Church & Dwight Co., Inc. (CHD) Earnings Call Transcript & Summary

Welcome to the 2020 Annual Meeting for Church & Dwight Co. Our host for today's call is Matt Farrell, Chairman of the Board of Directors. [Operator Instructions] I will now turn the call over to your host, Mr. Farrell. You may begin, sir.

Good afternoon, ladies and gentlemen. The meeting will now come to order. I want to welcome all to the 174th Annual Meeting of Stockholders of Church & Dwight. I am Matthew Farrell, Chairman of the Board of Directors of Church & Dwight. If you registered for the meeting using your proxy number, you may vote at any time prior to the closing of the polls using the link marked Vote Here in the lower right of your screen. The meeting materials may be referenced via the lower right of your screen, where you will find links to the proxy statement, annual report, agenda and rules of conduct. In the interest of protecting the health and well-being of our stockholders, employees, directors, officers and representatives, we are pleased to hold our annual meeting virtually. While the meeting is virtual only, we welcome questions from our stockholders. We are taking questions that are submitted online. You can submit your live questions through the text box located in the lower left corner of your screen. Though we may not be able to answer every question, we will do our best to provide a response to as many as possible, and we'll address any appropriate unanswered questions, depending on the subject matter and relevance, either directly or on our corporate website shortly after the meeting. We will respond to your questions after the business portion of the meeting, and again, at the end of my overview of the company's 2019 results. To conduct an orderly meeting, we ask that you abide by the meeting rules. These rules of conduct are available on the meeting website. As is our custom, we will conduct the business portion of our meeting first, followed by a review of the company's 2019 results. Thank you for your cooperation with these rules. I will begin the meeting today by first introducing the members of our Board of Directors. James Craigie, our former Chairman and CEO; Bradley Irwin, our Lead Director; Robert LeBlanc; Penry Price; Ravi Saligram, Chair of our Governance and Nominating Committee; Robert Shearer, Chair of our Audit Committee; Janet Vergis; and Arthur Winkleblack, Chair of our Compensation and Organization Committee; and finally, Laurie Yoler. This is Mr. Robert LeBlanc's last meeting as he is retiring from the Board effective today. Bob has been a Board member for 22 years, 9 of which he served as our Lead Director. Thank you, Bob, for your many, many years of service to the Board. Next, I will introduce a few of the Church & Dwight executives. Here with me are Patrick de Maynadier, Executive Vice President, General Counsel and Secretary; and Rick Dierker, Executive Vice President and CFO. In addition to Rick and Patrick, the remaining members of the executive leadership team are also participating today, and they are Britta Bomhard, Executive Vice President and Chief Marketing Officer; Steve Cugine, Executive Vice President of International and Global New Product Innovation; Rene Hemsey, Executive Vice President, Global Human Resources; Carlos Linares, Executive Vice President, Global Research and Development; Rick Spann, Executive VP, Global Operations; and Paul Wood, Executive Vice President, U.S. Sales. Jeff Mraz, the representative from Deloitte & Touche LLP, our independent auditor, is also present at the meeting through the webcast. During the Q&A period at the end of the meeting, Mr. Mraz will be available to answer questions concerning the company's financial statements. Anna Hagberg of CT Hagberg LLC has been appointed as Inspector of Election for the meeting and took the oath of Inspector of Election earlier today and is also present at the meeting through the webcast. Mr. de Maynadier, who is serving as Secretary of this meeting, has delivered an affidavit of mailing establishing that notice of this meeting was duly given. All stockholders of record at the close of business on March 3, 2020, are entitled to vote at this annual meeting. A list of our stockholders of record who are entitled to vote is available on the meeting website for inspection by the stockholders. I have been advised by the Inspector of Elections that the shares represented at the meeting, either in person or by proxy, are sufficient to constitute a quorum for the purposes of transacting business. Ms. Hagberg, do you have a report?

