Church & Dwight Company, Inc.

Please stand by. Your program is about to begin. If you need assistance during your conference today, please press star zero. Good morning, ladies and gentlemen, and welcome to Church and Dwight's first quarter 2024 earnings conference call. Before we begin, I've 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'd now like to introduce your host for today's call, Mr. Matt Farrell, Chairman, 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 done, we'll open the call up for questions. Q1 was another solid quarter for Church and Dwight. Reported sales growth was 5.1%, beating our outlook of 4% thanks to stronger results across the board from domestic, international, and specialty products. Organic sales grew 5.2%, which exceeded our 4% Q1 outlook, with volume accounting for a very healthy 70% of our growth. Gross margin expanded 220 basis points. At the same time, we increased marketing spending in the quarter and gained market share in a majority of our categories. Adjusted EPS was 96 cents, which was 11 cents higher than our 85 cent outlook. The results were driven by higher than expected sales growth, gross margin expansion, and a lower tax rate. We continue to grow in the online class of trade with online sales as a percentage of global sales now reaching 20.5%. In March, we signed a definitive agreement to acquire Graphico, our Japanese distributor, for approximately $35 million. We expect the acquisition to close later this year. Graphico's annual sales are approximately $38 million. The business is based in Tokyo and has 59 employees. Since 2008, Grafico has partnered with Church & Dwight and driven OxyClean to be the number one powder pre-wash additive in Japan. The acquisition is expected to contribute to greater expansion of our business in Japan and the greater APAC region. We intend to leverage the capabilities of the Grafico team to bring additional Church & Dwight brands to Japanese consumers. Now I'm going to turn my comments to each of the three businesses. First up is the U.S. The U.S. consumer business had 4.3% organic sales growth. 3.3% of that was volume-driven, making this the third consecutive quarter of U.S. volume growth. Five of our seven power brands gained market share in the quarter, and private label market share in our categories remained relatively stable. Now let's look at a few important categories in the U.S., starting with laundry. Arm & Hammer liquid laundry detergent consumption was flat, while the category grew 2%. Many of you may recall we had pulled back on promotional activity in Q4, and that continued into early Q1. As our promotional activity normalized, Arm & Hammer liquid laundry saw share gains late in the quarter, and the brand has continued to perform well in April. Now elsewhere in laundry, Arm & Hammer unit dose and Arm & Hammer scent boosters both grew faster than their categories, and grew share in the quarter. Our Extra Liquid Laundry brand, which is our extreme value offering, grew consumption 6.3% and increased market share to 3.8%. Regarding new products, we have launched two new products into the detergent category, Arm & Hammer Deep Clean and Arm & Hammer Power Sheets. The first, Arm & Hammer Deep Clean, is our most premium Arm & Hammer laundry detergent. entering the mid tier of liquid laundry and delivering a superior clean at a price consumers can afford. The second new product is Arm & Hammer PowerSheets laundry detergent, which was launched online in August of 2023. Arm & Hammer was the first major brand to offer this new unit dose form in the US. Now due to its online success, PowerSheets is now available in select brick and mortar retailers. PowerSheets continues to grow online, It now has 9,000 reviews with a 4.5 rating, and both deep clean and power sheets are off to a great start in 2024, and we're excited about the early results we are seeing. Now over in litter. Arm & Hammer litter grew consumption 5% in Q1, which was in line with category growth. Our new lightweight Arm & Hammer hardball clumping litter is now expanding nationally after a successful in-market test in 2023. We expect this new litter to help Arm & Hammer capture a greater share of the lightweight litter category. To give you a couple of facts here, lightweight litter today accounts for 16% of the clumping litter category. Our share of lightweight clumping litter has grown from 4% to 6% since year-end 2023, but that compares to our 29% share in regular weight litter, so still a long way to go. Turning to personal care, Batiste continues to see strong consumption growth with consumption up 19% in Q1, growing share to 47.5%. Batiste continues to be the global leader in dry shampoo. We are meeting consumers' desire for long-lasting results with the launch of Batiste sweat-activated and Batiste touch-activated dry shampoos. And so far, consumers are posting excellent reviews for both of these new innovations. Now mouthwash. Thoroughbreath Mouthwash and Hero continue to perform extremely well. Thoroughbreath is the number one alcohol-free mouthwash brand and is now the number three brand in total mouthwash with a 16% share. Thoroughbreath recently entered the antiseptic segment of the category with the launch of Thoroughbreath Deep Clean Oral Rinse, which represents 30% of the category. Hero continues to drive the majority of growth in the acne category and has grown to become the number one brand in the larger acne category with 19% share. Hero continues to launch innovative solutions and patches combined with adjacent consumer needs, such as the recently launched Dissolve Away Daily Cleansing Balm. Now, there are two businesses, Gummy Vitamins and Waterpik, that created a drag on total company organic growth in Q1. First, Waterpik. The good news for Waterpik is consumption for our water flosser business is healthy. However, flosser shipments were affected by retailer inventory adjustments in the first quarter. This, combined with lower showerhead consumption, accounted for a 1% negative drag on organic revenue growth. But we expect this to be transient. The second is Gummies, which also created a 1% drag. The gummy vitamin category declined 5% in Q1, which was actually worse than our expectations for the category, and our consumption was down even greater, down 12%. We continue to move forward with our plan to stabilize our vitamin business through changes to packaging, messaging, and greater marketing investments that we've talked about with you in the past. I will close my comments on the U.S. by saying that overcoming the drag from these businesses and still posting a 5% organic sales growth for total company just illuminates the strength of our portfolio. Turning now to international and specialty products, our international business delivered organic growth of 8.8% in Q1. This was driven by strong growth in the subsidiaries, just a few call-outs, especially Mexico, Germany, U.K., and France. and also had growth from our global markets group. And finally, specialty products. Specialty products organic sales increased 7.2%, primarily due to record sales in our Eurasia business as SBD continues to expand globally. I want to wrap up my remarks by reiterating that the company is performing well with all three divisions, delivering strong growth. And I want to thank our global employees for their great efforts each and every day. Now, we rarely raise our full-year outlook, Given our fast start, we raised our outlook for gross margin and EPS growth, and we have confidence in our new full year forecast. And now I'm going to turn it over to Rick to give you some more color around the quarter.

