Church & Dwight Co., Inc. (NYSE:CHD) Q1 2024 Earnings Call Transcript

Church & Dwight Co., Inc. (NYSE:CHD) Q1 2024 Earnings Call Transcript May 2, 2024

Church & Dwight Co., Inc. beats earnings expectations. Reported EPS is $0.96, expectations were $0.87. Church & Dwight Co., Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen. And welcome to Church & Dwight’s First Quarter 2024 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. Matt Farrell, Chairman and President and Chief Executive Officer of Church & Dwight. Please go ahead, sir.

Matt Farrell: Good morning, everyone. Thanks for joining us today. I’ll begin with a review of the Q1 results, and then I’ll turn the call over to Rick Dierker, our CFO. And when Rick is done, we’ll open the call up for questions. Q1 was another solid quarter for Church & Dwight. Reported sales growth was 5.1%, beating our outlook of 4%, thanks to stronger results across the Board from Domestic, International and Specialty Products. Organic sales grew 5.2%, which exceeded our 4% Q1 outlook, with volume accounting for a very healthy 70% of our growth. Gross margin expanded 220 basis points. At the same time, we increased marketing spending in the quarter and gained market share in a majority of our categories. Adjusted EPS was $0.96, which was $0.11 higher than our $0.85 outlook.

The results were driven by higher-than-expected sales growth, gross margin expansion and a lower tax rate. We continue to grow in the online class of trade, with online sales as a percentage of global sales now reaching 20.5%. In March, we signed a definitive agreement to acquire Graphico, our Japanese distributor, for approximately $35 million. We expect the acquisition to close later this year. Graphico’s annual sales are approximately $38 million. The business is based in Tokyo and has 59 employees. Since 2008, Graphico has partnered with Church & Dwight and driven OxiClean to be the number one powder pre-wash additive in Japan. The acquisition is expected to contribute to greater expansion of our business in Japan and the greater APAC region.

We intend to leverage the capabilities of the Graphico team to bring additional Church & Dwight brands to Japanese consumers. Now I’m going to turn my comments to each of the three businesses. First up is the U.S. The U.S. consumer business had 4.3% organic sales growth. 3.3% of that was volume-driven, making this the third consecutive quarter of U.S. volume growth. Five of our seven power brands gained market share in the quarter and private label market share in our categories remained relatively stable. Now let’s look at a few important categories in the U.S., starting with laundry. ARM & HAMMER Liquid Laundry Detergent consumption was flat, while the category grew 2%. Many of you may recall we had pulled back on promotional activity in Q4 and that continued into early Q1.

As our promotional activity normalized, ARM & HAMMER Liquid Laundry saw share gains late in the quarter and the brand has continued to perform well in April. Now elsewhere in laundry, ARM & HAMMER Unit Dose and ARM & HAMMER Scent Boosters both grew faster than their categories and grew share in the quarter. Our XTRA Liquid Laundry brand, which is our extreme value offering, grew consumption 6.3% and increased market share to 3.8%. Now regarding new products, we have launched two new products into the detergent category, ARM & HAMMER Deep Clean and ARM & HAMMER Power Sheets. The first, ARM & HAMMER Deep Clean, is our most premium ARM & HAMMER Laundry Detergent, entering the mid-tier of liquid laundry and delivering a superior clean at a price consumers’ can afford.

The second new product is ARM & HAMMER Power Sheets Laundry Detergent, which is launched — which was launched online in August of 2023. ARM & HAMMER was the first major brand to offer this new unit dose form in the U.S. Now due to its online success, Power Sheets is now available in select brick-and-mortar retailers. Power Sheets continues to grow online. It now has 9,000 reviews with a 4.5 rating, and both Deep Clean and Power Sheets are off to a great start in 2024 and we’re excited about the early results we are seeing. Now over in litter, ARM & HAMMER Litter grew consumption 5% in Q1, which was in line with category growth. Our new lightweight ARM & HAMMER Hardball Clumping Litter is now expanding nationally after a successful in-market test in 2023.