Yes. The stockholders list shows that holders of 245,776,372 shares of common stock of the company are entitled to vote at this meeting. There are, represented in person or by proxy, 216,082,232 shares of common stock or approximately 88% of all of the shares entitled to vote at this meeting. Therefore, we have a quorum.

Thank you. Because holders of a majority of the shares entitled to vote at this meeting are present in person or by proxy, I declare this meeting to be duly convened for purposes of transacting such business as may properly come before it. The next order of business is a description of the matters to be voted on at today's meeting. If you haven't voted yet, please do so now as the polls will be closed after my reading of the proposals. The first proposal is -- to be voted upon is the election of 5 directors to serve until the annual meeting of stockholders in 2021, and in each case, until their successors are duly elected and qualified. The Board of Directors recommends the election of the following persons as directors of the company: James Craigie, Brad Irwin, Penry Price, Janet Vergis and Art Winkleblack. The second proposal to be voted upon is an advisory resolution on the compensation of the named executive officers set forth in the company's proxy statement. The Board of Directors recommends a vote in favor of the compensation of our named executive officers. The third proposal to be voted upon is the approval to amend and restate our amended and restated certificate of incorporation to give holders of 25% of company's stock that meet certain requirements the right to request a special meeting. The Board of Directors recommends a vote in favor of the amendment and restatement to our amended and restated certificate of incorporation to give holders of 25% of company stock that meet certain requirements the right to request a special meeting. Fourth proposal to be voted upon is the approval to amend and restate our amended and restated certificate of incorporation to eliminate certain supermajority voting requirements to amend certain of its provisions. The Board of Directors recommends a vote in favor of the amendment and restatement to our amended and restated certificate of incorporation to eliminate certain supermajority voting requirements to amend certain of its provisions. The fifth proposal to be voted upon is the approval to amend and restate our amended and restated certificate of incorporation to move certain advanced notice requirements with respect to Director nominees and other proposals submitted by shareholders to the company's bylaws. The Board of Directors recommends a vote in favor of the amendment and restatement to our amended and restated certificate of incorporation to move certain advanced notice requirements with respect to Director nominees and other proposals submitted by stockholders through the company's bylaws. Sixth proposal to be voted upon is the ratification of Deloitte & Touche LLP to serve as the independent registered public accounting firm for the company for the fiscal year ended December 31, 2020. The Board of Directors recommends a vote in favor of the appointment of Deloitte & Touche LLP as the company's independent registered public accounting firm for the fiscal year 2020. We will now take questions from stockholders submitted online regarding these proposals. No questions. Thank you for your attention. Now that everyone has had the opportunity to vote, I hereby declare the polls closed. All electronic ballots and proxies are now in the possession of the Inspector of Elections. Will the Inspector of Elections please report the results of the voting?

The ballots have been counted and the preliminary votes indicate that the 5 nominees for election to the Board of Directors have been duly elected by the affirmative votes of at least 93% of the votes, representing more than a majority of the votes cast at the meeting. The compensation of the company's named executive officers has been approved by the affirmative vote of at least 92%, a majority of the shares present and entitled to vote. The amendment and restatement of the company's amended and restated certificate of incorporation to give holders of 25% of company stock that meet certain requirements the right to request a special meeting has been approved by the affirmative vote of at least 99%, a majority of the votes outstanding and entitled to vote. The amendment and restatement of the company's amended and restated certificate of incorporation to eliminate certain supermajority voting requirements to amend certain of its provisions has been approved by the affirmative vote of at least 99%, 2/3 of the votes outstanding and entitled to vote. The amendment and restatement of the company's amended and restated certificate of incorporation to move certain advanced notice requirements with respect to Director nominees and other proposals submitted by stockholders to the company's bylaws has been approved by the affirmative vote of at least 99%, the majority of the votes outstanding and entitled to vote. And the ratification of the appointment of Deloitte & Touche LLP as the company's independent registered public accounting firm for 2020 has been approved by at least 94%, a majority of the shares present and entitled to vote.

