising. So just curious to hear what you've been seeing in your categories and if you expect the promotional landscape to get even more aggressive in the back half of the year? And I guess in that vein, Rick, how should we think about net price realization going forward, especially within your Consumer Domestic segment?

Yes, Bonnie, good question. I think, look, whenever we talk about promotion, where we focus is really our household business, Laundry and Litter. That's the predominant amount of promotion. I would say it's kind of a divergent story.

Litter, actually, that category has spiked up above historical averages. If you look back at a long time, many, many quarters, it could go anywhere between 15% and 18% over years. It's spiked to 21% in the quarter. We were actually down a little bit.

Nestle was up dramatically as they are promoting their lightweight litter in a big way. So that was litter. Laundry actually is very consistent with the previous few quarters. Laundry detergent is typically in the low 30s.

And for the last 12 months, it continues to be in the low 30s. So we were we were up a little bit, but we're still in the low 30s. I think in general, Laundry has been pretty rational, litter has been elevated. And then vitamins, to some degree, is always a promotional category, but that's again, a little bit of a smaller business than the other 2 for us.

Okay. Helpful. And then maybe just a quick question about your gross margin guidance for the year. With end market trends sequentially getting better and your guidance suggesting top line is going to accelerate in the back half. Could you just maybe touch on the puts and takes, including tariffs on the expected declines on gross margins, especially in Q3?

Bonnie. Yes. So as we talked about, we say, number one here, our gross margin is still in the 60 basis point zone. But obviously, there's some moving pieces that have happened.

As we noted, tariffs have not materially changed for the year, although the 12-month number has gone up a bit, but there has been a bit of a timing piece. So there's a bit more in the back half than we initially estimated that certainly shows up in 3Q, in particular. Still driving productivity. And overall, it still keeps us in that same zone.

As Rick just talked about, we did have a little bit of a negative price in the second quarter. Now the majority of that was tied to our recall. There certainly is a little bit of discounting going on like a more normal environment, you have that in there. But that's the balance.

Again, the biggest piece is just the tariffs inflation. Inflation is still staying sticky. We keep driving productivity. And I think probably a good time to reiterate.

We've done a really nice job to manage the tariff topic. And really, that number is just a timing change for us. The absolute value for the year hasn't changed. We've been very proactive at managing it.

The 12-month number has gone up. But again, if we hadn't done all the actions we had taken, we'd have a much bigger headwind and we're just focused on driving that through productivity and probably some strategic pricing as we look forward.

Yes. I'm actually really pleased with -- we kept 60 basis points of the decline is our outlook, and we absorbed a lower gross margin number from these discontinued businesses as they ramp down, right, as you take inventory reserves for them as you do the proper run out of those businesses. And we had a recall that happened for our Zicam and Oragel business that impacted us. And despite all that, we were able to maintain margin.

Next question comes from the line of Steve Powers with Deutsche Bank.

First, just real quick, circling back on VMS and thinking about different strategic options. Just if you were to separate that business, can you talk a little bit about just how compartmentalized that business is and how easily separatable it is relative to any kind of stranded overhead considerations that you have to work through that we should be thinking about?

Sure. So that business is -- has separate manufacturing facilities in Vancouver, Washington, it's embedded in our -- also in our York, Pennsylvania manufacturing facility. But it's within its own 4 walls, it's like a plant within a plant within that facility. And then as you would think, R&D and supply chain and marketing, all those functional supports are tend to be a little bit separate because it's own largely SBU.

There are support structures within the corporation. And so there are some allocated costs. And if we did go down the route of selling, we'd have to go address the stranded costs. And that's normal with any business.

We just did that with the SPINBRUSH, FLAWLESS and WATERPIK showerhead rundown. I think the big thing for us is -- at the same time, we're also adding growth, right? We're also adding Touchland, and so that helps offset some of those leverage fixed costs as well.

Yes. Okay. Perfect. And then, Rick, setting aside the work that's being done in HPC on kind of portfolio rethinking across a lot of companies.

