Church & Dwight Co., Inc. (NYSE:CHD) Q4 2023 Earnings Call Transcript

Church & Dwight Co., Inc. (NYSE:CHD) Q4 2023 Earnings Call Transcript February 2, 2024

Church & Dwight Co., Inc. misses on earnings expectations. Reported EPS is $0.622 EPS, expectations were $0.64.

Matt Farrell: Okay gang. It’s a little bit like the Academy Awards. We’re going to be hearing cutlery and clinking of plates and whatnot. All right. Thank you. Welcome, everybody. This is our 2024 Analyst Day, and we got all of our sell-side analyst friends in the room and lots of major shareholders. So, let’s begin. We have a Safe Harbor statement. Encourage everybody to read that after class. And I’m going to start — virtually the entire management team, one of the best-looking management teams in CPG. I’m sure you’ll agree. And we’ve got kind of a packed agenda. I won’t read it to you, but got a number of people coming up, are going to talk to you today about financials, our new products, digital and also our international story.

So, here’s a quick look back to 2023. So, we had a great year for reported and also organic growth, our reported 9% and organic 5%. And we had gross margin expansion of 220 basis points. You can hold the applause for a minute. We had all-time high shares in a lot of our major brands, share gains. Marketing spending historically has been around 11%. We almost got all the way back to 10.9%. And we generated $1 billion in cash from operations. And finally, as you know, we’ve been investing in capacity for laundry, litter and vitamins and also adding to the capabilities of the company. And here’s our TSR. We show this to you every year, one, three, five and 10 years, especially what matters to our shareholders. 2022 was an abysmal year for us and we’ve recovered 2023.

And we got a lot of confidence going forward, which you’re going to walk out of the room here today thinking this is that. We’ve got a lot of confidence in our ability to grow in the US. You see that we tweaked our evergreen model in our press release, so we’re expecting 3% growth in the future in the US. International, we’ve tweaked that there to say we expect 8% growth internationally going forward. We have a wonderful lineup of new products in 2024, but we’ve been consistent in our innovation for many, many years. We’re becoming more and more digitally-savvy. So, one of the markers for that would be what percentage of your sales is online? And the answer is 20% of our sales is purchased online. That’s over $1 billion in sales. The new evergreen model is very healthy.

I’m sure you’re going to leave here today thinking that. We’ve got really strong fundamentals going forward. So, who are we? We’re a $6 billion company, largely US. You see 78% domestic and 17% international. Specialty Products is our original business from back in the 1840s. Historically, we’ve talked to you about 14 power brands, and those 14 power brands account for 85% of our revenues and profits. But today, as you saw under our release, in the future, we’re going to narrow our communication to investors and shareholders and analysts to seven of those 14. And those seven are ones that are in larger categories, and we also believe they have a lot of potential for our global growth. So, those are the seven, THERABREATH, VITAFUSION, HERO, of course, ARM & HAMMER, our biggest brand, WATERPIK, BATISTE, and OXICLEAN.

And they account for 70% of our revenues and profits. So, I’m going to run through what our winning formula is. First off is we have a very balanced and diversified business. We have low private label exposure, great innovation as you’re going to see here today, and we are an acquisitive company. For many, many years, we’ve said the highest and best use of our cash flow is to buy brands. All right. Here’s the balance. We’re pretty much 50-50 between household and personal care. As far as value versus premium, historically, it’s been 40-60 between value and premium, because of the growth of THERABREATH and HERO that shifted a little bit, but it’s still pretty solidly around 40-60. Low private label exposure, this is on a weighted average basis, it’s around 12%, and it’s been like that for many, many years.

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Q&A Session

Category-leading innovation. Barry Bruno is going to take you through a lot of the innovation group, things we’re launching in 2024. And we have a long history of acquisitions. So, if you went back to 2004, we had $1.5 billion in sales, and now we almost have $6 billion in sales in 2023. And our acquisition criteria is very specific, so we’re very fussy about what we’re going to buy. They have to be number one and number two brands. They need to have high-growth, high-margin brands, fast-moving consumables, asset light. We have to be able to bring something to the party and leverage our supply chain, our internal capabilities, and they have to have a long-term sustainable competitive advantage. All right. So, we’ve got seven of those power brands today and more to come.

And here’s our — I’m just going to wrap it up here just to remind you. Balanced portfolio, I think it’s really key to the long-term success of this company. Low private label exposure. We don’t have new exposure that some of our peers do. Innovation is the reason why our brands are so successful and the reason why our brand equity grows year-over-year. And finally, we’re an acquisitive company and we do it well. But I’m going to bring up Rick now to take you through the financials.

