Church & Dwight Company, Inc.

Good morning, ladies and gentlemen, and welcome to the Church and Dwight Second Quarter 2021 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, Chief Executive Officer of Church & Dwight. Please go ahead, sir.

Good morning, everyone. Thanks for joining us today. I'll begin with a review of the Q2 results, and then I'll turn the call over to Rick Durker, our CFO. And when Rick is done, we'll open up the call for questions. But before we begin, I'd like to recognize all Church & Dwight employees around the world for their continued dedication to keeping our company going during the pandemic, especially our supply chain and R&D teams, as during this quarter the company faced the complexities of raw material shortages and labor shortages at our suppliers and third-party manufacturers. Now let's talk about the results. Q2 was another solid quarter for the company. Reported sales growth was 6.4%. Organic sales growth grew 4.5% and exceeded our 4% Q2 outlook. The 4.5% organic growth is impressive, considering Q2 2020 organic sales growth was 8.4%. Adjusted EPS was 76 cents, and that's 7 cents better than our outlook. The EPS beat is attributed to two things. One, a temporary reduction in marketing, and two, our revenue growth handily exceeded our outlook. Another item that is noteworthy is we overcame a tax rate, which was much, much higher than expected in Q2. We grew consumption in 13 of the 16 categories in which we compete, and in some cases, on top of big consumption gains last year. Another way to look at this is to compare our Q2 consumption on those 16 categories to 2019, a pre-COVID year. We have higher consumption in 14 of those 16 categories compared to Q2 2019. Regarding brand performance, nine of our 13 brands saw a double-digit consumption growth, and I'll name them for you. Gummy vitamins, stain fighters, cat litter, condoms, battery-powered toothbrushes, depilatories, dry shampoo, saline spray, and water flossers. Now, although many of our brands deliver double-digit consumption growth, it is not reflected in our 4.5% organic sales growth as shipments were constrained by supply issues, which we do expect to lessen by Q4. In Q2, online sales as a percentage of total sales was 14.2%. Our online sales increased by 7% year over year. But remember, this is on top of the 75% growth in e-commerce that we experienced in Q2 last 2020 versus 19. We continue to expect online sales for the full year to be 15% as a percentage of total sales. With 70% of American adults having at least one vaccine shot so far, the U.S. has been opening up with consumers becoming more mobile. In recent days, however, it appears that trend could slow down due to the Delta variant combined with many people still being unvaccinated. Outside the U.S., many countries continue to enforce periodic lockdowns and we expect that to continue. As described in the release, we face shortages of raw and packaging materials, labor shortages that suppliers and third-party manufacturers have reduced their ability to produce, and transportation challenges have further contributed to supply problems. Besides shortages, we are dealing with inflation. Significant inflation of material and component costs is affecting our gross margin expectations, which Rick will cover in his remarks. Due to a lower case fill rate, we pulled back on Q2 marketing, especially for household products. We expect the supply issues to begin to abate in Q4. The higher input costs and transportation costs are expected to continue, though, for the rest of the year. On past earnings calls, we described how we expected categories and brands to perform in 2021. Overall, our full-year thinking is generally consistent. To name a few categories, Demand for vitamins, laundry additives, and cat litter is expected to remain elevated in 2021. Condoms, dry shampoo, and water flosses are recovering and experiencing year-over-year growth as society opens up and consumers have greater mobility. Baking soda and oral analgesics are expected to decline from COVID highs. Now I'm going to talk about the divisions. Consumer domestic business grew organic sales 2.8%. This is on top of 10.7% organic growth in Q2 2020. Looking at market shares in Q2, five out of our 13 power brands met or gained share. Our share results are clearly impacted by our supply issues. I'll comment on a