Church & Dwight Company, Inc.

Good morning, everybody. Thanks for joining us today.

Good morning, ladies and gentlemen, and welcome to the Church in Dwight first quarter 2033 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, President and 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 Q1 results, and then I'll turn the call over to Rick Durker, our CFO. And when Rick is wrapped up, we'll open the call for questions. So Q1 was a solid quarter. Reported revenue was 10.2%. Organic sales grew 5.7% and exceeded our 1% Q1 outlook. Now, the 10.2% reported sales growth beat our outlook of 4% thanks to stronger results from several brands, including Hero, Thoroughbreaths, Arm & Hammer Laundry, and Arm & Hammer Litter, and exceptionally strong sales growth in our international business. The other good news is that the vitamin business and the water pick business hit their Q1 sales plan and were right on expectations. And finally, it's also fair to say that we had a degree of conservatism in our original Q1 outlook, both top line and bottom line. Our Q1 top line growth reflects the strength of our brands, both premium and value, and also our focus on execution. The combination of consumer demand and improved case fill, which is now over 93% in the U.S., is resulting in strong revenue growth. Something else that is noteworthy, we had flat volume growth in Q1, which is an encouraging sign after declining volumes in the last six quarters. And we now expect volume growth in our full year net sales outlook. Adjusted EPS was 85 cents, which was 10 cents higher than our 75 cents EPS outlook. And that was driven by higher than expected sales in the U.S. and especially in our international business, which posted 11.6% organic growth. In Q1, global online sales as a percentage of total sales was over 16%, and we continue to expect online sales for the full year to be above 16%. Private label shares remain consistent with historical weighted averages, Both domestic and internationally, private label is stable in our categories. And now I'm going to comment on each business. First up is the U.S. The U.S. consumer business had 5.5% organic sales growth, and eight of our 14 power brands held or gained market share in the quarter. Now I want to look at a few of the important categories in the U.S., and I want to start with laundry. If we look at the big picture, value laundry detergent grew 9% while premium detergent declined 3%. So the trade down to value detergent continues into 2023. During Q1, the liquid laundry category grew 3.6% while Arm & Hammer grew 9.3%. Arm & Hammer liquid laundry detergent grew share by 80 basis points in the quarter to 14.3%. So with more consumers migrating to Arm & Hammer laundry detergent, we have the potential for a long-term benefit to the Arm & Hammer brand, similar to the last recession. Now, over in litter, the category grew 12.7%, while Arm & Hammer litter grew 13.5%, so we gained market share in the quarter. We did see a trade down from our premium Arm & Hammer cat litter to our Arm & Hammer value litter, which is in the orange box, so consumers are staying in the Arm & Hammer franchise. And our Give It the Hammer advertising campaign which halos the many categories that Arm & Hair competes in, is resonating with consumers. Now, in dry shampoo, the dry shampoo category was up 11.8% in Q1, driven by Batiste consumption, which was up 20%. We now enjoy a 46.2% market share in dry shampoo. In the condom category, the condom category was up 4.1% in Q1, while Trojan consumption was up 5.3%. There again, we gained 80 basis points of market share thanks to our new Trojan Bearskin Raw condom and the success of more targeted marketing. Our most recent acquisitions, Thoroughbreath Mouthwash and Hero, are performing extremely well. Thoroughbreath, which we acquired in December of 2021, had just a great quarter with 70% consumption growth. Thoroughbreath grew share 6.8 points to 22.5% of the alcohol-free mouthwash. And as promised when we bought the brand, distribution of Thoroughbreath has doubled since we acquired it in December of 2021. Thoroughbreath is now the number two non-alcohol mouthwash brand and the clear number four in total mouthwash. We expect this brand to be a long-term grower for Church & Dwight. Now Zycam, this is a December 2020 acquisition, also delivered strong results this quarter. Zycam is the number one brand in the cold shortening segment with a 78% share. Now to our latest acquisition, Hero, which grew year-over-year consumption by 43.5% and gained 1.6 share points to achieve a 9.1 market share in the total acne treatments category. And distribution has expanded by 50% since the October acquisition date. And as we said in the release, there continues to be a great deal of excitement around here about the Hero brand and especially the Hero team. From our oldest brand to our recent acquisitions, our brands are driving category growth. I'm going to give you a few examples. Arm & Hammer Liquid Laundry Detergent, which has a 14% share of the liquid laundry category, drove 35% of the category growth. In the dry shampoo category, Batiste has a category-leading 46 share, but contributed 75% of the category growth. And in the mouthwash category, TheraBreath makes up 11% of the total category, but delivered over 50% of the growth in mouthwash. Next up is international. Our international business delivered organic growth of 11.6% in Q1, driven by strong growth in the subsidiaries and double-digit sales growth from our global markets group, and that was quite balanced across all of our global regions. And the growth was headlined by Batiste, Vitamins, FemFresh, Waterpik, and Gravol. As far as the consumer goes, similar to the United States, unemployment remains low in our international countries where we have subsidiaries. However, in many of these markets, particularly in Europe, the consumer is facing inflation in energy and food. But so far, consumption has remained strong. In China, While it is a relatively small market for us, we are experiencing stronger growth in Q1 and remain optimistic about the full-year opportunity. And finally, specialty products. Specialty products organic sales decreased 5.9%, primarily due to lower volume in the dairy business as low-priced imports returned to the U.S. market. I want to wrap up my remarks right now by saying consumption is strong. Our value offerings are performing well, as are our premium offerings. Acquisitions are on track. We're ramping up our marketing this year in support of our brands and new product launches. And we expect to have the opportunity to invest even more behind our brands in future quarters. And now I'm going to turn it over to Rick to give you some more color on Q1.

