Church & Dwight Company, Inc.

Good morning, ladies and gentlemen, and welcome to the Church and Dwight First Quarter 2020 Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star then zero. 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 risk 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, Chief Executive Officer of Church & Dwight. Please go ahead, sir.

Good morning, everyone. Thanks for joining us today. I'll begin with a discussion of the impact of COVID-19, followed by a review of the Q1 results, and then I'll turn the call over to Rick Durker, our CFO. And when Rick is finished, we'll open the call up for questions. I'll start by addressing the impact of COVID-19 on Church and Dwight. Our priorities right now are the health and safety of our employees, meeting the needs of consumers and retailers, helping the communities where we live, and ensuring the strength of our brands. I want to recognize Church & Dwight employees around the world for their dedication to keep our company going during the pandemic. Church & Dwight has 4,800 employees, and we are committed to each other's safety. We have 3,000 people reporting to work every day who are keeping our plants and warehouses running. We are protecting our employees through temperature checking, working in pods, social distancing, and frequent sanitization of work areas, and we are sparing no expense to promote safety in our supply chain. We have another 1,800 Church and Dwighters who are working from home using Microsoft Teams. We had already invested in the tools to work remotely, so switching to work from home proved to be easy. We are learning how to be a virtual company. We are supporting our local communities with monetary and product donations to local food pantries and shelters, and donations of personal protective equipment and products to local hospitals, pet shelters, and schools. And we are preparing to produce hand sanitizer at our UK plant for both internal use and for donations. With respect to consumers and retailers, we understand the need for our products now more than ever, We have taken steps to increase short-term manufacturing capacity, and we are working closely with suppliers and retail partners to keep pace with increased demand in April. Okay, now let's talk about the results. Q1 was an exceptional quarter. Revenues, gross margin, earnings, and operating cash flow all significantly exceeded our expectations. Our positive results were influenced in part by pantry loading in the month of March. Organic sales growth of 9.2% exceeded our outlook of 3%. Earnings per share of 83 cents exceeded our EPS outlook by 10 cents. Reported sales growth was 11.5%, and gross margin expanded in the quarter. Regarding e-commerce, more consumers moved online. In Q1, 10% of our consumer sales were online, and we have seen growth in all retailer.coms. We expect to easily exceed our target of 9% online sales in 2020. Private label shares are always noteworthy. As you know, our exposure to private label is limited to five categories, and private label shares were unchanged in Q1. Now, to make sense out of March and April, let's take a look at consumption, shipments, and use-up rates. Consumption grew 30% in March for our combined U.S. categories. For the month of April, the good news is that our combined U.S. consumption growth is still slightly positive. This includes both measured and non-measured channels. The brands with positive consumption in April included OxyClean Additives, VitaFusion, and Little Critters Gummy Vitamins, Flawless Women's Grooming, Arm & Hammer Unit Dose, Arm & Hammer Baking Soda, and Orogel Oral Analgesics. The brands with negative year-over-year consumption growth in April include First Response Pregnancy Kits, Trojan, Spin Brush, Batiste, and Waterpik. All right, so that's consumption. Now let's look at shipments. Shipments in March were up significantly across most of our categories, largely due to pantry loading. For the month of April, shipments are tracking to be up 8%. led by laundry, litter, and vitamins for our combined U.S. categories, and continue at elevated levels as we replenish retailer stores and distribution centers. Now, with the backdrop of strong shipments in both March and April, we've attempted to determine use-up rates. We've been conducting weekly surveys to ask consumers if they are using more now than a month ago regarding categories in which we compete. It's not completely scientific, but here's what we learned. In April, our consumer survey showed an elevated use-up rate for household products, including laundry detergent, laundry additives, and baking soda. So, for example, 20% of our consumers say they are washing more, which is good news for the near-term health of our laundry brands and stain finder brands. The exception for household products was cat litter, where there is no reported change in usage. Regarding personal care... our consumers reported elevated usage of vitamins, nasal sprays, and oral analgesics. Most other personal care categories, such as dry shampoo, condoms, pregnancy kits, and toothbrushes, do not report an elevated use-up rate. So, to the extent that those categories experience higher shipments in March, it may take some time to work those off. In the water flosser category, Water pick consumption was down 55% in April due to retailer closures, deprioritization of water flossers by some retailers, and closure of dental offices. As you know, dental offices are closed except for emergency procedures, so there are no water flosser recommendations by dental professionals, which are an important source of first-time buyers. Flawless could be a bright spot, with 10% year-over-year consumption growth in recent