We're also seeing companies kind of double down on productivity announced new restructuring. And on the back end of that, theoretically, size will be stepping up investments in technology and innovation, go-to-market capabilities, et cetera. So as you think about your business, again, notwithstanding the portfolio work you've done. Just how do you think about your spending levels and your capabilities?

How do you benchmark them against peers, both today and where you think kind of the puck may be going? And is there any contemplation of having to do something similar from a restructuring and accelerated reinvestment program?

Yes. Steve, you've been following this company for so long as well. We've never really done a restructuring program. We're more of a pay-as-you-go type mentality.

I mean I think the only time we've ever called out anything was when we did a reimplementation of SAP and that was kind of a one-off. But what we tend to do is, in any 1 year, we could extremely -- we could go past our outlook on earnings growth, for example. But we tend not to do that. We tend to make investments for the long term, and we've been doing that for years.

And so we make investments in some of the analytics we put a center of excellence in place. We put a pricing group in place. We're looking at we've added infrastructure to our international team in a big way. We have centers of excellence over in Europe for the -- really the export business.

We're looking at more local innovation, more local manufacturing. But all those things we tend to embed in our Evergreen model and that we kind of pay as you go.

Your next question comes from the line of Andrea Teixeira with JPMorgan.

I want to go back, Rick, to your comment about how to think about these categories as you are divesting? And also, in general, as you step back in terms of acquisitions, like keeping innovation for be it BATISTE or be it now HERO. You have the Body patch. How are you going to be able to continue to innovate and how you're seeing percentage of sales coming from that innovation accelerating in the second half.

I know you might be comping some of the Laundry innovation that you had as you enter 2026. So how we should be thinking of that? And then conversely, I think you always have said about 20% of your revenues come from value. Are you gaining share in that segment of your portfolio? Or you're seeing that stable?

Yes. I think I got 2 of the 3, but I'll -- you can remind me what the third one was. So on innovation, you're right, like innovation for us has been kind of a bedrock. When Carlos came in -- Linares, who's our Head of R&D, he really changed the way we innovate.

And we went through this at Analyst Day a little bit, but we have so many different vectors now of innovation. And so for the last few years, about half of our organic growth is coming from innovation, which is just, I think, industry-leading, and it's fantastic. So if innovation last year was closer to, it's probably closer to -- our outlook was probably closer to 1.5% as we started the year. It's probably around 1.2%, 1.3%, just as still phenomenal.

But in times like this, when the consumers press, sometimes they don't reach for the innovative new product initially. So we're still really happy with a lot of innovation. We're putting our programs in place for sampling and for trial. But across the board, like if you think -- take a step back, deep innovation on Laundry has been driving category growth and category expansion and share gains for us.

Lightweight Litter has been growing category growth, our brand to grow and share gains for us. BATISTE, LIGHT, HERO, THERABREATH, incremental sizes and flavors. So innovation is alive and well and really a growth driver. On value share, I think you're right.

Part of our portfolio is premium and part of it is value. More recently, as HERO and THERABREATH have outsized growth, the premium kind of mix of our business has grown faster but the value portfolio continues to do really well. Even if you look at orange box in Litter, I mean, orange box in Litter is growing around 4%. There's not this massive trade down or trade up happening, but orange box in Litter is doing well.

I'd say ARM & HAMMER, the brand in Laundry is doing fantastically well. We have a good, better, best strategy there. It's probably the better and the best tiers are growing faster than the good tiers in ARM & HAMMER laundry, but those good -- I mean, better and best tiers are still a great value to the higher-end premium laundry detergents. So that's 2 of your questions, what was the third?

First question kind of categories, right?

Yes. No, than you, Lee. The categories as you think about the exits that you're making, right? And I think now correct me if I'm wrong, it seems like you're saying, well, perhaps we're going to do JVs and think about being creative on how we're going to look at these divestitures. So just to think perhaps if it's going to be just an exit or perhaps you can still be hopeful to sell them?

Yes, on the Vitamin business, right, it's the cleanest scenario is there's a sale. If you do a JV, it's because your partner doesn't have all the capabilities that they would need to run it. And so there's a transition period over time, most likely, and we've seen that in other categories, other industries. And then the third one is how do you rightsize it and grow more profitable and kind of take it out of its of the CPG framework of operating in a little bit more of the vitamin paradigm in operating the business.

