Church & Dwight Co., Inc. (NYSE:CHD) Q2 2023 Earnings Call Transcript

Church & Dwight Co., Inc. (NYSE:CHD) Q2 2023 Earnings Call Transcript July 28, 2023

Church & Dwight Co., Inc. misses on earnings expectations. Reported EPS is $0.76 EPS, expectations were $0.79.

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

Matt Farrell: Thank you, operator. Okay. Good morning, everyone. Thanks for joining us today. I’ll begin with a review of Q2 results, and then I’ll turn the call over to Rick Dierker, our CFO. And when Rick is wrapped up, we’ll open the call up for questions. Q2 was an excellent quarter for Church & Dwight. Reported revenue was up 9.7%, exceeding our 7% outlook. And this is thanks to strong results from several brands, including our two most recent acquisitions, HERO and THERABREATH. Organic sales grew 5.4%. This exceeded our 3% Q2 outlook. Gross margin expanded 270 basis points and marketing as a percentage of sales increased 130 basis points. Two items that are worthy of note. First one is 18% of our global sales were purchased online, compared to 17.5% in the year-ago quarter.

And second, private label is stable in our categories, both in the U.S. and internationally. Adjusted EPS was $0.92, and this was $0.14 higher than our $0.78 EPS outlook. And that result was driven by higher sales, higher-than-expected gross margin and a lower tax rate. Now I’m going to comment on each business. First up is the U.S. The U.S. consumer business had 6.3% organic sales growth and six of our 14 power brands held or gained market share in the quarter. And for context, the brands that grew share represent 65% of our U.S. sales. Now I want to look at a few of the more important categories in the U.S., starting with laundry. So laundry is a real success story in Q2. Church & Dwight closed out the quarter as the fastest-growing overall laundry detergent, liquid detergent, unit dose detergent and scent booster manufacturer in both dollar and unit share.

ARM & HAMMER liquid laundry continues to see strong consumption growth, driven in part by the continued trade down to value brands and in part by media support behind our new, Give it the Hammer master brand advertising campaign. ARM & HAMMER liquid laundry detergent grew share by 90 basis points in the quarter, so we’re now at 14.5% share. And Extra, which is in the extreme value segment of the category, grew consumption 7.2% and gained 20 basis points of share in Q2. ARM & HAMMER litter also continues to perform extremely well with 12.6% growth outpacing the category and growing share. Consumers continue to choose ARM & HAMMER litter offerings and our orange box, in particular, offers great value for the cost constrained cat owner. Turning now to Personal Care.

BATISTE grew consumption 12% in the quarter as we continue to build dry shampoo awareness and drive household penetration. While TROJAN delivered share growth and increased share to 68.3% in Q2. HERO, which was acquired last October, grew year-over-year consumption by 66%, gating 4.7 share points to achieve a 17.2% market share in the total acne treatment category. The number of retail distribution points has tripled since we acquired the brand, and we still have room to run as we expand across all classes of trade. The HERO team is doing a spectacular job growing this business, and there continues to be a great deal of excitement at Church & Dwight about the HERO brand. Similarly, THERABREATH, which was acquired in 2021 and is performing extremely well with 100% year-over-year consumption growth in the quarter.

THERABREATH grew share of 5.6 points year-over-year to a 13% share of the mouthwash category. The mouthwash category grew 14% in the quarter, and THERABREATH accounted for 50% of the category growth. Distribution of THERABREATH has more than doubled since the acquisition date. So THERABREATH is now the number two non-alcohol mouthwash brand and the clear number three in total mouthwash. And we expect this brand to be a long-term grower for Church & Dwight. Regarding a couple of businesses that depressed our 2022 results, WATERPIK is stabilizing, with Q2 coming in close to plan, and this is similar to Q1. While VITAFUSION was close to our plan in the first half, our consumption was down in Q2, 9%, partly due to distribution losses at some retailers due to our supply issues in 2022.

The good news is the gummy category was up 1% in Q2 after three successive down quarters. And our job now is to win back retailer confidence and then regain lapsed consumers. So we expect both businesses, this is WATERPIK and VITAFUSION year-over-year to be flat net sales, so although not hurting us in 2023 versus 2022. Next up is international. Our international team is doing a great job, delivering organic sales growth of 6.1% in Q2, driven by broad-based growth in every one of our six subsidiaries in all five regions of our Global Markets Group. And finally, Specialty Products. Specialty Products organic sales decreased 6.5%, but this is primarily due to lower volume in the dairy business as lower-priced imports returned to the U.S. market.