We expect this new litter to help ARM & HAMMER capture a greater share of the lightweight litter category. Let me give you a couple of facts here. Lightweight litter today accounts for 16% of the clumping litter category. Our share of lightweight clumping litter has grown from 4% to 6% since year-end 2023, but that compares to our 29% share in regular weight litter, so still a long way to go. Turning to Personal Care, BATISTE continues to see strong consumption growth, with consumption up 19% in Q1, growing share to 47.5%. BATISTE continues to be the global leader in dry shampoo. We are meeting consumers’ desire for long-lasting results with the launch of BATISTE Sweat Activated and BATISTE Touch Activated dry shampoos, and so far consumers are posting excellent reviews for both of these new innovations.

Now Mouthwash. THERABREATH Mouthwash and HERO continue to perform extremely well. THERABREATH is the number one alcohol-free mouthwash brand and is now the number three brand in total mouthwash with a 16% share. THERABREATH recently entered the antiseptic segment of the category with the launch of THERABREATH Deep Clean Oral Rinse, which represents 30% of the category. HERO continues to drive the majority of growth in the acne category and has grown to become the number one brand in the larger acne category with 19% share. HERO continues to launch innovative solutions and patches combined with adjacent consumer needs such as the recently launched Dissolve Away Daily Cleansing Balm. Now there are two businesses, Gummy Vitamins and WATERPIK, that created a drag on total company organic growth in Q1.

First WATERPIK. The good news for WATERPIK is consumption for our water flosser business is healthy. However, flosser shipments were affected by retailer inventory adjustments in the first quarter. This combined with lower showerhead consumption accounted for a 1% negative drag on organic revenue growth, but we expect this to be transient. The second is Gummies, which also created a 1% drag. The Gummy Vitamin category declined 5% in Q1, which was actually worse than our expectations for the category and our consumption was down even greater, down 12%. We continue to move forward with our plan to stabilize our vitamin business through changes to packaging, messaging and greater market investments that we’ve talked about with you in the past.

I will close my comments on the U.S. by saying that overcoming the drag from these businesses still — and still posting a 5% organic sales growth for total company just illuminates the strength of our portfolio. Turning now to International and Specialty Products, our International business delivered organic growth of 8.8% in Q1. This was driven by strong growth in the subsidiaries, just a few call-outs, especially Mexico, Germany, U.K., and France, and we all — and also had growth from our global markets group. And finally, Specialty Products. Specialty Products organic sales increased 7.2%, primarily due to record sales in our Eurasia business as SBD continues to expand globally. I want to wrap up my remarks by reiterating that the company is performing well with all three divisions delivering strong growth and I want to thank our global employees for their great efforts each and every day.

Now we rarely raise our full year outlook after only one quarter, but given our fast start, we raised our outlook for gross margin and EPS growth and we have confidence in our new full year forecast. And now I’m going to turn it over to Rick to give you some more color on the quarter.

Rick Dierker: Thank you, Matt, and good morning, everybody. We’ll start with EPS. First quarter adjusted EPS was $0.96, up 12.9% from the prior year. The $0.96 was better than our $0.85 outlook, primarily driven from higher-than-expected sales growth, gross margin expansion, and a lower tax rate. Reported revenue was up 5.1%, and organic sales were up 5.2%. Organic sales were driven by volume of 3.7%, and positive product mix and pricing of 1.5%. 70% of our organic growth was volume-driven, and as Matt mentioned earlier, this makes three consecutive quarters of U.S. volume growth. Our first quarter gross margin was 45.7%, a 220-basis-point increase from a year ago, primarily due to productivity, volume, mix and pricing, net of the impact of higher manufacturing costs.

Let me walk you through the Q1 bridge. Gross margin was made up of the following; positive 130 basis points impact from price volume mix and a positive 130 basis points from productivity. This was partially offset by 10 basis points from currency and 30 basis points from inflation. Moving to marketing, marketing was up $29.7 million year-over-year. Marketing expense as a percentage of net sales was 10.1% or 150 basis points higher than Q1 of last year and led to share gains. For SG&A, Q1 adjusted SG&A increased 80 basis points year-over-year. Other expense all in was $20.9 million, a $2.2 million decrease, primarily due to lower outstanding debt and higher interest income. We now expect other expense for 2024 to be approximately $80 million.

