Church & Dwight Company, Inc.

Good morning, ladies and gentlemen, and welcome to the Church and Dwight third quarter 2022 earnings conference call. Before we begin, I've been asked to remind you that on today's call, the company's manager may make forward-looking statements regarding, among other things, the company's financial objectives and forecast. These statements are subject to risk and uncertainties and other factors that are described in the details 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, thank you, operator. Good morning, everyone. Thanks for joining us today. We've got a lot to talk about. I'm going to begin with a review of Q3 results. Then I'll turn the call over to Rick Durker, our CFO. And when Rick's done, we'll open a call for questions. First off, I'll say we revised our full-year revenue outlook in early September, and we're tracking to hit 3%, which was the midpoint of our 2% to 4% range at that time. In Q3, reported revenue was up 0.4%. And that exceeded our expectation of minus 1%. As you read in the release, while the majority of our brands are performing well, we have three businesses that are coloring our results this year. And those are Waterpik, our vitamin business, and Flawless. And those businesses accounted for a 6% sales headwind in Q3. Adjusted EPS was 76 cents. Now, this was 11 cents higher than our EPS outlook, driven by higher international sales, lower SG&A, and timing of marketing spend. The U.S. portfolio grew consumption in 11 of 17 categories. The trade down to value laundry detergent continued as Arm & Hammer liquid detergent achieved an all-time high market share of 14.3%. Arm & Hammer clumping litter, Batiste dry shampoo, and TheraBreath mouthwash also achieved all-time high market shares. Trojan condoms returned to share growth And OxyClean Stain Fighters and Arm & Hammer Baking Soda delivered double-digit consumption growth. The strong performance of these businesses is offsetting the impact of the discretionary businesses and vitamins on reported sales. In Q3, our most discretionary brands, Waterpik and Flawless, which account for approximately 10% of our global sales, were impacted by lower consumer spending. Similarly, the gummy vitamin category, in which our VitaFusion brand competes, was impacted by a decline in consumption as fewer households purchased vitamins and supplements, and we were also lapping the COVID Delta variant in the prior year quarter. In Q3, online sales as a percentage of total sales was 15%, and we continue to expect online sales for the full year to be above 15%. Now I'm going to comment on each business. First up is the U.S., U.S. consumer, which had 1.7% organic sales decline. Looking at market share, seven of our 14 power brands held or gained share. Looking ahead, we expect even further improvement in our market share positions in Q4, as we expect our highest fill rates of the year and our highest quarterly promotional and marketing spend. I want to look at a few of the important categories in the U.S. I want to start with laundry. The trade-down to value detergent, which began in Q2, continued in Q3. During Q3, the liquid laundry category grew 3.1%. Now, if we break that down, value laundry detergent grew 9%, while premium laundry declined 3%. Arm & Hammer unit dose also benefited from the trade-down. Our Arm & Hammer pods grew consumption by 25% in the quarter compared to unit dose category growth of 4.5%. With more consumers migrating to Arm & Hammer, the long-term benefit to the Arm & Hammer brand is similar to the last recession. In litter, the category grew 11%, while Arm & Hammer litter grew 14%, so we gained share in the quarter. Both our black box, which is premium, and our yellow box, which is value, had double-digit consumption growth in Q3. In stain fighters, OxyClean gained share as consumption was up 10%, while the category grew 7%. The dry shampoo category was up 18% in Q3, driven by Batiste consumption, which was up 37%. And we now enjoy a 46% market share in dry shampoo. The condom category was up 3.5% in Q3, while Trojan consumption was up 4.5%. So again, we gained 60 basis points of market share, thanks to our new Trojan Bare Skin Raw condom and the success of more targeted marketing. Our most recent acquisitions are performing well. Thoroughbreath, which we acquired in December of 2021, had a great quarter with 46% consumption growth. Thoroughbreath grew share 4.3 points to 17.8% of the alcohol-free mouthwash category. Thoroughbreath is the number two non-alcohol mouthwash and the clear number four brand in total mouthwash. Thoroughbreath is expected to be a long-term grower for Church & Dwight in the future. Zycam also delivered strong results this quarter. You may recall we acquired Zycam in December of 2020. Zycam is the number one brand in the cold shortening segment with a 76% share in Q3. Now looking ahead to Q4, the regular flu season in the U.S. is projected to be far more severe than recent years. And as a reminder, approximately 40% of Zycam consumption happens in Q4. We closed on our latest acquisition, Hero, in mid-October. Now, while we did that own Hero in Q3, the brand performed extremely well, growing consumption 56% and gaining 3.6 share points to achieve a 14% market share in the total acne treatments category. There's a great deal of excitement here about this business as we look ahead to 2023 and longer term. all right next up is international our international business delivered organic growth of 3.2 percent in q3 primarily driven by the international subsidiaries which posted strong growth in the quarter on the other hand our global markets group has been impacted by weakening demand in china due to lockdowns and we expect this to continue in q4 finally specialty products our specialty products business delivered one percent organic growth in the quarter but keep in mind that the 1% organic growth is on top of 18.5% organic growth in Q3 2021. Now I want to spend a couple minutes discussing our two discretionary brands, Waterpik and Flawless, which have longer purchase cycles. And after that, I'll talk about the vitamin business. First, Waterpik. So Waterpik is the number one brand in water flossers. We continue to see lower dollar consumption for water flossers in the US. However, Waterpik unit volumes are actually positive both in Q3 and year to date as consumers trade down to lower priced cordless models. If we look back at 2021 and 2020, the consumer was healthier and a good portion of our growth came from our super premium products like Sonic Fusion. In 2022, the decline in our flosser sales is driven by trade down and inventory reductions by retailers. Shipments for full year 2022 are expected to decline approximately 20% as retailers