So those are the 3 scenarios. And like I said, we need a few months to work through the optimal path and we'll report back by the end of the year.

And if I can squeeze one on the margin. Are you implying -- and sorry if I missed that, that you're going to be taking pricing because a lot of your competitors are saying we're taking pricing even in the U.S. Can you comment on any pricing that is not list pricing that is not coming from innovation?

Yes. I think we kind of mentioned it in the release or in the transcript. But really, look, we're going to do our best to offset the tariffs as needed. And where we can't do that and where we believe it's needed, we'll take some targeted pricing.

So that's the plan. And it's not going to be across the portfolio, but it will be targeted specific where we get hit the hardest with tariffs that we can't -- and we can't -- after we've done all we can do to offset. That's what the next path forward would be.

Your next question comes from the line of Lauren Lieberman with Barclays.

I know you touched on promotions a little bit earlier, but I wanted to just kind of revisit that a bit. I know on laundry, the hovers around this kind of 30% rate, generally speaking, over time. We've seen some kind of more elevated activity from Church & Dwight from ARM & HAMMER in certain retailers more recently, and I know there was like it just happened what day you're in what store. So it's a matter of luck of the drop.

But just wanted to get your perspective on further leveraging promotion in liquid laundry, particularly we've got this time with the consumer under more pressure, the way to kind of bring forward the message on the value of the brand, et cetera. Just kind of thoughts on promotion from here.

Yes. I would just reemphasize my comments. Like if you look back a couple of years with history, and I have it right in front of me, we've averaged anywhere between 31%, 33% amounts sold on deal for ARM & HAMMER laundry detergent. This is an IRI or Nielsen.

And in Q1, we were at 31% in Q2, we were 33%. so I think we're right where it is considered as historical. We didn't take -- remember I said last quarter, a couple of other competitors had compacted. A couple of other competitors had taken price, we didn't do that. I mean we had done the compaction maybe 18 months ago.

So they were kind of catching up. So I feel like we're right in the realm of normality and I think the category is too.

Okay. And just as a follow-up, just the depth of not just the frequency, but just anything on depth of promotion?

Yes. I mean depth of promotion, it's a good question. I would say our depth of promotion has not changed at all. Like we -- sometimes we line price certain SKUs in order to make sure that they can all hit the promotion.

Price and sizing matters a lot in this type of environment, what your opening price points are and what your -- kind of your pricing curves up to the large sizes, but I would say depth hasn't changed either.

And Lauren, if you look at the second quarter, yes, you see a little bit of negative price. But again, the majority of that was related to our recall. So to your point, it's a nominal amount so far, just right in line with Rick's comments.

Next question comes from the line of Olivia Tong with Raymond James.

Great. I'm going to start with a bit of a short-term question, but you had mentioned that July, you had a particularly easy comp and so good growth off of that. Can you talk about the comps for August and September, if there are any call-outs there? And then across your categories, peers have obviously talked about trade down both within their portfolio and then out of their portfolio.

So to what extent does trade down a factor for you both in terms of the negative of trade down from black to orange in Litter versus factors that are a tailwind to you like laundry?

Yes. I'll take the second one first, Olivia. I think trade down overall is a benefit for us. And I think we've said this a few times, but there needs to be, I think, more recessionary type behavior and discussion before trade down really happens.

I mean the consumer still is resilient, even though they faced all this inflation and whatnot over these past few years. But typically, when recessionary behavior and economics are happening, that's when extra starts to grow by leaps and bounds. That's when orange box outpaces black box a lot. So right now, we're doing well in my mind.

I mean you see that with all of our share scorecards. We are -- our value brands are growing share as consumers are tight. But our premium brands that are problem solution brands continue to gain share as well. And that's the THERABREATH, that's the HERO.

Nair is doing really well. So absent the recall stuff, Orajel is doing well. So again, it's a cross section. And then your first question...

The months...

