Church & Dwight Company, Inc.

Good morning, ladies and gentlemen, and welcome to the Church and Dwight First Quarter 2022 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 and Dwight. Please go ahead, sir.

Okay, 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 Durker, our CFO. And when Rick is done, we'll open the call for questions. Q1 was a solid quarter for us. Reported revenue was up 4.7%. Organic sales grew 2.7%, and we exceeded our 1% to 2% Q1 outlook for organic growth. The adjusted EPS was 83 cents, and that's 8 cents better than our outlook. We grew consumption in 11 of the 17 categories in which we compete, and in some cases on top of big consumption gains last year. This is remarkable as our low fill rates held back our consumption. The good news is April fill rates across many categories are now mid to high 80s and improving. Regarding brand performance, our brands saw a double-digit consumption growth in seven of those categories, and I'll name them for you. Arm & Hammer Scent Boosters, Arm & Hammer Baking Soda, Arm & Hammer Clumping Litter, Batiste Dry Shampoo, Waterpik, Water Flossers, Zycam Zinc Supplements, and TheraBreath Mouthwash. In Q1, online sales as percentage of total sales was 16%. Our online sales increased 2.6% year over year. Now, keep in mind, this is on top of 53% growth in e-commerce that we experienced last year in Q1 versus 2020. We continue to expect online sales for the full year to be above 15% as percentage of total sales. Now, since early 21, we have announced price increases to combat inflation. And through early 2022, we had already announced price increases covering 80% of our global portfolio. Since we spoke to you last in January, we are now expecting $85 million of new incremental cost inflation. And as a result, we recently announced another round of price increases on our fabric care and litter products, which will be effective in July of this year. In addition to pricing, we are pursuing additional measures to offset higher than expected costs, such as productivity and pack size changes. Also in laundry, you may know we have now concentrated our portfolio by approximately 10%. Now I'm going to talk about each business, and first up is the consumer business in the U.S. Consumer domestic business grew organic sales 2.7%, and this is on top of 5.1% organic growth in Q1 of 21. Looking at market shares in Q1, seven of our 14 power brands gained share. Our most recent acquisitions are performing well. TheraBreath, which we acquired in December of 21, had a great quarter with 37% consumption growth. TheraBreath grew share 3.6 points to 15% of the alcohol-free mouthwash category. And Q1 was the first full quarter in which TheraBreath surpassed ACT as the fourth largest mouthwash brand, and Thoroughbreath remains the number two alcohol-free mouthwash brand. Total distribution points, or TDPs as we call them, for the Thoroughbreath brand are up 20% versus a year ago. Zycam also delivered strong results this quarter. You may recall we acquired Zycam in December of 2020. We were hurt in year one of our ownership due to masking and social distancing. Zycam cold remedy consumption was up 56% in Q1, and we expanded our share of the cold shortening segment to a little over 75% share. Turning to gummy vitamins, total shipments of VitaFusion and Little Critters were relatively flat in the quarter. Demand for gummies remained high as the category consumption grew 11%, but our case fill was low. So we left money on the table. The good news is our fill rates, also in vitamins, are finally starting to improve. Next up is international. Despite significant disruptions, our international business did deliver some organic growth in Q1, 0.3%, primarily driven by Ceramar, Batiste, OxyClean, and VMS in the global markets group. Lockdowns and transportation issues hurt our results. We have the orders. We're just struggling to fill them. We expect our difficulties to abate in the second half in international. Next up is specialty products. Our specialty products business delivered a strong quarter, 9.2% organic growth driven by both higher pricing and volume. I want to spend a few minutes on the health of the consumer, private label trends, innovation, and our ability to supply. Now, we all know that inflation is at a multi-decade high. Interest rates are rising to tamp down inflation. And while wages have risen, households are getting squeezed, and we expect consumers will start to make choices to make their dollars go further. We have seen Netflix lose subscribers, but here are a few indicators that we're seeing. First, consumption of value detergent was flat year over year in Q1, and this is after losing share to premium detergent for several quarters. Over in cat litter, our traditional Arm & Hammer Orange Box cat litter, which is a value product, grew faster than our premium Arm & Hammer cat litter in Q1. Over in personal care, Waterpik is seeing faster growth of lower priced price point models in the foster business. And then in showerhead, showerhead category consumption is slowing, which may be an indicator that consumers may be spending less on home improvement. Now, we're keeping an eye on these trends, and we are prepared if categories become more promotional in the second half. It's important to point out that 40% of our portfolio is value, and we expect to perform well in a difficult economic environment. And just to remind everyone, our largest businesses, laundry detergent and vitamins, are value products. And in litter, our orange box is also value. So we feel well-positioned for what may be coming. Now, regarding private label, private label shares are stable in the five categories where we have meaningful exposure to store brands. As you saw in the release, we have a strong lineup of innovation across our personal care and household categories. Most of these new products are shipping in Q2, and we believe our consumer is always attracted to new and improved product offerings. Regarding our ability to supply, we hit bottom early in Q1 with the Omicron resurgence, and we saw our fill rates dip below 80%. As I mentioned earlier, April fill rates are trending toward the mid to high 80s, and we're on track to be at historical fill levels by the end of the year. So we have confidence in our full-year outlook for several reasons. We have improving fill rates. We have new product innovation hitting the shelves by July 1. Two-thirds of our marketing spend is concentrated in the second half. We have the incremental impact of pricing, and we have the positive effect of concentration on consumption. So in closing, we expect our portfolio of brands to do well both in good and bad times, and we continue to hunt for new TSR accretive businesses. And next up is Rick to give you more details on Q1.