weeks in April. With the closure of salons, female consumers are focusing on what they can do at home, and our marketing team has moved quickly to change our marketing messages. Flawless is one of our brands that could benefit from the at-home grooming trend. The dramatic increase in the use of Zoom, Teams, and FaceTime has contributed to the interest in Flawless products so that women can be camera ready. Now turning to investments. In the months ahead, we intend to invest in our business. Innovative new products will continue to attract consumers, even in this economy. There is no pullback in R&D spending or in new product development. With respect to new product launches, many of our new products began shipping in Q1 prior to the COVID impact, although some retailer resets have been delayed due to the virus. And with respect to acquisitions, we are always open to acquiring TSR accretive businesses. We believe we are well-positioned in an economic downturn given our balanced portfolio of value and premium brands and strong balance sheet. In times like these, it is natural to make comparisons to prior recessions for indications of how a company might perform now. In 2009, our organic growth was 4.2%. Today, 37% of our products are considered value, which is similar to 2009 when 40% of our portfolio was value. We have 12 power brands today compared to eight in 2009. Although two of those brands, Waterpik and Flawless, are more discretionary in times of recession, our vitamin brands, which are VitaFusion and Little Critters, are in great demand due to consumer focus on health. And the equity of our flagship brand today, Arm & Hammer, is much stronger, especially in the laundry and litter categories. Our international business is larger today. with a more diverse portfolio and more opportunities to grow, as evidenced by our 9% sales growth CAGR over the past four years. We are well balanced globally with more business in Asia Pacific, and we are less dependent upon more mature markets. In fact, the international business delivered 7% organic growth in Q1 and weathered the initial impact of the coronavirus in Asia. that the 2020 economic downturn is not simply a more severe version of the 2009 recession. There are many differences that influence the path forward. We have social distancing, quarantining, government shutdown orders, retailer closures, the closure of dental offices, and the decline of foot traffic at retailers. And there is always the risk of supply chain interruptions and the potential resurgence of the virus later this year. Because of the virus, consumer trends are emerging which affect our business, including a focus on cleaning, personal wellness, new grooming routines, and a spike in buying online. These consumer trends may endure over the long term, and we are well positioned if they do. In conclusion, there are lots of reasons to have confidence in Church and Dwight. The great thing about our company is we are positioned to do well in both good economic times and in economic downturns. The categories in which we play are largely essential to consumers. We have a balance of value and premium products. Our power brands are number one or number two in their categories, and we have a low exposure to private label. We are coming off one of our best years in 2019 and are entering this downturn in a position of strength and with a strong balance sheet. So finally, we have the resources, the common sense, and the ambition to ensure that our brands perform well in the months ahead. Next up is Rick to give you details on the first quarter.

Thank you, Matt, and good morning, everybody. We'll start with EPS. First quarter adjusted EPS, which excludes an earn-out adjustment and the gain on the sale of an international brand, grew 18.6% to $0.83 compared to $0.70 in 2019. The $0.83 was better than our $0.73 outlook, primarily due to higher volume associated with a significant increase in demand for many of our products in March. Better gross margins and lower marketing. Also included in the $0.83 is a penny drag from FX as the dollar strengthened with the global pandemic and a $0.02 drag from a higher tax rate. We did not have a currency impact assumed behind our Q1 guidance. As we discussed in previous calls, the quarterly earn and adjustment will continue until the conclusion of the earn-out period. Reported revenue was up 11.5%, reflecting a significant increase in consumer demand for our products due to COVID-19. Organic sales were up 9.2%, more than tripling our Q1 outlook of approximately 3%. The organic sales beat was driven by our global consumer growth of 9.6%. We have taken several short-term actions to increase capacity, especially for laundry and litter, due to overwhelming demand. We were able to fast-forward a planned capacity expansion for laundry, and we made the decision in Q1 to exit extra laundry detergent from the less profitable drug class of trade. And in hindsight, the decisions to exit private label vitamins and reduce promotional activity for OxyLaundry were the right ones at a time like this so we can focus on our core products. Now let's review the segments. First, consumer domestic. Organic sales increased by 10.2% due to higher volume and positive price mix. Growth was led by Arm & Hammer liquid laundry detergent, VitaFusion, and Little Critters gummy vitamins. OxyClean stain fighters, Arm & Hammer clumping cat litter, and baking soda, as well as Batiste dry shampoo. One question we usually are asked is, can we bridge our 10% growth for the domestic business back to Nielsen? For this quarter, we have the unusual circumstance of Nielsen and our organic growth are comparable. And actually, there are two large offsetting