Church & Dwight Company, Inc.

Good morning, ladies and gentlemen, and welcome to the Church and Dwight's first quarter 2025 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. Rick Durker, President and Chief Executive Officer of Church and Dwight. Please go ahead, sir.

All right. Good morning, everyone. Thanks for joining us today. I'll begin with some thoughts on the macro environment and review our Q1 results, and then I'll turn the call over to Lee McChesney, our new CFO. When Lee is done, we'll open the call up for questions. As you read in the release, we have several topics to discuss this morning, including Q1 results, portfolio changes, tariff management, U.S. consumer spending, and a revised full-year outlook. With that, let's turn to how we performed in Q1. During our presentation at CAGNI in February, we stated we expected our organic sales growth to be at the low end of 0 to 2 percent range due to retail Destocking and weakening consumer demand. As it turned out, organic sales decreased 1.2%, falling short of our outlook. Retailer destocking accounted for a drag of approximately 300 basis points on organic growth. The good news is our strong brand performance. We gained share in nine of our 14 major brands as our consumption outpaced category growth. 80% plus of our business grew volume share in the quarter. Contributing to our Q1 results is our success in the online class of trade, with online sales as a percentage of global sales now reaching close to 23%. In a few minutes, I'll contrast our Q1 consumption with category growth when I comment on the major categories. Regarding earnings per share, adjusted EPS was $0.91, beating our outlook by a penny. Now let's discuss the strategic actions we outlined in the press release. Each year, our management team reviews our brand portfolio with the board of directors, and in concert with that review, the company completes a valuation exercise for each and every brand. As a result of that review, the company is pursuing strategic alternatives for the Flawless, SpinBrush, and Waterpik showerhead business, which means we'll be shutting down or selling these businesses. These businesses generate $150 million of net sales, or around 2% of our total net sales, with below average profitability. We expect to take a charge in Q2 relative to this decision. This decision will prune our portfolio, sharpen our focus on core brands, and mitigate a significant tariff exposure, which is the next topic I would like to discuss. Turning to tariffs, while the tariff situation remains fluid, the company is currently projecting a gross 12-month run rate tariff exposure of $190 million. The net impact of the portfolio decisions and a series of supply chain actions is expected to reduce our tariff exposure by approximately 80%. The supply chain actions include no longer sourcing water pick flossers from China for the U.S. market. Our ability to move with urgency to execute these changes is a testament to the Church and Dwight culture. I'm very proud of the company and the reaction that we've done here. Now I'm going to turn my comments to each of the three businesses. First up is the U.S. Consumption was positive in the quarter for the U.S. business, while organic sales declined 3%, entirely driven by negative volume from retail destocking. So let's look at the trend line. In the U.S., consumer spending continues to sequentially weaken. For context, it's instructive to look back at our U.S. year-over-year category growth since around mid-2024. In the second half of 2024, category growth averaged 2.5%. In Q1, our categories grew around 1.5%. March was flat, and April was negative 1%. And remember, for context, over the last 10 years or so, category growth is typically around 3%. In addition to the consumer, retailers took inventory actions, which impacted our top line. Now I'm going to provide a bit of color for a few of our important categories. Let's start off with laundry detergent. Arm & Hammer liquid laundry detergent consumption grew 3.4%, in contrast to zero category growth. Arm & Hammer share in the quarter reached 14.7%. There's a similar story on unit dose. Arm & Hammer unit dose saw consumption growth of 26.9%. which drove 120 basis point share gain to reach a 5.5 share. This is in contrast to a weak unit dose category, which declined 1.1%. Now moving to litter, similar story as to laundry. The category was up 1.9%, while Arm & Hammer Litter Conception grew 2.3%, which outpaced the category, and share reached 24.9%. The gummy vitamin business continues to be a drag on the company's organic growth. The gummy vitamin category grew 4.8%, which is the second consecutive quarter of growth, the bad news is our consumption was down 19%. The plans that we shared with you on previous calls will begin to be visible in the market starting in May. Those actions include new products, an enhanced taste profile, and new creative marketing. We'll update you on our progress on the Q2 call. Next up is Batiste. Consumption was down 5% in the quarter, with share declining 3.4%. There are a couple of contributing factors. One is we were experiencing some supply chain issues that have since been resolved. In addition, a competitor had a significant price increase that impacted our dollar share. On a positive note, Batiste continues to be the global leader in dry shampoo, and this year we're launching Batiste Light. As a leading brand, our innovations continue to attract new users to the category and increase household penetration. Over at Mouthwash, TheraBreath continues to perform extremely well. While the mouthwash category was flat in Q1, TheraBreath consumption grew 26%. It is now the number two mouthwash with a 20.3% share. Remember, we believe there's a lot of runway here as our household penetration for TheraBreath currently sits around 10.5% versus the category of 65%. Hero is the number one brand in acne care with a 22% share and continues to drive growth. Hero grew consumption by 13%. outpacing a 1.1% decline in the category. Hero market share grew 280 basis points in the quarter. And similar to the TheraBreath story, we believe household penetration growth is key for this brand. Currently, it sits at 8.7% versus the category of 25%. Hero continues to launch innovative solutions and patches and is entering the growing body care segment in 2025 with the Mighty Patch Body. Looking ahead, we're excited about our pipeline of new products, which remain a key driver of our success. In 2025, we expect continued innovation to power our growth and build on our momentum, especially in several core categories where we're leading the way. And we spoke about many of these at our analyst day in New York. Now turning to international and SPD. Our international business delivered sales growth of 2.7% in the quarter. Organic sales increased 5.8%, largely due to higher volume. Growth was led by Hero, TheraBreath, and Waterpik, and was broad-based with all of our subs delivering growth. Finally, SPD organic sales increased 3.2% due to a combination of higher price and product mix and higher volume. This business continues to deliver, and we continue to be excited about the future. Looking ahead, our full-year organic growth outlook is now 0 to 2%, driven by a weaker U.S. consumer. We expect our Q1 brand share momentum to continue. bolstered by our new product launches, our distribution gains, and sustained full-year investment in marketing. After considering the trend line that I shared with you, we do not see a catalyst for improvement in the US consumer. Our outlook also reflects no bounce back from Q1 retailer destocking. For adjusted EPS, we now expect 0% to 2% growth, which reflects the impact of lower sales and the impact of tariffs. I'll close by saying that despite a slowdown in category consumption, our brands are strong. They're doing well. We're gaining both dollar and volume share across much of the portfolio with a healthy mix of value and premium offerings, and we're well equipped to navigate the current environment. The strategic actions we announced today will position the company well for the future, and we continue to be on the hunt for the right acquisitions. I'd like to thank all the Church & Dwight employees for executing well in a volatile environment, and now I'll hand it over to Lee for more detail on the quarter.