few of the brands right now. VitaFusion gummy vitamins saw great consumption growth in Q2, up 10%. Consumers have made health and wellness a priority. It appears that new consumers are coming into the category, and they're staying. So here's a supporting statistic. In the last year, VitaFusion household penetration is up 17%. That means the brand is now in one out of every 10 households. Next up is Waterpik. Waterpik grew consumption 72% in Q2 as it continues to recover from COVID lows and benefits from the heightened consumer focus on health and wellness. Waterpik is also benefiting from dental offices returning to pre-COVID patient levels. We expect the frequency of our Lunch and Learn program to return to normal levels in the second half of this year. Batiste Dry Shampoo grew consumption 37%. Dry Shampoo is recovering as stores have reopened and consumers are becoming more mobile. Similarly, Trojan delivered 11% consumption growth. Society has been opening up. As restaurants, bars, and clubs have reopened, people are hooking up again. Here's a fun fact that might be a contributing factor. In Q2, Trojan launched on TikTok with an explosive uptake from consumers with over 47 million views. Next, I want to discuss international. Despite intermittent lockdowns in our markets, our international business came through with 10.4% organic growth in a quarter, primarily driven by our strong growth in our global markets group. Asia continues to be a strong growth engine for us. Waterpik, Batiste, and Arm & Hammer led the growth for the international division in the quarter. Our specialty products business delivered a positive quarter with 11.8% organic growth. This was driven by higher pricing and volume. Milk prices remained stable, and demand is high for our nutritional supplements. The prior year quarterly organic growth for specialty products was 3%, so 11.8% is an impressive result. Now turning to new products. Innovative new products will continue to attract consumers. In 2021, we have launched many new products which are described in our press release. In the household products portfolio, we introduced OxiClean laundry and home sanitizer. It's the first and only sanitizing laundry additive that boosts stain fighting and eliminates 99.9% of bacteria and viruses. In the personal care portfolio, VitaFusion launched elderberry gummies, triple immune gummies, and power sink gummies to capitalize on increased consumer interest in immunity. Waterpik launched Waterpik Ion, a water flosser which is 30% smaller with a long-lasting lithium ion battery. It is specifically designed for smaller bathroom spaces. To capitalize on its earlier success, Waterpik Sonic Fusion, the world's first flossing toothbrush, was upgraded to Sonic Fusion 2.0, with two brush head sizes and two brush speeds, and that's doing extremely well. And finally, Flawless is taking advantage of the at-home beauty and self-care trends with at-home manicure and pedicure solutions. Now let's turn to the outlook. Since we last spoke to you in April, unplanned cost inflation has grown by another $35 million. In addition to the price increases on 33% of our portfolio that we announced in April, We have just announced price increases on other categories, which means we have now priced up 50% of our portfolio. Of course, there is a lag on the positive impact of these increases, which impacts our earnings outlook. We now expect to be at the lower end of our range of adjusted EPS growth of 68% as a result of heightened input costs. Although we expect to be at the low end of the range, It's really important to remember that we are comping 15% EPS growth in 2020. We expect full-year reported sales growth of 5% with 4% full-year organic sales growth. It's also important to call out that we are committed to maintaining the long-term health of our brands by ensuring sustained high levels of marketing investment in the second half. In conclusion, July consumption continues to be strong. We are navigating through significant supply challenges and cost inflation. We believe we are well positioned for 2022 with the pricing actions we have taken. We expect our portfolio brands to do well, both in good and bad times, and in uncertain economic times such as now. We have a strong balance sheet, and we continue to hunt for TSR-accretive businesses. Next up is Rick to give us details on Q2.