For income tax, our effective rate for the quarter was 19.9%, compared to 24.4% in 2023, a decrease of 450 basis points due to a high level of stock option exercise in Q1 of 2024. We continue to expect the full year rate to be approximately 23%. And now to cash. For the first three months of 2024, cash from operating activities increased to $263 million, a decrease of $10.1 million with higher cash earnings offset by higher working capital. We now expect full year cash flow from operations to be approximately $1,050 billion, up slightly from our previous $1 billion outlook. Capital expenditures for the first three months were $46.3 million, a $21 million increase from the prior year as capacity expansion projects proceed as planned. We expect 2024 CapEx of approximately $180 million as we complete the major capacity investments that were initiated in 2023 and we expect capital spending to return to historical levels of 2% of sales in 2025.

And now for the full year outlook. We continue to expect the full year 2024 reported inorganic sales growth to be approximately 4% to 5%. We now expect full year EPS in the range of 8% to 9% growth. This is up from our previous 7% to 9% and is inclusive of costs related to the exit of a Megalac business, as well as Graphico transaction costs. We now expect full year gross margin to expand approximately 75 basis points, up from previous range of 50% to 75% basis points. Given our outstanding Q1 margin expansion of 220 bps, this outlook implies moderate gross margin expansion for the remainder of the year. We continue to expect an increase in manufacturing costs to be more than offset through productivity, mix, higher volume and carryover of product pricing.

We continue to expect marketing as a percentage of net sales to be approximately 11%. SG&A is now expected to be flat as a percentage of net sales compared to 2023, reflecting the investments we are making in our International and e-commerce infrastructure and costs related to the Graphico acquisition Matt discussed earlier. For Q2, we have a strong outlook and expect reported sales growth of approximately 3.5%, organic sales growth of approximately 4%. We had a really strong April from a consumption perspective, so some might be expecting a higher organic growth outlook. Our 4% outlook reflects higher coupons and trade promotion in support of new products, we’re fully lapping 2023 price increases and we’re lapping a year ago distribution gains for HERO.

Moving on to the rest of the P&L, we expect moderate gross margin expansion in the quarter in Q2 as we have less of an impact from carryover pricing. Increased marketing spending support our innovation pipeline, higher SG&A expense and a significantly higher tax rate of 24% compared to the prior year of 17.9%, which benefited from a high level of stock option exercises. This represents a roughly $0.07 drag on EPS. As a result, we expect adjusted EPS of $0.83 per share, down 10% versus last year’s adjusted Q2 EPS. And with that, Matt and I would be happy to take any questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] And we’ll take our first question today from Chris Carey with Wells Fargo Securities.

Chris Carey: Hi. Good morning, everyone.

Matt Farrell: Hey, Chris.

Chris Carey: Just regarding the queue for outlook for organic sales to be below the run rate that we’re seeing in the scanner trends, Rick, you mentioned, a trade promotion lapping of HERO just, excuse me, I think, the THERABREATH or HERO distribution gains. If you could confirm that. How would you contextualize the drivers of those two items for the organic sales outlook and Q2 being below what we can see in the consumption trends and then I have a follow-up?

Matt Farrell: Yeah. Thanks for the question, Chris. You’re right. April was around 6.5% consumption growth. Really, really strong. And we said three things really driving a lower organic outlook of around 4%, which is probably in the grand scheme, HERO lapping a year ago distribution gains as we went national for HERO was probably the biggest one. And then number two, not getting any contribution from pricing. We’ve fully lapped 2023 pricing actions by, as we enter into Q2. And then the third one would be higher coupons for and trade for supporting our new products because this is one of our best years of innovation.

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

Rick Dierker: Yeah. You got a lot of questions there, Chris.

