Church & Dwight Company, Inc.

Good morning, ladies and gentlemen, and welcome to the Church and Dwight Second Quarter 2022 Earnings Conference Call. Before we begin, I have been asked to remind you that this call, 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 Financial Officer of Church & Dwight. Please go ahead, sir.

Actually, I got promoted as CEO about seven years ago. But anyway, good morning, everyone. Thanks for joining us today. We've got a lot to talk about. 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's done, we'll open the call for questions. So Q2 was a solid quarter for us. Reported revenue was up 4.2%. Organic sales grew 3.4%, and this was in line with our 3% to 4% outlook. The adjusted EPS was 76 cents. Now, this was six cents higher than our outlook, but that was due to lower marketing. We grew consumption in 11 of our 17 categories in which we compete, and in some cases, on top of big consumption gains last year. Fill rates have improved to 90% in June, and we expect to get back to historical levels by the end of the year. Regarding brand performance, we experienced double-digit consumption growth in six of our 17 categories, And I'll name them for you. Arm & Hammer Scent Boosters, Arm & Hammer Baking Soda, Arm & Hammer Clumping Litter, Batiste Dry Shampoo, Zycam Zinc Supplements, and Thoroughbreath Mouthwash. And we gained a share on eight of our 14 power brands. So that's a good story. Our shares are healthy. In Q2, online sales as a percentage of total sales was 16%. Our online sales increased 15% year over year. And we continue to expect online sales for the full year to be up, be above 15% as a percentage of sales. Since early 21, we have announced price increases to combat inflation. And through mid 2022, we have already announced price increases covering 80% of our global portfolio. And we did a second round of price increases in laundry and litter that just hit the shelves. Uh, but at the same time, cost inflation continues to climb. So since we spoke to you in April, we are now expecting $50 million of new incremental cost inflation. So the cumulative incremental cost inflation is $135 million since we gave our initial full-year outlook way back in February. The incremental $50 million of inflation combined with currency headwinds caused us to lower our full-year EPS outlook. We now expect 6% operating income growth offset by a much higher year-over-year tax rate. Now I'm going to comment on each business. First up is U.S. consumer business, which grew organic sales by 2.4%. Looking at market shares, as I said before, we had good numbers as eight of our 14 power brands gained share. Looking ahead, we expect even further improvement in our market share positions by year-end. as our fill rates will improve and promotional and marketing spend increases in the back half. Let's look at a few of the important categories. Let's start with laundry. The trade down to value detergent has begun. I'll give you some numbers. For example, during Q2, the liquid laundry category grew 7%, but value laundry detergent grew 11%, while premium laundry grew 4%. In litter, the category grew 12%. Both our black box, which is premium, and our yellow box, which is value, had double-digit consumption growth in Q2. The dry shampoo category was up 18% in Q2, while Batiste's consumption was up 43%. Our growth would have been higher if not for our difficulty in securing aerosol cans and actuators. Over in gummy vitamins, the sequential quarterly growth of the category is slowing down. For the last three quarters, the category growth rate has been 16%, 10%, and most recently 5%. We expect the category growth to turn negative in Q3 simply because we are lapping the consumption spike from the Delta variant in last year's Q3. And we continue to struggle with fill rates, which is hampering our ability to grow. Our most recent acquisitions are performing well. Thoroughbreath, which we acquired in December 2021, had a great quarter. with 33% consumption growth. Thoroughbreath grew share 3.1 points to 16.4% of the alcohol-free mouthwash category. Thoroughbreath is the number two non-alcohol mouthwash and is solidly the number four brand in total mouthwash. Zycam is our other recent acquisition. 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 55% in Q2 and is the number one brand in the cold shortening segment with a 75% share. Now, looking ahead to the rest of the year, the regular flu season in the U.S. is projected to be more severe than recent years based on what the southern hemisphere is experiencing right now. Next up is international. Despite significant disruptions, our international business delivered organic growth of 6.5% in Q2, primarily driven by Batiste in Europe, Vitamins and Batiste in Canada, and growth across the GMG business, which is our export business. In April, when we spoke to you, we expected flattish growth in Q2 and a continuation of the supply chain woes we experienced in Q1, such as fill level issues and delivery issues. Those actually proved to be less disruptive in the quarter than we anticipated. However, fill levels and delivery issues will continue to weigh on our global markets group in the near term. Next up is specialty products. Our specialty products business delivered a strong quarter with 6.3% organic growth, driven by both higher price and volume. Now I want to spend a couple of minutes discussing our more discretionary brands, since they are having an impact on our full-year revenue outlook. We see lower consumption for water flossers in the US as consumers trade down to lower price water flossers. Also, the Waterpik Asia Pacific flosser consumption has and is expected to decline as a result of lockdowns. Similarly, there is a lower demand for Waterpik showerheads, and this is due to less do-it-yourself projects. A lot of those got completed during COVID times. Waterpik is a discretionary purchase, and we continue to invest in demand-driving activities, such as lunch and learns to drive household penetration of flossers. It's fair to say gum health has not gone away, and still only 16% of the U.S. population flosses every day. Now, this is a business that has averaged high single-digit growth, top line, since we acquired them in 2017. And we're confident that the long-term growth prospects for Waterpik are sound. The other discretionary brand we have is Flawless. We're experiencing lower consumption, but that is largely due to the absence of our new products in this fast-moving beauty category. China lockdowns have impacted our manufacturing, and the new product launches that were planned for the first half have been delayed until the end of 22. Now I want to spend a few minutes on the health of the consumer, private label trends, innovation, and our ability to supply. Innovation is at a multi-decade high, and interest rates are rising to tamp down inflation. And while wages have risen, households are getting squeezed, and the consumers are making choices to make their dollars go further. Now, think back to April during our Q1 call. We called out the strengthening value detergent segment. In the latest four weeks, ended July 17th, value liquid laundry detergent categories up 8%, Deep value is up 1%, and premium is down 1%. So we think that trade-down is happening. Here's another early indicator of trade-down, this time in oral care. We had one major retailer point to the strength of manual toothbrush, which has held up well for them in contrast to declines in rechargeable and power toothbrushes. This trend impacts both Waterpik and SpinBrush, and here are a few numbers to illustrate the trend. The flosser category was down 7% in Q2, and battery-operated toothbrushes, the category was down 4% also in Q2. So we're keeping an eye on these and other trends. It's important to point out that 40% of our portfolio is value, and we expect to perform well in a difficult economic environment. Our largest businesses, 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. I want to highlight the early success of Arm & Hammer Baby Laundry Detergent, which has already achieved a 10% share of the baby laundry category at Walmart. The other product I'd like to highlight is Trojan Raw, which is the thinnest condom now on the market which is already the number six out of 400 SKUs sold at Amazon. I also want to mention our recent launch of a new lightweight litter that we call Hardball. We expect over time this will enable us to get our fair share of the lightweight litter category. For the cat owners on the call today, we named it Hardball because of the hard, ultra-compact clumps. It's quite a unique consumer experience. Now, regarding ability to supply, You may recall we hit bottom in Q1 with the Omicron resurgence when we saw our fill rates dip below 80%. The overall Q2 fill rates improved to 89%, although recovery in our high margin personal care side of the business is still lagging. We're on track to be near historical fill levels by the end of the year, and the good news is July continues to show improvement. We have confidence in our revised full year outlook for several reasons, improving fill rates, trade down to value, healthy new product innovation, and consumption strength in our recent acquisitions. Regarding support, we have key promotional events lined up in the second half, and two-thirds of our full-year advertising spend is concentrated in the second half. In closing, we expect our portfolio brands to do well, both in good and bad times, and we continue to hunt for new TSR accretive acquisitions. Next up is Rick to give you more details on Q2.