The month, we're not going to make a new practice of talking about months, I'm sorry. Like I just wanted to give a sense that there's a high degree of confidence, 2.5% in the back half. That's my point.

And all I would add is, to your point, you got that confidence in the 2.5%, and we obviously talked about the category growth and the U.S. performance and probably should be noted also just the international team consistently performing again despite some of their macro challenges as well. So that's all embedded into that outlook for the back half.

All right. Got it. And then just thinking about the portfolio overall, vitamin, strategic alternatives, what have you. What's your view on some of the other underperformers, particularly in personal care, as you think about positioning the company for faster growth and freeing up some resources to drive that?

Yes. I feel like, look, portfolio decisions aren't done lightly. And I feel like we've been very agnostic on where to go and kind of -- where to play and how to win. Like it's -- we're taking white piece of paper and going through that with the Board on here are the brands that we think have a reason for being for decades.

And you saw kind of the output as we fast-forwarded those decisions once tariff implications happened, those were already underway and under discussion. And so that was really the portfolio part 1. Vitamins, that discussion, we've done our best to turn that around some green shoots, but that's why we're talking about strategic alternatives today about vitamins. There's no further plans in the short or medium term to go through any other portfolio. These brands are great brands.

They have roles. Some of them might be cash cows versus the primary growth drivers of the company but they all have a role to play, and we're happy with the brands we have.

Your next question comes from the line of Filippo Falorni with Citi.

I wanted to ask on the tariff first. Within the $30 million that you guided for the year, which is unchanged. What are really the countries that are getting impacted within the $30 million? I thought there was some China leftover impact there.

So just curious there. And then outside of tariffs, in terms of commodities, what is your expectation in terms of your input cost basket and maybe you can walk us through some of the major, the major swings there.

Good question. So I'll start off with just the broader inflation. It's interesting. It's still holding in there.

So if you think about what we talked about for the normal amounts of inflation we're seeing that as we laid out for this year. It crept up a little bit earlier in the second quarter, it's kind of come back to still, still a slightly elevated level. The tariffs, I'll state this. Number one, very, very proactive.

So obviously, we've done all the things to manage through China. So after that, you get into Korea, Thailand, Vietnam, Europe, those are kind of our top. They make up about 73% of what's left. Even the change is just overnight, actually even net-net makes that number even a little bit better.

So the good thing is we're down to -- whether we look at it by country, look at it by product line, it's kind of 3 or 4, and we get to a large portion of what we're facing here. So again, this proactive nature says, "Hey, we're not talking about a change this quarter, we're just talking about how we're going to manage it going forward here". And again, majority will be through our productivity programs. And then we'll look at some pricing as well in some targeted areas.

Yes. And just to reemphasize, it changes all the time, right? I mean even in the release, we put $60 million for our run rate for 12 months. And even with the decisions overnight, now it's closer to $50 million.

So it's going to keep doing that. We have to -- the good thing about our company is we can move with speed and agility. And that's what we have done. That's what we're going to continue to do.

Your next question comes from the line of Robert Moskow with TD Cowen.

Just want to know if you could touch on a little more detail on the International business. It continues to outpace the rest of the portfolio. And I remember a key strategy of this was to expand U.S. brands into these markets, either through export markets or where you operate your own businesses. Can you give us an update on how that's doing?

Like how is HERO doing? How is THERABREATH doing. And in a slower market, is it getting harder to introduce them and gain attention?

Yes. Great question, Robert. I'm so pleased with how international is doing. International growth, mid-single digits, sometimes high single digits, really largely behind 2 or 3 factors.

One is as we have local brands like Sterimar, even BATISTE kind of growing all over the world. But as we also have these recent acquisitions like THERABREATH and HERO, and we've talked about it before, but HERO was in 50 countries within 12 months. I mean that's fantastic for us to be able to get all the regulatory work done to do that. And we're benefiting from that in a big way. .

There is a strong demand for HERO and THERABREATH all over the world. Many of these countries that we talk about, they're having the same economic malaise that the U.S. is. And so when categories are 0 to maybe negative in many of these countries, some of our competition, if you look at it, is actually declining in many of these countries, we're growing. And we're growing mid-single digits, more often than not, because of some of the acquisitions and new brands for new retailers are driving growth for categories and story we have here.