reset their inventories and product mix. We continue to invest in demand-driving activities for Waterpik, such as lunch and learns with dentists and hygienists to drive household penetration of flossers. And in 2023, the next year, we expect to return to pre-pandemic levels for lunch and learns. Now remember, Waterpik is the Kleenex of water flossers. And 9 out of 10 dentists recommend the product by its brand name. This is extremely important as 60% of consumer purchases are driven by a recommendation from a dental professional. It's fair to say that gum health is not going away and still only 16% of the US population flosses every day. Now looking back, Waterpik averaged high single digit top line growth from 2017 when we acquired the business through 2021. So we're taking a big step back in 2022, but we're confident that the long-term growth prospects for Waterpik are sound. Now, the other discretionary brand we have is Flawless, which is the number one brand in women's health hair removal. We're experiencing lower consumption in this category, which resulted in higher inventories at retail. Our share has been further hurt by the delay in launching new products caused by the China lockdowns at our supplier. After the conclusion of a 30-month earn-out period, which ended in 2021, our marketing team took over the front end of the business and has been narrowing the product assortment to the winners. So you're familiar with the brand of Face, Brow, Manny, and Teddy. And we're also shifting the focus from older consumers to digital targeting of younger consumers in the beauty space. Now, we believe these changes will have a positive impact on the long-term prospects for the business. Now, finally, over in VMS, we have the number one adult gummy vitamin. Category consumption is being impacted as temporary consumers who were interested in prevention during COVID times have exited the category. Beyond category dynamics, the VitaFusion brand has also lost some share due to our lower fill rates, particularly earlier in the year. It's clear that fewer households are purchasing vitamins and supplements post-COVID, and a category is being impacted by the recession. So here are some stats. For the last three quarters, the category growth rate has been plus 10% in Q1, plus 5% in Q2, and most recently minus 8% in Q3. Now, the minus 8% compares to a plus 33% increase in the category in Q3 2021. And there is some good news here. In the first few weeks of October, the rate of category decline has moderated to minus 4%. And longer term, the transition from pills and capsules to gummy vitamins gives us confidence in the long-term appeal of the Gummy category. And I'll conclude with a few takeaways that I'd like to leave you with. The majority of our business is strong. We believe the three brands that are coloring our numbers have good long-term prospects. Case fill is now over 90% and improving. We've ramped up our marketing and trade promotion investment in the second half, especially in Q4, and we have confidence in our Q4 outlook. I'm going to turn it over to Rick to give you more details on Q3.

Thank you, Matt, and good morning, everybody. We'll start with EPS. Third quarter EPS was 76 cents, down 5% the prior year. The 76 cents was better than our 65-cent outlook, primarily due to higher sales, lower SG&A expense, and timing of marketing spend. Reported revenue was up 0.4%, including a 1% drag from currency. Revenue was higher than our outlook of minus 1%. Organic sales declined 0.7% as volume was down 8.5%, partially offset by positive pricing of 7.8%. Matt reviewed the top line for the seconds, so I will go right to gross margin for the company. Our third quarter gross margin was 41.7%, a 250 basis point decrease from a year ago. Let me walk you through the Q3 bridge. Gross margin was impacted by 580 basis points of higher manufacturing costs, primarily related to commodity inflation, distribution, and labor costs. These costs were offset by a positive 190 basis point impact, largely from pricing, positive 20 basis points from acquisitions, and a positive 120 basis points from productivity. Moving to marketing, marketing was down 20 million year over year, although this was a significant increase of 40 million sequentially from our first half 2022 levels of 8% of sales, as our fill rates have improved. Fill rates in Q3 were 91%, and we expect further improvement in Q4. Marketing expense as a percentage of net sales was 10.7% in the quarter. We expect a continued increase in marketing spend in Q4 to approximately 13% of net sales. For SG&A, Q3 adjusted SG&A decreased 30 basis points year over year. Other expense all in was $19.4 million, a $7.3 million increase resulting from higher average outstanding debt levels and higher interest rates. And for income tax, our effective rate for the quarter was 20.2% compared to 20.4% a year ago. And now to cash. For the first nine months of 2022, cash from operating activities decreased $119.5 million to $534 million, due primarily to higher inventory levels from Waterpik, Flawless, and Vitamin. We expect inventory levels to come down over the next 12 months. And as of September 30th, cash on hand was $438 million. Looking ahead to Q4, we expect reported sales growth of approximately 2%, organic sales decline of approximately 1%, and gross margin contraction. Adjusted EPS is expected to be $0.58 to $0.62 per share, a 3% to 9% decrease from last year's adjusted Q4 EPS. This decline is primarily due to significantly higher quarterly tax rate of 25% versus an unusually low tax rate in the prior year of 3.7%. which was largely due to a high number of stock option exercises a year ago. Turning to the full year, we expect the full year outlook for reported sales growth to be approximately 3%, the midpoint of our previously 2% to 4% range. We expect organic sales growth to be approximately 1%. The strong consumption across most of our businesses in 2022 has offset the slowdown in discretionary brands, as Matt talked about. We now expect full year adjusted EPS to be 293 to 297, a decline of two to 3% compared to 2021. The range is influenced by the extent of margin mix within the portfolio. We continue to expect the full year tax rate to be 23%, and we now expect cash from operations for the full year to be approximately 800 million. And our full year CapEx plan is now approximately 170 million, as we continue to expand manufacturing capacity in anticipation of future growth in laundry and litter. In closing, we continue to perform in a volatile environment, We expect further market share gains in Q4 as we invest in our brands and our supply chain fill levels continue to improve. And with that, Matt and I would be happy to take any questions.