Chris Carey: I promise…

Rick Dierker: That’s okay. Yeah. So if you look at laundry category, you got a lot going on. You got liquid laundry, you got unit dose and you got scent boosters. So if you look at the categories, the last three quarters for each of those, like liquid laundry sort of decelerated year-over-year growth, Q3, Q4, Q1, like up 5, up 2, up 2, and so it has decelerated. The reason we feel good about where we stand right now is we know we lost some share early in the quarter. Then we normalized through the trade spend and then we’re going to have even more couponing and trade going forward. Why? Because we got Deep Clean that we’ve launched nationally. So, and we think that, we make that stick in mid and high mid-tier and that could provide years of growth for us.

So I think the horse to ride this year in laundry is going to be Deep Clean. As far as unit dose and scent boosters go, unit dose, that’s decelerated as well, last three quarters, 8%, 5%, 3%. But we — our unit dose grew 34% in the quarter. So we had a lot of success, a lot of trade done going on there. And scent — and then scent boosters, which is a very discretionary category. Last three quarters is 2%, 1%, 1% as far as the year-over-year growth and we grew 7% because we’re a value in that category. So we’re in a good position both in unit dose and in scent boosters. So then when you talk about how promotional things are right now, like liquid laundry, if you went to Q4 versus Q1, it’s up a bit, like it’s up 70 bps. And this is in measured channels, of course.

And, of course, you can’t see coupons as well, if you look at IRR or Nielsen. But if you look at the sold-on deal, it went from 33.2% to 33.9% just sequentially. So you wouldn’t say, well, that’s not that big a move. But year-over-year, Q1 to Q1, it’s up 180 bps. So we would still say that if you go back to pre-COVID times, if you went back to, say, 2018, it’s about a 40% sold-on deal. So we’re a long way from being where we used to be. But I’d say trend-wise, if you drew a trend line, you’d say that it is inching up over the last six quarters to eight quarters. We mentioned litter as well. Litter is the same sold-on deal in Q1 as Q4. It’s 15.3%, but still up year-over-year 40 bps, but a long way from where it was if you went back years ago, if you were more around 20%.

So, but it is — obviously, we had one competitor that was out of stock for a while. So they’ll need to, I suspect, be promoting to win back share. But like I said, the horse we’re riding there is a hardball. We’ve got a lot of opportunity in the lightweight litter category. So, that’s a — you had a long question, so it’s kind of a long answer. But, did I hit most of the points, Chris?

Chris Carey: That’s perfect. I will feed the floor. Thank you very much.

Rick Dierker: Okay, Senator. Thank you.

Operator: Our next question will come from Rupesh Parikh with Oppenheimer.

Rupesh Parikh: Good morning and thanks for taking my question. Also, congrats on the next quarter. So just going back to the vitamin category, just curious what continues to weigh in the category, and then how should we think about expectations for the balance of the year versus, I guess, the double-digit consumption decline we just saw in Q1?

Matt Farrell: Yeah. Well, if you look at the category, Q4 and Q1, just round numbers, are both down 5%, down 5%, down 5%. And normally, you would expect the New Year’s resolutions and people wanting to get healthy, that would be a boost to the category. You didn’t see it in Q1. So I — it was two things. It still is probably the tail from post-COVID. But also, you could also argue that for many people, it’s the discretionary. So the third thing, though, is people moving from gummies to other forms and that is powders and also things like chewables. And we’re launching a chewable this year, so we could do some of that shift to other forms. But I would say those are the dynamics that we’re looking at. Now, as far as our performance, yeah, we’ve had double-digit decline in Q4 and Q1, so obviously I’m not happy about that.

It takes a while to turn that around. You probably are starting to see new packaging in-store, not only new packaging, but higher marketing spend as well. We are seeing signs of retailer support with respect to shelf placement and facings pre- and post-reset. So we hope that this is the year we’re going to stabilize. We’re really hoping that in the second half of this year that this business will inflect and start to grow. But we’ve been down Q4 and Q1, as I said.

Rupesh Parikh: Great. And maybe just one quick follow-up for Rick. So you guys raised the bottomline guidance but still kept the same topline guide, even with the Q1 beat and sounds like strong momentum in April. So I’m just curious in terms of, is it just conservatism for reaffirming the guide or is it still just early in the year?

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

Rupesh Parikh: Great. Thank you. I’ll pass it the line.