Thank you, Matt, and good morning, everybody. We'll start with EPS. First quarter adjusted EPS was $0.85, up 2.4% prior year. The $0.85 was better than our $0.75 outlook primarily due to continued strong consumer demand for many of our products and higher than expected gross margins. Reported revenue was up 10.2% and organic sales were up 5.7%. About half of the reported revenue growth year over year was hero. Organic sales were once again driven by pricing in Q1. However, as Matt mentioned, the fact that volume was flat was encouraging and gives us confidence that we will return to volume growth later this year. Matt covered the segments, so I'll go right into gross margin. Our first quarter gross margin was 43.5%, a 90 basis point increase from a year ago, primarily due to improved pricing, productivity, and the impact of the HERO acquisition, net of the impact of higher manufacturing costs. Let me walk you through the Q1 bridge. Gross margin was made up of the following, positive 160 basis points impact from price volume mix, positive 120 basis points from acquisitions, a positive 160 basis points from productivity, and 10 basis points from currency, partially offset by a drag of a 360 basis point impact due to higher manufacturing costs, including inventory charges related to discretionary brands, primarily flawless. For the balance of the year, we still expect sequential improvement in gross margin year-over-year expansion throughout the year. Moving to marketing, marketing was up $20 million year-over-year. Marketing expense as a percentage of net sales was 8.6%. were 70 basis points higher than Q1 of last year. For SG&A, Q1 adjusted SG&A increased 90 basis points year-over-year. Other expense all in was $23 million, an $8.6 million increase due to higher interest rates. Our expectations for interest rates for the remainder of the year remain unchanged from our prior guidance. We do not have any looming long-term debt refinancing. In fact, August of 2027 is the timing of our next maturity. For income tax, our effective rate for the quarter was 24.4% compared to 23.2 in 2022, an increase of 120 basis points. We continue to expect the full-year rate to be approximately 23%. And now to cash. For the first three months of 2023, cash from operating activities increased to $273 million due to higher cash earnings and improvements in working capital. We now expect full-year cash flow from operations to be approximately $950 million. Previously, we expected $925 million. The $25 million increase is driven by higher cash earnings and an improvement in working capital. Our full-year CapEx plan continues to be approximately $250 million as we continue to make capacity investments, and we expect to return to historical levels by 2025. And now for the full-year outlook. Given the strength of our Q1 results and our confidence for the remainder of the year, we are raising our outlook for sales, EPS, gross margin, and cash flow. We now expect the full-year 2023 reported sales growth to be approximately 6% to 7%, and organic sales growth to be approximately 3% to 4%. We now expect full-year EPS in the range of 2% to 4% growth. Given the strength of the business, we see opportunities to make incremental investments in our brands and capabilities in future quarters. We now expect full-year reported gross margin to expand approximately 120 basis points, and as we expect pricing and productivity to more than offset inflation. Our full-year inflation expectations remain unchanged from our previous outlook. Gross margins is expected to benefit from pricing, pack size changes, laundry concentration, and the full year impact of the higher margin hero business. As you read in the release, two items of note that are aiding our margin recovery are new litter pricing that went into effect on February 1st and the latest round of concentration for laundry. We intend to increase marketing as a percent of net sales to 10.5%. We continue to expect SG&A both in dollars and as a percent of net sales to increase compared to 2022, as the company's incentive compensation plan returns to normal levels in 2023. As a reminder, our EPS guidance includes a step up in our level of marketing investment as well as higher SG&A. For Q2, we have a strong outlook and expect reported sales growth of approximately 7% of organic sales growth of approximately 3% and gross margin expansion and higher marketing spending. The math would show a sequential decline in sales growth, but it's easy to explain. First, distribution pipeline fill for HERO and TheraBreath accounted for 1% of growth in Q1. That will not repeat in Q2. The other is around quarterly comps and how that impacts the current year. For the domestic business, there was a large improvement in case fill from Q1 to Q2 last year, which leads to a tougher comp in Q2 of this year compared to Q1 last year. As an example, our international business in Q1 in 2022, organic growth was zero, and then Q2 was 6.5% in 2022. As a result, adjusted EPS is expected to be 78 cents per share, a 2.6% increase from last year's adjusted Q2 EPS. And with that, Matt and I would be happy to take questions.