Thank you, Matt, and good morning, everybody. We'll start with EPS. First quarter adjusted EPS was 96 cents, up 12.9% from the prior year. The 96 cents was better than our 85 cent outlook, primarily driven from higher than expected sales growth, gross margin expansion, and a lower tax rate. Reported revenue was up 5.1% and organic sales were up 5.2%. Organic sales were driven by volume of 3.7% and positive product mix and pricing of 1.5%. 70% of our organic growth was volume driven. And as Matt mentioned earlier, this makes three consecutive quarters of U.S. volume growth. Our first quarter gross margin was 45.7%, a 220 basis point increase from a year ago. primarily due to productivity, volume makes and pricing 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 130 basis points impact from price volume mix and a positive 130 basis points from productivity. This was partially offset by 10 basis points from currency and 30 basis points from inflation. Moving to marketing, marketing was up 29.7 million year over year, Marketing expense as a percentage of net sales was 10.1% or 150 basis points higher than Q1 of last year and led to share gains. For SG&A, Q1 adjusted SG&A increased 80 basis points year over year. Other expense all in was $20.9 million, a $2.2 million decrease primarily due to lower outstanding debt and higher interest income. We now expect other expense for 2024 to be approximately $80 million. For income tax, our effective rate for the quarter was 19.9% compared to 24.4% in 2023, a decrease of 450 basis points due to a high level of stock option exercise in Q1 of 2024. We continue to expect the full year rate to be approximately 23%. And now to cash. For the first three months of 2024, cash from operating activities increased to $263 million a decrease of $10.1 million with higher cash earnings offset by higher working capital. We now expect full-year cash flow from operations to be approximately $1.5 billion, up slightly from our previous $1 billion outlook. Capital expenditures for the first three months were $46.3 million, a $21 million increase from the prior year as capacity expansion projects proceed as planned. We expect 2024 CapEx of approximately $180 million, As we complete the major capacity investments that were initiated in 2023, we expect capital spending to return to historical levels of 2% of sales in 2025. And now for the full-year outlook. We continue to expect the full-year 2024 reported inorganic sales growth to be approximately 4% to 5%. We now expect full-year EPS in the range of 8% to 9% growth. This is up from our previous 7% to 9%. and is inclusive of costs related to the exit of the MEGALEC business as well as GRAFICO transaction costs. We now expect full-year gross margin to expand approximately 75 basis points, up from previous range of 50 to 75 basis points. Given our outstanding Q1 margin expansion of 220 bps, this outlook implies moderate gross margin expansion for the remainder of the year. We continue to expect an increase in manufacturing costs to be more than offset through productivity, mix, higher volume, and carryover of product pricing. We continue to expect marketing as a percentage of net sales to be approximately 11%. SG&A is now expected to be flat as a percentage of net sales compared to 2023, reflecting the investments we are making in our international e-commerce infrastructure and costs related to the Graphico acquisition Matt discussed earlier. For Q2, we have a strong outlook and expect reported sales growth of approximately 3.5%, organic sales growth of approximately 4%, We had a really strong April from a consumption perspective, so some might be expecting a higher organic growth outlook. Our 4% outlook reflects higher coupons and trade promotion in support of new products. We're fully lapping 2023 price increases, and we're lapping a year ago distribution gains for Hero. Moving on to the rest of the P&L, we expect moderate gross margin expansion in the quarter in Q2, as we have less of an impact from carryover pricing. Increased marketing spending to support our innovation pipeline. higher SG&A expense, and a significantly higher tax rate of 24% compared to the prior year of 17.9, which benefited from a high level of stock option exercises. This represents a roughly 7 cent drag on EPS. As a result, we expect adjusted EPS of 83 cents per share, down 10% versus last year adjusted Q2 EPS. And with that, Matt and I would be happy to take any questions.