Operator: Our next question will come from Dara Mohsenian with Morgan Stanley.

Dara Mohsenian: Hey. Good morning. So…

Rick Dierker: Hi, Dara.

Matt Farrell: Hi, Dara.

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

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

Rick Dierker: Yeah. I mean, consumption for WATERPIK is high, up high single-digit, low double-digit. So consumption is great. We had to work through some inventory that was higher than, I guess, at retail and that’s been worked through now so we feel like it’s in a good spot as we move forward.

Matt Farrell: Yeah. As far as our expectations for the year, we called 4% to 5% organic growth for the year and we expect this ballpark, about 2% of that, to be driven from new product launches, which is a big number. And but if you kind of roll through, we’ve got Deep Clean launching in laundry and ARM & HAMMER we are going national with — ARM & HAMMER Litter were going national with Hardball. So those are our two big businesses on the household side of the house. And then when you get into Personal Care, THERABREATH launching with 30% — antiseptic being 30% of the category. That’s gigantic. So we’re only just getting started there. And BATISTE, I mentioned, we’re the number one dry shampoo in the world. We’ve got BATISTE Touch, BATISTE Sweat.

They’re getting really high ratings. And early days, the velocities for virtually everything that we’ve launched are meeting or exceeding expectations. So I would suggest we feel good about at least after one quarter that we’re going to hit that 2% number for organic sales growth in 2020 — 2024. And that will probably be one of our biggest years ever as far as the contribution of organic sales from new products.

Dara Mohsenian: Great. Thanks.

Operator: Our next question will come from Andrea Teixeira with JPMorgan.

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

Rick Dierker: Hey, Andrea. It’s Rick. I’ll give you a couple of comments if Matt wants to add. So, first of all, for the Q2 call, I went through a little bit of the details. But really, it’s a new product. Couponing and trade promotion is kind of a little bit of a step down or step up in Q2. So that’s impacting net sales. We had a year ago HERO gains as we went national. That’s what I said before. And then we’re lapping some of the price increases, right? Almost all of our volume, all of our organic growth from here forward is almost 100% volume driven, okay? So we had 70% in Q1, but as we move forward, it’s closer to 100%. And then as for litter, Matt went through the amount settled and deal. It has ticked up a little bit. Private label is up a little bit more. Spending’s up a little bit. But buy and buy, our shares are strong in litter.

Matt Farrell: Yeah. And as far as you mentioned supply difficulties of other competitors. Yeah, sure, obviously, we and other brands in the category can benefit and have benefited from that difficulty. And when you have repeat purchases over and over again, oftentimes those changes stick. So naturally, that’s our expectation that, yeah, we’re going to hang on to some of those new consumers that moved our way. But some will be tempted back by promotions.

Andrea Teixeira: That’s super helpful. Thank you.

Operator: Our next question will come from Nik Modi with RBC Capital Markets.

Nik Modi: Yeah. Good morning everyone. Just two quick questions. Rick, maybe on just the marketing guidance, I guess based on our math, the rest of the year would imply kind of reduced marketing. Of course, also very big increases from the year ago. But just wanted to get kind of philosophically if you kind of saw the upside, would you have a bias to reinvest more given the consumer environment or would it be more flowing through to the bottomline? And then the second question is really around re-inflation, right? We’re starting to see some commodities across the energy complex re-inflate. And I would just be curious on kind of how you think about managing that against this consumer backdrop in terms of pricing? Thanks.

Rick Dierker: Yeah. Thanks for the question, Nik. For marketing, we were up 150 basis points in Q1. We expect to be up in Q2 and then Q3 and Q4. Q3 up probably and then Q4 down. And why is that? We spent a lot of marketing in Q4 a year ago. We wanted to move and shift part of that to the front half as we supported our new product. So we did that in a meaningful way. Feel really good about that. On an absolute basis, marketing in Q4 would still be a high number. So we feel like we’re supporting the brands great. To the extent that we over-deliver and have the momentum, we typically look to reinvest in marketing because it drives share, it drives organic growth and it’s a virtuous cycle. On inflation, I would say for us, it’s largely unchanged.