I’m going to wrap up my comments right now by saying consumption on our consumer products businesses are strong. A return to volume growth is expected in the second half. In fact, July is off to a very strong start. Our value offerings are performing well, as are our premium offerings, acquisitions are on track. And because we had an excellent first half, and we have a strong outlook for the second half, we are in a position to significantly increase our marketing spend. Last year, we pulled back on marketing due to our fill rate issues. When we started 2023, we intended to increase our marketing from 10% of sales in 2022 to 10.5% of sales in 2023 and then 11% in 2024. So we now intend to ramp up marketing to 11% of sales this year in 2023.

In support of our brands and new product launches as business gets back to normal. And now I’m going to turn it over to Rick to give you some color on Q2 and the full year and other investments that we’ll be making in the second half.

Rick Dierker: Thank you, Matt, and good morning, everybody. We’ll start with EPS. Second quarter adjusted EPS was $0.92, up 21% to the prior year. As Matt mentioned, the $0.92 was better than our $0.78 outlook, primarily due to continued strong consumer demand for many of our products and higher-than-expected gross margins as well as a lower tax rate. Net sales was up 9.7% and organic sales were up 5.4%. Almost half of the reported revenue growth year-over-year was HERO. Organic sales were once again driven by pricing in Q2 with volumes slightly down. That slight decline was better than expected and turning to the second half, we continue to expect a return to volume growth. Our second quarter gross margin was 43.9%, a 270 basis point increase from a year ago, primarily due to productivity pricing and strong contributions from higher margin acquisitions that are offsetting inflation.

This result exceeded our expectations for the quarter as we saw a greater impact from productivity programs, a better product mix driven by our recent acquisitions. Let me walk you through the Q2 bridge. Gross margin was made up of the following: positive 280 basis points impact from price/volume mix, positive 120 basis points from acquisitions, a positive 160 basis point impact from productivity and 10 basis points from currency, partially offset by a drag of 300 basis points due to higher manufacturing costs. For the balance of the year, we expect this trend to continue. Moving to marketing. Marketing was $29 million, up year-over-year. Marketing expense as a percentage of net sales was 9.1% or 130 basis points higher than Q2 of last year.

For SG&A, Q2 adjusted SG&A increased 60 basis points year-over-year. Other expense all-in was $24 million, a $9.1 million increase due to higher average interest rates. For the full year, we now expect other expense of approximately $100 million. We do not have any looming long-term debt refinancing. In fact, other than the $200 million left in our term loan, August of 2027 is the timing of our next maturity. For income tax, our effective rate for the quarter was 17.9% compared to 24.1% in 2022, a decrease of 620 basis points driven by a higher tax benefit from stock option exercises, we now expect the full year rate to be approximately 22%. And now to cash for the first six months of 2023, cash from operating activities increased to $509 million due to higher cash earnings and improvements in working capital.

Turning to the full year outlook. Given the strength of our Q2 results and our confidence for the remainder of the year, we’re raising our outlook for sales, gross margin, EPS and cash flow. We now expect the full year 2023 reported sales growth to be approximately 8% and organic sales growth to be approximately 5%. Given the strength of the business, we see opportunities to make incremental investments in our brands and capabilities in future quarters. We now expect full year reported gross margin to expand 200 basis points. Compared to our previous outlook, we see commodity cost favorability, higher productivity and faster growth from our higher margin recent acquisitions. While we have seen some pockets of lower inflationary pressure, since our prior outlook, we continue to expect net inflation for the year.

For perspective, we expect $120 million of manufacturing cost increases in 2023, much better than the $290 million we saw in 2021 and the $250 million in 2022, but still elevated from historical levels. Speaking of history, if we look back at history from 2010 to 2019, we typically had 2% of COGS as inflation. During the COVID impacted years of 2020 to 2022, we saw an 8% of COGS impact. And in 2023, we’re seeing about a 4% inflation rate. So currently, we see commodities like ethylene down 20% year-over-year. However, going the other way, we see soda ash up 50%, soda ash is now used with lithium for lithium carbonate, which is then used in lithium batteries and solar panels. This demand spike combined with pressure on the supply side. So for example, China is the largest supplier of soda ash globally and has had intermittent supply issues, and that’s causing upwards pressure on price.

