Church & Dwight Company, Inc.

Good morning, ladies and gentlemen, and welcome to the Church and Dwight third 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, 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 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, and thanks for joining us today. I'll begin with a review of the Q3 results. Then I'll turn the mic over to Rick Durker, our CFO, head of business operation. Once Rick is done, we'll open the call up for some Q&A. All right, Q3 was another solid quarter for Church & Dwight. Reported sales growth was 3.8%, which beat our outlook of 2.5%, and that was thanks to strong results from our domestic, international, and specialty products businesses. Organic sales grew 4.3%, which exceeded our 3% Q3 outlook, with volume accounting for a very healthy 3.1% of our growth. Adjusted gross margin expanded 60 basis points. At the same time, we increased marketing spending, and we gained market share in the majority of our categories. Adjusted EPS was 79 cents, which was 12 cents higher than our 67-cent outlook. So a nice beat. The quality results were driven by higher-than-expected sales growth and gross margin expansion. Our online class of trade continues to perform well, with online sales as a percentage of global sales at approximately 21%. Next, I'm going to comment on each of the three businesses, and the first up will be the U.S. business with 3.3% organic sales growth. Volume growth was 2.6%, and this is the fifth consecutive quarter of volume growth in our U.S. business, with five of our seven power brands gaining market share in the quarter. Now let's look at a few important categories in the U.S. Innovation, of course, is a big contributor to our success this year and every year. As I comment on the categories, I'll highlight the success of the new product launches. I'm going to start off with laundry detergent. Arm & Hammer liquid laundry detergent consumption grew 2%, which outpaced a flat category, with Arm & Hammer's share in the quarter reaching 14.7%. The unit dose category declined 1.1%. However, Arm & Hammer unit dose saw a consumption growth of 16.5%, And we grew a share of 70 bps to 4.8% a unit dose. Regarding new products, this year we launched two new products into the detergent category, Arm & Hammer Deep Clean and Arm & Hammer Power Sheets. Deep Clean is our most premium laundry detergent, where we entered the mid-tier of liquid laundry. Deep Clean accounted for a little over 40% of Arm & Hammer's liquid laundry detergent consumption growth in the quarter, and it's highly incremental to our franchises. The second new product is PowerSheets. This is a new form of laundry detergent. And you may remember in August of 2023, Arm & Hammer was the first major brand to offer this new unit dose form in the US. Our fresh linen scented sheet is now the number two sheet on Amazon. And since launching this product into bricks and mortar this year, we have seen high consumer interest in the form. Arm & Hammer is the number one sheet brand at Kroger. It's also the number two brand in all food. We feel great about the future prospects for this new form. Now I'm going to switch over to litter. The category was flat in Q3. That's category consumption. As expected, Arm & Hammer litter consumption declined 1.5%, and this reflects the absence of a competitor out-of-stock situation, which benefited our prior year market share. The good news is we've held on to about half of our prior year share gains. Our new lightweight Arm & Hammer clumping litter, which is our new product this year, is outperforming our expectations as our share of the lightweight category continues to grow. This is important because lightweight accounts for 17% of the clumping litter category. Hardball became the number two major brand in lightweight segment in Q3. Now I'm going to switch over to personal care. The gummy vitamins business continues to be a drag on the company's organic growth. The gummy vitamin category declined 0.3%. We can call that flat in Q3, which is an improvement from the category declines in the past few quarters. The bad news is our consumption was down even greater. We were down 10%. The improvement of this business is taking far longer than we expected. and as you saw in the release, has reduced our expectations about the long-term growth and profit of the business. This resulted in a $357 million write-down of the book value of the assets. We continue to move forward with our stabilization actions, which include new packaging, upgraded formulas to improve the consumer experience, and higher marketing investments, which gives us some degree of optimism for the business as the innovation that we have coming. in 2025. Next up is Batiste, which continues to see strong growth with consumption up 6% in Q3, growing share to 46%. Batiste continues to be the global leader in dry shampoo. This year we launched Batiste Sweat Activated and Batiste Touch Activated. These innovations continue to bring new users to the category, which is very important. And already these two new products account for 2% of the dry shampoo category. And Sweat Activated is the number one new product on dry shampoo. Over in mouthwash, Thoroughbreath continues to perform extremely well. The mouthwash category was up 5% in Q3, but here's a few stats. Alcohol-based mouthwash was down 1%, while non-alcohol category grew 11%. TheraBreath is the number one alcohol-free mouthwash with 35 shares and is the number three brand in total mouthwash with an 18 share. Getting over to new products, this year we entered the antiseptic segment of the category with the launch of TheraBreath Deep Clean Oral Rinse. It's important to note that the antiseptic subcategory represents about 30% of the $2 billion mouthwash category. And our launch