Thank you, Matt, and good morning, everybody. We'll start with EPS. Second quarter adjusted EPS was $0.76 flat to prior year. The $0.76 was better than our $0.70 outlook, primarily due to continued strong consumer demand and lower marketing spend due to below normal fill rates in our personal care business. The marketing impact was about $0.04 on the quarter. Good news is our overall fill rate continued to show improvement and hit 89% for Q2. Reported revenue was up 4.2%, reflecting a 1% drag from currency. Organic sales were up 3.4%, in line with our outlook. Matt reviewed the top line for the segment, so I'll go right to gross margin for the company. Our second quarter gross margin was 41.2%, a 220 basis point decrease from a year ago. Let me walk you through the Q2 bridge. Gross margin was impacted by 600 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 20 basis points from acquisitions, and a positive 100 basis points from productivity. Moving to marketing, marketing was down 14 million year-over-year. Marketing expense as a percentage of net sales was 7.8%, and we expect two-thirds of advertising to be concentrated in the second half as case bill improves. For SG&A, Q2 adjusted SG&A decreased 10 basis points year over year. Other expense all in was $15.1 million, a $3.7 million increase resulting from higher average debt outstanding. And for income tax, our effective rate for the quarter was 24.1% compared to 24% a year ago. And now to cash. For the first six months of 2022, cash from operating activities decreased 10% to $310 million due to lower cash earnings and higher working capital. driven by higher inventory levels. We expect inventory to get back in line by year end, and as of June 30th, cash on hand was $640 million. Looking ahead to Q3, we expect reported sales growth of approximately 2% to 4%, organic sales growth of approximately 1% to 3%, and gross margin contraction. Sequentially, we are decelerating from Q2 as our VMS business comes to COVID surge from a year ago, and we see a tightening in the consumer for our discretionary products, such as Waterpik and Flawless. Those two reasons, coupled with the inventory issues we've all heard from retailers, compress Q3 growth. Adjusted EPS is expected to be $0.55 per share, a 19% decrease from last year's adjusted Q3 EPS. This is largely due to higher SG&A, which is normalized levels of incentive comp versus a year ago, plus higher marketing and promotional support. We expect higher EPS in Q4 to offset the Q3 declines, driven by acceleration of organic growth in the absence of prior year one-time investments. And now to the full year. We now expect the full year outlook for reported sales growth to be approximately 4% to 6%, reflecting an incremental drag from currency of 1%. We now expect organic sales growth to be approximately 3% to 4%. As you read in the release, we now expect an incremental $135 million of cost inflation for the year, which is $50 million higher than our April outlook. On the longer time horizon, we continue to plan on offsetting inflation incremental pricing, laundry compaction, and productivity. We continue to anticipate full-year reported gross margin to be down versus 2021 as inflation is partially offset by pricing and productivity. We continue to expect gross margin to improve sequentially in Q3 and increase year-over-year in Q4. Marketing spend is now expected to be lower in 2022, driven by the lower spend in the first half of the year. We now expect full-year adjusted EPS to be flat to 2021 due to incremental inflation and currency headwinds. We continue to expect the full-year tax rate to be 23%. We expect cash from operations for the full year to be approximately $900 million, down from $920 million, and our full-year CapEx plan is now approximately $180 million as we continue to expand manufacturing capacity. In closing, we continue to perform in a volatile environment. Our share performance improved again in Q2, and we expect further market share gains in the second half. as we invest in our brands and supply chain fill levels improve. And with that, Matt and I would be happy to take any questions.