So the point is we’re not in a deflationary period as of yet. Wrapping up gross margins, we have made a lot of progress. However, for the full year, we still expect to be about 200 basis points below our pre-COVID margin levels. It’s a lot of opportunity over the next few years. We intend to increase marketing as a percent of net sales to 11%. This is great news as we previously anticipated getting back up to 11% in 2024, and the fact that we’re able to get there sooner than initially anticipated, we’ll position the business well for the future. We expect SG&A both in dollars and as a percent of sales to increase compared to 2022. The increase in SG&A is expected to be larger than what was assumed in our prior outlook as a strong business performance increases instead of compensation and as we make strategic investments.

As in past years when we have strong business performance for investing for the future, these investments are focused in two areas. First, growth with higher marketing investments and R&D investments around MPD [ph], as well as accelerating product registrations in international markets. Second would be efficiency, investments in automation and technology. We now expect full year EPS to be approximately 6%. And as a reminder, our EPS guidance includes a step up of marketing that we’ve talking about in higher SG&A. We now expect full year cash flow from operations to be approximately $1 billion. Previously, we expected to be $950 million. The $50 million increase is driven by higher cash earnings and an improvement in working capital. Our full year CapEx plan continues to be approximately $250 million.

As we continue to make capacity investments and we expect to return to historical levels of 2% of sales by 2025. Strong performance in the first half of the year drove 12% EPS growth as a result of accelerating investments, we expect second half EPS growth to be flat. And for Q3 specifically, we have a strong outlook and expect reported sales growth of 8%, approximately 4% for organic and gross margin expansion. We also expect a significant increase year-over-year in marketing spend as well as SG&A. Adjusted EPS is expected to be $0.66 per share, a 13% decrease from last year’s adjusted Q3, as investment spending has weighted more towards Q3. So to summarize, a strong six months of the year are behind us, a return to volume growth in the back part of the year, a lot of momentum as we move into 2024.

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

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from Chris Carey from Wells Fargo Securities. Please go ahead.

Chris Carey: Hey, good morning.

Matt Farrell: Hey, Chris.

Chris Carey: So on my math, this is the first return to organic sales growth, in personal care since the beginning of 2021, unless I’m calculating that wrong. And clearly there was some commentary around WATERPIK and vitamins being on plan. Nevertheless does feel like a bit of a step change on this kind of important area of the P&L. And I wonder if you could just frame, what’s going on, on an underlying basis in that business to drive this reacceleration. I know comps are getting easier, but we hear so much about WATERPIK and FLAWLESS and sometimes, not the rest of the underlying drivers of organic sales here. And really, I’m just trying to get a sense of the full delivery of this personal care portfolio into the back half of the year, specifically as HERO comes into the base.

Matt Farrell: Okay. I’ll start. And this is Matt, Chris and then Rick can pile on. So I mentioned WATERPIK and vitamins. So that we said on a full year basis that they would be flattish in net sales. So first half, they’re both down year-over-year, and the expectation is up in the second half. So you’re right about that. They’re going to start contributing to the inflection of personal care starting to grow. In international, we have BATISTE and STERIMAR where we’ve been somewhat capacity constrained, and that’s debating right now too. So that’s going to help us on the international side. And BATISTE continues to grow in the U.S. continue to be able to expand, as I mentioned in my remarks awareness and also household penetration.

THERABREATH is a juggernaut. And we bought that business probably had around $100 million in sales. Our ambition long-term is for that to be a $0.5 billion business globally. So it’s – that’s going to continue to grow. We’ve got lots of distribution gains already this year and more ahead of us. And the same is true for HERO. Here we just bought last October, we’ve got a fantastic team driving that business that they’ve – by and large have all stuck around with us, and we want them to stay for a long time because we have so much success and so much runway ahead of us. So I give you a little sense for a half a dozen brands here that are contributing to the growth.

Rick Dierker: Yes. And I would probably just add Chris, it’s Rick. And Matt’s exactly right, BATISTE, THERABREATH, all those things are happening. You’re right. Your math is correct. Q1 organically for personal care was negative. Q2 is positive. We expect Q3, Q4 to be positive. So we do see the inflection point as well.

Matt Farrell: And the good news here that’s the high margin part of the business is personal care.

Chris Carey: Okay. Yes. And that’s just one thing I wanted to confirm that mix should become a bit more of a tailwind for gross margins in the back half as well. So I think you just – you took care of that. The one other then I’ll get back in. We saw some incremental pricing in the Nielsen data around laundry. Just wanted to confirm that if that’s true or not, sent in the way, if there was pricing taken in the business, and then maybe just contextualize if that was the case, why it happened and how you’re thinking about kind of maintaining value and volume share in the laundry business in the U.S. go forward. Thanks so much.

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

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