Thank you, Matt, and good morning, everybody. We'll start with EPS. First quarter adjusted EPS was 83 cents, flat to prior year. The 83 cents was better than our 75-cent outlook, primarily due to continued strong consumer demand, driving higher than expected sales, as well as better gross margin than expected. Reported revenue was up 4.7%, and organic sales were up 2.7%. Now let's review the segments. First, consumer domestic organic sales increased by 2.7% due to positive price mix offset by lower volume. As anticipated, the discontinuation of Waterpik Shower Club programs was a drag to organic growth. We also experienced some bumpiness in the month of March and continued into April due to the laundry concentration transition. Good news is we are through that now. Consumer International had flat organic sales in Q1 due to broad supply chain disruption and laundry portfolio decisions in Canada. And for our SBD business, organic sales increased 9.2% due to higher price mix and volume. Milk prices have increased throughout Q1 and are projected to level out as 2022 moves forward. Our first quarter gross margin was 42.6%, 190 basis point decrease from a year ago. Let me walk you through the Q2 bridge. Gross margin was impacted by 550 basis points of higher manufacturing costs, primarily related to commodity inflation, distribution, and labor, as well as a 10 basis point drag from currency. These costs were offset by a positive 270 basis point impact from price volume mix, positive 30 basis points from acquisitions, and a positive 70 basis point from productivity. Moving to marketing, marketing was up 3 million year over year. Marketing expense as a percentage of net sales was 7.9%. For SG&A, Q1 adjusted SG&A decreased 50 basis points year over year. Other expense all in was $14.5 million, a $2.9 million increase resulting from higher average debt outstanding. And for income tax, our effective rate for the quarter was 23.2% compared to 24.2% a year ago, a decrease of 100 basis points. We continue to expect the full year rate to be 23%. And now to cash. For the first three months of 2022, cash from operating activities increased 53% to $153 million due to improvements in working capital, partially offset by lower cash earnings. We continue to expect cash from operations to be approximately $920 million for the full year, and as of March 31st, cash on hand was $174 million. Our full-year CapEx plan continues to be approximately $200 million as we continue to expand manufacturing capacity focused on laundry, litter, and vitamins. For Q2, we expect reported sales growth of approximately 5 to 6 percent and organic sales growth of approximately 3 to 4 percent. This is sequentially higher from Q1 as we expect an improvement in case fill levels after seeing April trend up into the mid to high 80s. We expect Q2 gross margin to contract 200 basis points as we continue to experience higher inflation ahead of the latest round of price increases. Adjusted EPS is expected to be 70 cents per share. An 8 percent decrease from last year's adjusted Q2 EPS. This means our first half earnings will be down approximately 4%, consistent with what our outlook was in January. And now for the full year outlook. We continue to expect the full year reported sales growth to be approximately 5% to 8%, and organic sales growth to be approximately 3% to 6%. As you read in the release, we now expect an incremental $85 million of cost inflation compared to our original outlook. We're planning on incremental pricing, laundry compaction, and productivity to help offset We continue to expect 10% plus operating income growth to offset a 320 basis point increase in the effective tax rate. We continue to expect full-year EPS in the range of 4% to 8%. However, we now expect to be at the low end of the range. And with that, Matt and I would be happy to take any questions.