adjustments. We had 400 basis points of untracked channel growth, largely due to the strong online sales Matt mentioned. So we would say consumption for the quarter was closer to 14%. Our organic growth, as I said, was 10%. So that means inventory at retail declined by 400 basis points as we couldn't fill all the orders in March. One thing to keep in mind during this time is that while scanner data is usually a good barometer for us, the current pandemic has made online growth well exceed brick and mortar. With much of the online class of trade not measured in scanner data, Nielsen data is currently less of an indicator. For example, for the week ending 4-18, scanner data would indicate that we were down roughly 10% in consumption. Well, based on point-of-sale data across all channels that we have, which includes online retailers, our consumption was slightly positive. International delivered a strong quarter for 7.1% organic growth, also benefiting from pantry loading. Growth was driven by Arm & Hammer cat litter, liquid laundry detergent in Canada, and Cure Ash baby wipes and FemFresh feminine hygiene in Australia. Sterimar nasal spray in the U.K. and Batiste dry shampoo in Germany. For our SPD business, organic sales increased 3.4%. Demand continues to grow in the poultry industry. On the other hand, there has been a reversal in the outlook for the dairy sector. Negative market impact from COVID-19 could result in lower milk demand and a negative impact on the dairy industry. Turning now to gross margin. Our first quarter gross margin was 45.7%, a 60 basis point increase from a year ago due to higher pricing and productivity, partially offset by higher manufacturing costs, COVID-related expenses, and effects. The gross margin bridge for the quarter is plus 140 basis points for price volume mix, plus 110 basis points for productivity, plus 10 basis points for acquisitions, less 180 basis points for higher manufacturing costs. of which COVID costs make up 30 bps. Less 10 bps for currency, and then minus 10 bps for distribution costs. Commodities have moved significantly, especially oil. However, for other commodities like ethylene and resins, such as HDPE, while they've moved down, it typically takes six months or longer for them to move in concert with oil. We entered 2020 about 60% hedged, and no doubt commodities will be a tailwind. But unfortunately, the COVID-related costs more than offset any commodity benefit For example, in Q1, we were about $4 million of COVID costs, and that was primarily for the month of April. Moving now to marketing. Marketing was down 1.7 million year over year. Market expense as a percentage of net sales decreased 110 basis points to 8.3%. Q1 is typically our lowest quarter for marketing spend as new products have yet to be launched. We delayed March spending to the back half with consumption in late Q1, and likely Q2 being primarily driven by demand related to the coronavirus and less by marketing activities. For SG&A, Q1 adjusted SG&A increased 40 basis points year over year, primarily due to intangible amortization related to acquisitions. Net operating profit, adjusted operating margin for the quarter was 24%. This represents 130 basis point increase over Q1 2019. Other expense all in was $15.2 million, primarily driven by interest expense. And for income tax, our effective rate for the quarter was 23.2%, compared to 21.9% in 2019, an increase of 130 basis points, primarily driven by lower stock option exercises. This was a two-cent year-over-year drag on EPS in Q1. And now to cash. For the first three months of 2020, cash from operating activities increased 71.5% to $237 million, or almost a $99 million increase from prior year, due to higher cash earnings and a lower increase in working capital. Our full-year CapEx plan has gone from 90 million to 80 million, largely due to delayed start dates. The pandemic has limited access to plant locations, and IT upgrades are being delayed. Our liquidity is strong. We strive to maintain our credit rating while expecting to be sub-two times by the end of the year. As we've previously communicated, we're experiencing a significant increase in consumer demand for many of our products, and thus cash flow is stronger. Furthermore, during January and February, we proactively termed out our CP borrowings until the second and third quarters at favorable rates. Those actions eliminated a need for us to access the commercial paper market for the remainder of the year. Our current cash balances exceed $1 billion, as we drew $825 million from our revolver, giving us ample flexibility. We're confident in our liquidity, which is why we haven't issued long-term debt, even though the market is open for us. The great thing about revolver drawdowns is that they are quickly repayable. Now turning to the outlook, the company previously issued its fiscal 2020 guidance on January 31st, 2020, which did not include the impact of COVID-19. As you read in the release, due to the rapidly evolving situation, the high degree of uncertainty relating to the impacts of the virus, including consumer demand and global economy, the company is withdrawing its fiscal 2020 guidance. As for the second quarter, the company's primary focus is ensuring the safety of our employees a sustained supply to retailers to keep pace with higher demand and maintaining the strength of our brands. And that is really the extent to which we will comment on the outlook. Wrapping up, yesterday the Board of Directors declared a regular quarterly cash dividend of $0.24 per share, a 5.5% increase versus a year ago. That's the company's 477th regular consecutive quarterly dividend. And with that, Matt and I would be happy to take any questions.