Church & Dwight Company, Inc.

Please stand by. Your conference is about to begin. Should you require operator assistance today, simply press star and zero. Good morning, ladies and gentlemen, and welcome to Church and DeWitt's second quarter 2024 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 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, 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 Q2 results, and then I'll turn the call over to Rick Durker, who's our CFO and Head of Business Operations. And when Rick is done, we'll open up the call for questions. So Q2 was another solid quarter for Church & Dwight. Reported sales growth was 3.9%, which beat our outlook of 3.5%. And that was thanks to strong results across the board from domestic, international, and specialty products. Organic sales grew 4.7%, which exceeded our 4% Q2 outlook, with volume accounting for a very healthy 3.5% of our growth. Adjusted gross margin, expanded 150 basis points. At the same time, we increased marketing spending, and we gained market share in the majority of our categories. Adjusted EPS was 93 cents, which was 10 cents higher than our 83 cent outlook. That was a quality quarter and Rick will take you through that later. The results were driven by higher than expected sales growth and gross margin expansion. And we continue to grow in the online class of trade with online sales as a percentage of global sales now reaching 21.2%. Now I'm going to turn my comments to each of the three businesses. First up, is the US consumer business with 3.8% organic sales growth. Volume growth was 3.3%, making this the fourth consecutive quarter of volume growth in the US. As you read in the release, Church and Dwight had the highest dollar consumption growth among our top 10 peers. And five of our seven power brands gained market share in the quarter, with a few hitting all-time highs. Now let's look at a few important categories in the US. innovation is a big contributor to our success this year. And as I comment on the categories, I'll highlight the success of our new product launches. I'm going to start with laundry detergent. So Arm & Hammer liquid laundry detergent consumption outpaced the 1.6% category growth and achieved an all-time high record share in the quarter of 14.8%, which is up 20 bps. Arm & Hammer unit dose Arm & Hammer scent boosters and extra liquid laundry brand all grew faster than their categories and also grew share in the quarter. 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 laundry detergent entering the mid-tier of liquid laundry. Arm & Hammer Deep Clean accounted for 40% of Arm & Hammer's liquid laundry detergent consumption growth in the quarter and is highly incremental to the Arm & Hammer franchise. The second new product is Arm & Hammer Power Sheets. This is a laundry detergent. Arm & Hammer was the first major brand to offer this new unit dose form in the U.S. last year in August. Since expanding the launch of this product into bricks and mortar retailers this year, we have seen high consumer interest in the form. Arm & Hammer PowerSheets is proven to be highly incremental to both the sheets category and the total laundry detergent category, and we are seeing repeat rates increase. We feel great about the future prospects for this product and form. Now I'm going to talk about litter. Arm & Hammer litter grew consumption 6% in Q2, which was almost double the category growth. Our new lightweight Arm & Hammer Hardball clumping litter is outperforming our expectations. as our share of the lightweight category has grown from 4.5% in Q1 to 8.2% in Q2. And this is important because lightweight accounts for 16% of the clumping-level category, and so we expect hardball to continue to grow in the coming quarters. Turning to personal care, the gummy vitamins business continued to be a drag on the total company organic growth in Q2. The gummy vitamin category declined 1.9% in Q2. which is an improvement from the 5% category decline in the past two quarters. The bad news is our consumption was down even greater. We were down 10.9%. We continue to move forward with our plan to stabilize our gummy business through new packaging, upgraded formulas to improve the consumer experience, new forms like chewables, and greater marketing investments that we've talked about with you in the past. However, the improvement is taking much longer than we anticipated. Next up is Batiste. Batiste continues to see strong consumption growth with consumption up 14.5% in Q2, growing share to 47%. Batiste continues to be the global leader in dry shampoo, and innovation is very important to the success of this brand. So listen to this. This year we launched Batiste Sweat Activated and Batiste Touch Activated dry shampoos. These products are bringing new users to the category, and already these two new products account for a 2% share of dry shampoo, and Sweat Activated is the number one new product in the category. Over in mouthwash, Thoroughbreath continues to perform extremely well. Thoroughbreath is the number one alcohol-free mouthwash and the number three brand in total mouthwash with a 17% share. This year, TheraBreath entered the antiseptic segment of the category with the launch of TheraBreath Deep Clean Oral Rents. It's important to note that antiseptics represents 30% of the $2 billion mouthwash category, and our launch into antiseptics accounted for 100 basis points of our 400 basis point year-over-year market share gain in total mouthwash. So that's a great indicator of the future of the antiseptic launch. Hero continues to drive the majority of growth in the acne category and has grown to become the number one brand in the acne category with a 20% share. Hero continues to launch innovative solutions and patches combined with adjacent consumer needs. An example would be the recently launched Dissolve Away Daily Cleaning Balm. Now a few comments about private label. Regarding private label, the good news is our weighted average private label exposure is relatively stable. We have seen notable private label share gains in gummy vitamins, where private label gained two share points, achieving a 16.7% share, which is back to pre-COVID historical highs. This has also contributed to our difficulties in that business. In the litter category, private label share has increased sequentially, in the last few quarters from 13.1% in Q4, 13.3% in Q1, and 13.5% in Q2. So current levels are historical highs. The good news is that it's a different story for us as Arm & Hammer Litter continues to gain share in spite of the private label strength. I'll close my comments on the U.S. by saying that although consumption has been strong through the first half of the year, we did experience a slowdown in June and July. And for context, and you read this in the release, our categories averaged four four point five percent dollar consumption growth through May of this year. But since then, it has been close to two percent. Now, this is not entirely a surprise, as we expected a deceleration as year over year pricing rolled off. However, unit consumption has also saw a deceleration from the first five months to what we saw in June and July. So it appears that the consumer may be getting extended and is making choices around spending habits. While we have only seen this trend for the last couple of months, we expect that categories are likely to grow at a slower pace than we experienced in the first half of the year. And as you know, our balanced portfolio of value and premium offerings performs, I should say, is well-suited to changes in consumer buying patterns. Turning now to international and specialty products, our international business delivered organic growth of 9.3% in Q2. This was driven by strong growth in the subsidiaries as well as our global markets group. And just a few call-outs, we had strong growth in Canada, Mexico, Germany, and our global markets group. And finally, specialty products. Organic sales increased 3.9%, and that's two quarters of solid organic growth for this business. We're confident that this division will achieve of 5% organic sales growth this year, which would hit our evergreen growth target. I want to wrap up my comments by reiterating that the company's performing well, all three divisions delivering strong growth. I want to thank all the Church and Dwighters out there for doing such a great job each and every day. And now I'm going to turn it over to Rick to give you some more color around the quarter and full your outlook.