All right, thank you. So, as a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again.

Please stand by while we compile the Q&A roster.

For the first question, it comes from the line of Chris Carey from Wells Fargo. Chris, please go ahead.

Hi, good morning.

Hey, Chris.

So I just wanted to ask about... Chris, you're breaking up.

Hey, operator, why don't we go to the next question, and Chris can get back in the queue.

Right, sure. No worries. One moment, please, for our next question.

We're not hearing anything.

Our next question. All right, so for your next question, it comes from the line of Kevin Grundy from Jefferies. Kevin, your line is open. Please go ahead.

Great. Thanks. Good morning, everyone. Can you guys hear me okay? Yes. Great. So I want to start on the gross margin outlook, some of the key drivers there, maybe how you're seeing that a little bit differently given the strong start to the year and some of the moderation in commodities and sort of tie that in with how you're thinking about potential reinvestment. So the outlook now up 120 basis points on gross margin year over year. The prior outlook was 100 to 120, so modestly better. Rick, maybe just comment on how you're seeing the contribution from pricing, commodities, and productivity, sort of the key levers. And then Matt, maybe you'd want to chime in on just how you're thinking about restoring advertising and marketing levels. It was kind of a stair-step function, at least that was sort of the thinking coming into the year. Is there any thought to maybe accelerating that, you know, sort of within the context of advertising and marketing had been 12% of sales, dipped down to 10% this year. The thinking is 10.5%. How should we be thinking about the potential reinvestment if gross margin exceeds expectations? And I have a follow-up. Thanks.

Yeah. Thanks, Kevin. I'll go first. I think, you know, gross margin, we said in the release and in my script, that really we expect gross margin to expand the expansion of continues to improve throughout the year. We did do better than we expected in Q1. That's why we raised the full year. From a pricing perspective, as we go through the year, there will likely be less pricing overall. There will be less inflation overall. And productivity kind of ramps up as we go through the year as well. So all those things we think will be a tailwind.

um and to the extent that we over deliver on gross margin that's why we put the investment commentary in the release as well matt yeah he asked a good question with respect to marketing so everybody knows last year in 2022 our marketing as percentage sales was 10 was a kind of a low point for us and what contributed to that was all our difficulties with the fill rate etc and we said hey we're going to build that back we want to get back to 11 which we go halfway there in 2023 and you can see from you know we had a really good first quarter we let some of that flow through to eps on a full year basis so we took up our our estimate from zero to four to two to four but you know we always take a long-term view uh with the company so so yeah to the extent that we have even better performance in future quarters it's going to give us an opportunity to go higher than 10.5%. That's the percentage of sales. And we know whenever we're in a position like this, and it's been a few years since we've been flush, but there's three destinations. First is going to be growth. So we'll be looking at, hey, for marketing, can we go higher than 10.5%? For international, we have a lot of runway there. So one thing we could do there with respect to regulatory, we get third-party help to help us knock out product registrations that might have been scheduled for next year or the year after. And there's always R&D projects as well that we can allocate to. And then from an efficiency standpoint, like most companies, we're trying to automate this place. And there are discrete projects we can accelerate to automate some repetitive transaction processing in the company. And also, there's always IT investments. And finally, with respect to the environment, we're real focused on our sustainability. So there are projects with respect to sustainability like alternative packaging that we could fast forward as well. So it gives us the degrees of freedom. And so we're in a good spot here looking forward for the rest of the year, Kevin.

Yeah, I appreciate the comments. If I could just get in one more, Matt, just on and for Rick as well. Hero seems to be performing much better, I think, maybe than folks that modeled. How is it coming in relative to your own expectations presumably better, I would think. And why is that? Is the distribution ramped more quickly? Has the velocity been better? Is it both? And sort of why? And then maybe just updated thoughts on your outlook for the brand. And I'll pass it on. Thank you.

Yeah, I'll give you a couple comments, Kevin. It's Rick. I think both is the answer. Velocities are even better than we expected. And I think distribution gains and TDPs are even better than we expected, faster than we expected. I think in the Maybe in Matt's script, he commented about TDPs for Hero, and we're 50% higher since we bought the business already.

One moment for your next question.

For our next question, it comes from the line of Chris Carey from Wells Fargo. Chris, your line is open. Please answer your question.

Hi, good morning, and sorry about the technical difficulties there in the last question. So I just wanted to ask about personal care business. Clearly, we're continuing to see a little bit of sequential improvement. I guess, can you just comment on your visibility on this business? relative to even, you know, a few months ago, and also just what you're seeing from a kind of gap between what we can see in the consumption data, which remains stronger relative to what you're actually delivering from an organic sales standpoint, just any visibility on when you think, you know, your organic sales will start to look a little bit more than, like, what we see in the consumption data, which is a little bit better. Thanks so much.

Yes, I can hear you. By the way, we lost Chris's line at this time.

Should we move on to the next caller?