Thank you, Matt, and good morning, everybody. We'll start with EPS. Second quarter adjusted EPS, which excludes the positive earn-out adjustment, was $0.76, down 1.3% to prior year. And as we discussed in previous calls, the quarterly earn-out adjustment will continue until Q4, which is the conclusion of the earn-out period. $0.76 was better than our $0.59 outlook, primarily due to continued strong consumer demand for many of our products, as well as a temporary reduction in marketing spend as supply chain shortages were impacting customer fill rates. which we expect to recover in Q4. The $0.76 includes a $0.04 drag from a higher tax rate and a $0.04 drag from the VMS recall costs. Reported revenue was up 6.4%. Organic sales were up 4.5%, driven by a volume increase of 4.3%. Matt covered the top line, and I'll jump right into gross margin. Our second quarter gross margin was 43.4%, a 340 basis point decrease from a year ago. This was right in line with our outlook for down 350 basis points for the quarter. Gross margin was impacted by 480 basis points of higher manufacturing costs, primarily related to commodities, distribution, and labor costs. Tariff costs negatively impacted gross margin by an additional 50 basis points. These costs were partially offset by a positive 40 basis point impact from price volume mix and a positive 140 basis point impact from productivity programs. as well as a 10 basis point positive impact from currency. Moving to marketing, marketing was down 5.3 million year-over-year as we lowered spend to reduce demand until fill rates could recover. Marketing expense as a percentage of net sales decreased 100 basis points to 9.2%. We continue to expect full-year marketing expense as a percentage of net sales to be approximately 11.5% in line with historical averages. For SG&A, Q2 adjusted SG&A decreased 140 basis points year-over-year with lower legal costs and lower incentive comp. Other expense all-in was $11.4 million, a $3.3 million decline due to lower interest expense from lower interest rates. And for income tax, our effective rate for the quarter was 24% compared to 19.6% in 2020, an increase of 440 basis points primarily driven by lower stock action exercises. You will hear in a minute this also impacts for full-year tax rates. And now to cash. For the first six months of 2021, cash from operating activities decreased 42% to $344 million due to higher cash earnings being offset by an increase in working capital. Accounts payable and accrued expenses decreased due to the timing of payments. As a reminder, in the year-ago numbers, there was an $80 million benefit in Q2 related to the timing of U.S. federal income tax payments shifting from the second to the third quarter in the prior year. We expect cash from operations to be approximately $950 million for the full year. As of June 30th, cash on hand was $149.8 million. Our full-year CapEx plan is now $140 million as we continue to expand manufacturing and distribution capacity, primarily focused on laundry, litter, and vitamins. The decrease from our previous $180 million is project timing related. For Q3, we expect reported sales growth of approximately 3%, organic sales growth of approximately 1.5%, entirely due to supply chain constraints. We expect gross margin expansion in the quarter. led by our price increases. Adjusted EPS is expected to be 70 cents per share, flat from the last year's adjusted EPS, as strong operating performance is offset by a higher tax rate. And now for the full-year outlook. We now expect full-year 2021 reported sales growth to be approximately 5%, organic sales growth to be approximately 4%. Our consumption is strong and outpacing shipments. We expect our customer fill levels to improve by Q4. Turning to gross margin, we now expect full-year gross margin to be down 75 basis points. This represents an incremental impact from our last guidance due to broad-based inflation on raw materials and transportation costs. Our April outlook expected gross margin to be flat for the year and 90 million of inflation from our original guidance. Now we're absorbing 125 million of incremental costs for the full year. This additional 35 million of inflation drives the change in our gross margin outlook. We've taken another round of pricing actions with over 50% of our global brands having announced price increase. While some of this benefit helps the second half of 2021, most of the benefit is in 2022. As a reminder, we price to protect gross profit dollars, not necessarily margin. The $35 million movement versus our previous outlook is primarily non-commodity related. Transportation, labor, third-party manufacturers, and other raw material price increases make up the majority. Commodities are also up. And while we have 80% of our commodities hedged, let me give you a sense of what's going on with major commodities. Over the past few months, second half expectations for resins have moved up considerably. For example, previously in our forecast, it was based on HDPE being up 30% in the second half of the year. Now it's up 60%. PolyPro has moved from being up 40% to now 90%. In addition, transportation costs, such as diesel, have continued to rise. We previously expected second-half diesel to be up 18%. Now it's up 27%. Cartons and corrugate previously were single-digit. Now they're low double-digit. So that's the latest thinking on commodities, and now we'll move to tax. Our full-year tax rate expectations are now 23%, higher versus our last expectations due to lower stock option exercises. This is a 4-cent drag versus our previous outlook. We now expect adjusted EPS to be the lower end of our previous range of 6% to 8%. Our brands continue to go from strength to strength as strong consumption and organic sales growth lapsed almost 10% organic growth a year ago. While inflation is broad-based, we have taken pricing actions to mitigate, which gives us confidence in margin expansion in the back half. And with that, Matt and I would be happy to take any questions.