into antiseptics has accounted for 100 basis points of our 400 basis points year-over-year growth in market share. So great indicator of the future for the antiseptic launch. Hero is the number one brand in acne care with a 22 share and continues to drive the majority of the growth in the category. The patch category grew 42%. While Hero grew patch market share by 1.7 basis points to 57 shares. So Hero continues to launch innovative solutions and patches, and we're very bullish about the future of that brand. I'm going to provide you with a couple of remarks on promotional levels in our household categories. In the liquid and laundry detergent, we've seen stable sold-on promotion in the low 30s over the last few quarters. Over in unit dose, pretty much the same story. Percentage sold on promotion is also stable, averaging in the low 30s over the last few quarters. Litter is a different story. In litter, conditions are different and promotional levels have increased. And here's the trend line. So if you look at Q1, sold on deal was 15.5%. Q2 was a little over 18%. In Q3, it was 19.5%. It's going to be even higher in Q4. The increase in litter promotions is primarily driven by one major competitor, where sold-on deal exceeds 40%. All right. Turning now to international and specialty products, our international business delivered organic growth of 8.1% in Q3. That's right on our algorithm of 8%. This was driven by strong growth in every one of our subsidiaries as well as our global markets group. Finally, specialty products. Organic sales increased 7.5%. That's three quarters now of solid organic growth for this business. We're confident that this division will achieve 5% organic sales growth this year and will hit our evergreen growth target. So we feel great about our progress in specialty products. This is commentary on the consumer. In July, we noted a deceleration in consumption in our categories. This continued in Q3 as we expected. After seeing 4.5% growth in our categories for the first five months of the year, June, July, and August were closer to 2.5%. Now, in September, we saw consumption in our categories strengthen to about 3%. And then in October, category consumption was up 5%. But let's all remind ourselves that the hurricane and the port strike no doubt influenced those results. So we remain cautious in Q4 regarding the U.S. consumer and category growth rates. I want to wrap up my comments by reiterating that the company is performing well with 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. Great team. And now I'm going to turn it over to Rick to provide more color on the quarter and full year outlook.

All right. Thank you, Matt. And good morning, everybody. We'll start with EPS. On a reported basis, we had a loss of $0.31 a share, primarily due to non-cash asset impairment of our vitamin business. Third quarter adjusted EPS was $0.79, up almost 7% from the prior year. The $0.79 was better than our $0.67 outlook and is a high-quality beat, primarily driven by higher than expected operating profit. Reported revenue was up 3.8% and organic sales were up 4.3%. Organic sales were driven by volume of 3.1% and positive price mix of 1.2%. Volume was again the primary driver of organic growth and we expect volume growth to continue in Q4. Our third quarter adjusted gross margin was 45%, a 60 basis point increase from a year ago, primarily due to productivity, volume, mix net of the impact of higher manufacturing costs. Let me walk you through the Q3 bridge. The gross margin was made up of the following, positive 140 basis points impact from volume and mix, a positive 130 basis point impact from productivity, and a 10 basis points positive impact related to acquisitions. This was partially offset by 220 basis points from higher manufacturing costs. Moving to marketing, marketing was up 18 million year-over-year. Marketing expense as a percent of net sales was 12.3%, or 80 basis points higher than Q3 of last year, and helped drive share gains. For Q3, adjusted SG&A increased 20 basis points year-over-year, primarily due to international R&D and IT investments. Other expense decreased by 11.9 million. We now expect other expense for the full year to be approximately 65 million on an adjusted basis. In Q3, there was a tax benefit of 25.9%, and this was related to the vitamin impairment. Excluding that impact, our effective rate was 23.8%, and that compares to 24.1% in Q3 of 2023. The expected adjusted effective tax rate for the full year is now approximately 22.5% versus the previous outlook of 23%. And now to cash. For the first nine months of 2024, cash from operating activities was $854 million. an increase of almost $70 million driven by higher cash earnings. We now expect full year cash flow from operations to be approximately $1.1 billion. We're having a great year in regards to cash. CapEx for the first nine months was $125 million, almost a $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, while we saw U.S. consumption in our categories improve slightly towards the end of the third quarter, we remain cautious regarding the U.S. consumer and category growth rates for the remainder of the year. We continue to expect our organic revenue outlook to be approximately 4%, and reported sales growth to be approximately 3.5%. We continue to expect full-year adjusted EPS to be approximately 8%, During the gross margin, we now expect expansion of approximately 110 basis points at the high end of the previous range, and we now expect marketing as a percent of sales to be above 11%. And as you read in the release, to the extent our business does better than our outlook, we plan on incrementally investing behind marketing and SG&A to help enter 2025 with momentum. And with that, Matt and I would be happy to take any questions.