And so we have -- I guess the answer is yes. We're doing -- brands just continue to grow existing brands in other countries all over the world. The new acquisitions are doing really well. And I think we have -- we're in early innings there.

There's more momentum to come. And then finally, we continue to look at acquisitions independently in Europe and China. I think that team is ready for it. We just need to find the right fit.

And we look at what countries we should become a sub in the future. Like so there's a whole -- there's like 4 or 5 pieces of growth for international, but they're doing a great job.

Your last question comes from the line of Kevin Grundy with BNP Paribas.

Two quick ones. At least I hope they're quick. To follow up on Lauren's question, Rick, you guys sound fairly benign on the promotional environment. I ask this in the context, there's competing narratives.

You guys sound fairly benign. Your key competitors are suggesting that things are ramping. The Nielsen data would suggest things are ramping, particularly around ARM & HAMMER. So with that context, what do you have embedded in the back half of the year for promotion levels, particularly for household, which is where you see most of the promotion.

And if the answer is like we expect more of the same, which your characterization was relatively flat, how much cushion do you have to respond? Because it seems like your competitor well? And then I have a follow-up.

Yes. I mean, look, you guys can ask all about promotions. I kind of gave you the answer. Q1 and Q2 are within historical norms in Laundry.

And there's not much more to go there. I mean, some of our competitors were lower on promotion in Q2 2025 but you got to remember, it's all about the net price point, and they took price as well. So sometimes when you look at promotion, you got to make sure you're factoring what the net price is. I would say promotion for us is consistent with the last 3 or 4 quarters, maybe even 4 or 5 quarters.

And in the back half, promotions are already set for the back half. They've been sold in for a while now. So in this environment, we saw -- and maybe it's because we saw it further afield than most. But 6 months ago -- 9 months ago, we were seeing how some of the promotional volumes weren't as effective because everyone category was there.

Everyone's promoting across many different categories. And so we made sure we put the plans in place even late last year, early this year for the whole promotional calendar. So I have a lot of confidence in our Laundry business. Our Laundry business in the month of June and July is -- continues to gain share and continues to do well.

And I think part of that is promotional, but I think part of that is innovation and deep clean continues to do well, hit hurdles and drive category growth. So long answer, but that's the facts that I look at.

Okay. Very good. And one quick follow-up. I know the call is going long here.

Just on the Vitamin business to come back to that. Can you talk about how you balance the timeliness to get something done and naturally getting the best value you can for it and minimizing the potential risk that there's another leg down in the business? Because I think just intuitively, when these sort of announcements are made, it shows sort of a decommitment to the asset to retailers and the business is struggling. And so from an investor's perspective, if this goes 2, 3, 4 quarters, how do you protect against another leg down.

So your comments there would be helpful as well.

Yes. Look, we're running this business like we're going to own it forever. And that means that the amount of time and energy we spend on innovation doesn't change, the amount of time we spend on promotional pricing to programming doesn't change. That's how we have to run it.

And then if there is a strategic choice to do something different, then that's what we do. But that's what our communication will be with the retailer. They just -- they want VITAFUSION and [ L’IL CRITTERS ] to be successful, too. It's a big brand.

And so we're going to continue to show them the innovation, continue to show them why we believe it can grow categories after we get through this kind of TDP down cycle. But at the end of the day, it's -- they're good brands. And I think for us, we're spending an inordinate amount of time for what's relatively a small business. And so that weighs into my thinking on how much time the organization spends on supporting the business of that size versus the benefit, and that's part of the kind of strategic decision, too.

I would now like to turn the call back over to Rick Dierker for closing remarks. Please go ahead.

Okay. Well, thank you, everyone. Like Lee and I said, a lot of confidence as we look forward. The company is doing extremely well in a tough environment. And we'll talk more at the end of October on our next call. Thank you.

Ladies and gentlemen, this concludes today's call. We thank you all for joining, and you may now disconnect.