Thank you, Rick, and good day to everyone. Before I jump into the quarter, I do want to say thank you to Rick and the entire CHD team for the warm welcome. I've only been here for a month or so. I've already seen what makes this company such a strong performer as a team is focused on execution. We're acting swiftly to address the challenging macro environment that nearly every company is facing today. With that, let's dive into the first quarter and our outlook. We'll start with EPS. First quarter adjusted EPS was 91 cents. down 5.2% from the prior year. The 91 cents was slightly better than our 90 cent outlook. Reported revenue was down 2.4%, and organic sales was down 1.2%. The organic sales decline was due to lower volume of 1.4%, partially offset by positive pricing and mix of 0.2%. Our first quarter adjusted gross margin was 45.1%, a 60 basis points decrease from a year ago, with improved productivity, positive mix, and higher margin acquisitions being offset by the impact of commodity inflation, higher manufacturing costs, and lower volume. Let me walk you through our Q1 gross margin bridge. We saw 160 basis points from productivity, a favorable 10 basis points from the combination of mix and price, and a positive 10 basis points related to the acquisitions. Those factors were offset by the headwinds I just mentioned above, and 20 basis points related to FX. Moving to marketing, our marketing expense as a percentage of sales was 9.3%, where 80 basis points lower than one Q of last year. For the year, we are targeting 11% of net sales. And accordingly, we expect to continue our first quarter momentum in gaining market share. For SG&A, Q1 adjusted SG&A increased 40 basis points year over year, primarily due to the year over year volume change. Other expense decreased by $7.7 million, inclusive of lower interest expense and higher interest income. We continue to expect other expense for the full year to be approximately $50 million on an adjusted basis. In Q1, our effective tax rate was 22% compared to 19.9 in Q1 of 24, a 210 basis point year-over-year increase. The expected adjusted effective tax rate for the full year continues to be 23%. And now to cash. For the three months of 2025, cash from operating activities was $185.7 million, a decrease of $77.3 million versus last year due to lower cash earnings and the sales time impact on working capital. Capital expenditures for the first three months was $16.5 million, a $29.8 million decrease from the prior year. We expect 2025 CapEx of approximately 130 million as we return to historical levels of 2% of sales in 2025. Let's now take a few minutes to walk through our outlook. For the full year, we now expect our organic revenue outlook to be approximately zero to 2%. Previously, that was three to four. The sales outlook now reflects the slower category growth and the retailer inventory reductions that we don't expect to recover. Full year gross margin is now expected to contract 60 basis points versus 2024. Previously, that was a positive 25 basis points outlook. As we expect the tariff impacts, persistent commodity input inflation costs to offset the incremental productivity. We now expect full year adjusted EPS to be 0 to 2%, down from our previous view of 7 to 8. This is primarily due to the lower sales outlook and the tariff pressures. Cash flow from operations for the full year is now estimated to be approximately $1.05 billion due to the impact of our lower EPS and the one-time charges. For 2Q, we expect organic sales of approximately negative two to flat. And as a result, we expect adjusted EPS of 85 cents per share, a decrease of 9% versus last year's adjusted Q2 EPS. As our outlook implies, we expect EPS growth to be weighted towards the back half of 25 to the marketing investment timing versus last year. And finally, as we noted in the release, this adjusted outlook as of April 1st, 2025, excludes charges and the ongoing results for the Flawless, Spinbrush, and Waterpik showerhead business. Those charges are expected to be between $60 and $80 million, larger recorded in 2Q, and two thirds is expected to be non-cash. With that, Rick and I would be happy to take any questions.