Thank you, Matt, and good morning, everybody. We'll start with EPS. Second quarter adjusted EPS was 93 cents, up 1.1% from the prior year. The 93 cents was better than our 83 cent outlook and is a high quality beat, primarily driven from higher than expected sales growth and gross margin expansion. We'll walk through the details of the P&L. But this was a strong quarter with 8% growth of profit before tax versus the prior year, excluding the tariff benefit. Another important highlight for the quarter was the majority of our brands gained share. Reported revenue was up 3.9% and organic sales was up 4.7%. Organic sales was driven by volume of 3.5% and positive price mix of 1.2%. Volume was a primary driver of organic growth and we expect volume growth to continue for the rest of the year. And as Matt mentioned earlier, this makes four consecutive quarters of volume growth. Our second quarter gross margin was 47.1%, a 320 basis point increase from a year ago reflected a one-time benefit on a favorable ruling and rebate related to historical tariff payments. Excluding this impact, adjusted gross margin increased 150 basis points due to productivity, volume, and mix net of the impact of higher manufacturing costs. Let me walk you through the Q2 bridge. Gross margin components are as follows. Positive 80 basis points impact from price volume mix and a positive 120 basis points from productivity. This was partially offset by a 10 basis point drag from currency. and at 40 basis points dragged from inflation. Moving to marketing, marketing was up 20.2 million year-over-year. Marketing expense as a percent of net sales was 10.1%, or 100 basis points higher than Q2 of last year, and led to share gains. For SG&A, Q2 adjusted SG&A increased 20 basis points year-over-year, primarily due to international R&D and costs related to the Grafico acquisition. Other expense decreased by 7.8 million, primarily due to lower outstanding debt and higher interest income. For income tax, our effective rate for the quarter was 24%, compared to 17.9% in 2023, which is significantly higher than a year ago due to a high level of stock options exercised in Q2 of 23. We continue to expect the full year rate to be approximately 23%. And now to cash. For the first six months of 2024, cash from operating activities was $499 million, almost $500 million. A decrease of $9 million with higher cash earnings offset by higher working capital. We now expect full year cash flow from operations to be approximately $1.8 billion. Capital expenditures for the first six months was $76.6 million, a $13.4 million increase from the prior year as capacity expansion projects proceeded as planned. We expect 2024 capex of approximately $180 million as we complete the majority of those investments that were initiated in 2023. And we continue to expect capex to return to historical levels of 2% of sales in 2025 and beyond. And now for the full year outlook. As Matt mentioned, strong financial performance in the first half of the year and strong categories and share gains. As we move into the second half, consumption growth has moderated in many categories as the consumer remains under pressure. Consequently, we are tightening our organic revenue outlook and now expect organic sales growth to be approximately 4%, the low end of our prior 4% to 5% range. Reported sales growth is expected to be approximately 3.5%, which also reflects a drag from currency and the impact from divestitures. We continue to expect full-year adjusted EPS in the range of 8% to 9% growth, but now at the low end of the range. In round numbers, the sales call down would normally be offset by the gross margin raised at the EPS line. However, we have two other factors for the change. Number one, as you saw in the release, full-year SG&A is now expected to increase as a result of higher spend for Grafico. That drag went from a penny to two pennies as we make incremental investments. And then number two is dry powder in the event categories get more promotional in the second half. Turning to gross margin, we now expect expansion of approximately 100 to 110 basis points, up from our previous outlook of 75 basis points of expansion. We continue to expect an increase in manufacturing costs to be more than offset through productivity, mix, and higher volume. We continue to expect marketing as a percentage of net sales to be approximately 11% as we continue to grow share across many of our brands. And with that, Matt and I would be happy to take any questions.