Rick Dierker: All right. Thanks, Matt. I’m going to talk to you about the quarter, the full year, which we finished really strongly, and also our outlook and our evolved evergreen model. So, first, the quarter. Our outlook was 5% from a net sales growth perspective. It was 4% organically. We came in at 6.4% and 5.3%, so just better in the top line all around. Gross margin, we just had expansion. We came in at 260 basis points, expanding versus a year ago. And then EPS was up. So just green arrows all the way. For the full year, similar story. We had 9% as an outlook for the top line and 5% for organic. We came in at 9.2% and 5.3%. Gross margin, we had expected to be up 210, were actually up 220, as Matt mentioned. And then EPS reported and adjusted are both better than we expected.

Cash flow, $1 billion was our outlook and we came in at $1.30 billion, so just strong cash flow all the way around. All right. So just I’m going to spend some time on the evergreen model. So for many, many years, we’ve been going through, and I begin and end almost all my presentations with the evergreen model, because that is the backdrop for the company. Organic net sales of 3%, gross margin expansion of 25 basis points, flat percentage for marketing higher dollars, and then we leveraged SG&A by 25 and that’s how we got to 50, and that led to 8% EPS growth. And that’s what we’ve been saying year-after-year-after-year. And we’re evolving it today. And we’re going to say 4%. For the last 10 years, if you look back at our history, we’ve been growing 4%.

But we’re saying we have confidence in the future and we’re going to continue to grow at 4%. I’ll get into that detail in a second. But the divisions would be 3% domestic, 8% international and 5% for SPD. Gross margin, we also think that this is the time that we are accelerating on productivity. Inflation is starting to moderate, and we have some fast-growing acquisitions that we’ve done that are helping — that are tailwinds to gross margin. Marketing, same story, flat percentage but higher dollars. And as we grow faster, that just means we’re going to invest even more dollars in marketing to help gain share and to help grow our brands. SG&A we’re going to leverage, maybe not as much as in the past, but still leverage. And in that number, we’re now investing largely behind international and largely behind e-com, and we’ll get into that detail in a second, too.

So operating margin still expands 50 basis points and industry-leading growth of 8%. That’s the new model. So let’s just go through the detail a little bit on organic. What gives us confidence? Well, we’re in fast-growing categories, and Barry will show you, as we talk about those seven, they’re extremely fast growing. We want to take share and we do that through marketing, through innovation, and we’ve done that year after year after year. THERABREATH and HERO, recent acquisitions, are fast-growing and international growth is accelerating to 8%. On the gross margin side, again, productivity is outpacing inflation. We have higher-margin acquisitions on the marketing side, and Surabhi is going to talk about it. We’re getting good ROIs in our spend.

That transition is helping. And then we have higher dollars as we grow the top line. And then SG&A, we’re putting in systems all over the world. Put in a China ERP system, we’re putting in an ERP system for our GMG business based out of Europe. All these investments are embedded in our numbers. We also are building capabilities around the world, regulatory, back office to support this fast-growing business called GMG within our international. And then analytics and e-commerce, those are capabilities we want to build. Okay, moving to 2024. So I just talked to the new evergreen model. The outlook is actually a step-up from that. The outlook is 4% to 5% on the top line. It’s 4% to 5% organically, excluding MEGALAC, excluding currency. Gross margin up 50 to 75 basis points, so to step up again from our evergreen model.

SG&A is leverage, operating profit expansion is higher than our evergreen model, 60 to 80. Tax rate is a little bit higher and EPS growth of 7% to 9%, and our cash from operations is $1 billion-plus. Now, we do have some timing within our EPS outlook. So the first half is essentially flat, and the second half is where all of our EPS growth is coming from. Why is that? Well, we’re purposely moving marketing spend from the second half to the first half, because we have one of the biggest new product introductions in major categories in our history. And Barry is going to walk you through what each and one of those are. But we’re excited about that. We’re going to go ahead and spend the money upfront to drive trial, drive awareness to do that. And then the second point is we had a great first half in 2023.

The first half of last year was a strong comp to compare against. We had 11% EPS growth last year in the first half. How do you think about — or how do we think about EPS growth? Well, 8% to 10%, if we strip out the MEGALAC, again, we’re not excluding MEGALAC. It’s included. These are the shutdown costs. These are the stranded costs. So adjusted EPS growth before MEGALAC is 8% to 10%. MEGALAC impact is a 1% drag. That’s why we get to 7% to 9%. If you think about the tax rate, that’s also a headwind of about 2% for operating performance. So we’re really strong operating performance is what I would want to leave you with for 2024. Let’s look at our track record. Ten years of growth. Last year, net sales growth grew 9.2%, one of our strongest years ever, and we’re going to have 4% to 5% growth on top of that growth in 2024.