How we run the company, we have an evergreen model that I mentioned upfront. This is how we plan our year and the 3 to 5 years coming. The top line, we expect to grow 3%, and we expect to grow the bottom line 8%. And the way we get there is to expand gross margin by 25 basis points and get 25 basis points of leverage on SG&A. The 3% top line organic growth is broken down as follows: We expect the U.S. business to grow 2%; international 6%; and our specialty products business, 5%. We have a prioritized use of free cash flow. We generate a significant amount of free cash flow as a company. So in order of importance: #1 is TSR-accretive M&A; followed by debt reduction; #3 would be new product development; and finally, CapEx for organic growth and our Good to Great program; and return of cash to shareholders through dividends and buybacks. Okay. We have 5 operating principles. Number one, we have brands consumers love. Number two, we're a friend of the environment. I'll say more on that -- about that in a moment. Number three, we leverage people. We have highly productive people, and Church & Dwight is a place where people matter. We're asset light. Now if you do those 4 things, you're going to get great returns. But if you can also leverage acquisition, you're going to have great returns. I said we're a friend of the environment. It's important to be sensitive to consumers today. 83% of consumers identify themselves as being mainstream or extreme green. Here's a little history of the company. Remember, we started in 1846. In 1888, we introduced wall charts and trading cards as a promotion to save the birds. In 1907, we started to use recycled paperboard in our cartons. In the 1970s, we were the first company, and actually, the only company, to be a corporate sponsor of the first Earth Day. And we were the first company to take phosphates out of laundry detergent. More recently, in 2016, 50% of our electrical demand globally was supplied by renewable energy sources. A couple of years later in 2018, it was 100%. And then in 2019, actually, we started this in 2017, from '17, '18 and '19, we began planting trees with Arbor Day. And in 2019, we planted 9 million trees in order to remove CO2 from the atmosphere, and we plan to plant far more in the future. Here are 3 important public goals for us. First, water. We plan to reduce water and our wastewater by 25% by 2022. With respect to waste, we have a goal this year to hit -- to increase solid waste recycling to 75%. With respect to the air, I think this is one that we're most proud of, we want to achieve 100% carbon-neutral status for all global operations by the end of 2025. What that means is that through planting trees and also by using renewable electricity, we will be offsetting all of the CO2 that our factories put into the atmosphere. And we've been getting recognition for this. We do the right thing as a company simply because it's the right thing to do, but many external organizations have picked up what we've been doing, and we've been getting some accolades in the past year or so. They're listed on this slide. All right. As far as managing in the current environment, safety of our employees is our #1 priority. If you look at our press release today, you know that we are engaging in social distancing, working in pods, additional sanitization. We've expanded our sick pay practices for employees. And of course, we've restricted business travel. We're also expanding our manufacturing capacity, particularly with respect to laundry detergent where we have a new line going in, in our York plant. And we're working very closely with our upstream supply chain, both suppliers and co-packers, to make sure that they can supply the products that we need, the run -- packaging materials that we need to run our plants. And we're also working closely with retail partners to make sure their distribution centers and shelves are full. With respect to communities, we've made monetary donations to local food pantries and shelters. We've also provided masks and products to local hospitals, pet shelters and schools. And we're also procuring the necessary equipment to manufacturing gloves at our Colonial Heights plant for both employees and for donations. I'm going to jump into the financials. As I said earlier, 2019 was a terrific year for Church & Dwight. Our organic sales grew 4.4%. You can see where it came from. Domestic grew 4%. International grew a whopping 9.2%. And specialty products took a step back down 3.3%, largely because of difficulties in the dairy industry. We had a great year for gross margin expansion. You can see on the right that gross margin expanded 60 basis points, excluding acquisitions. We spent a little bit more on marketing last year as a percentage of sales. And we also had record cash from operations, $865 million. Our free cash flow conversion is always a very important measurement. This is a relationship of how much cash you generate in relation to what your earnings per share is. And for many years, we've averaged easily above 120%. With respect to the first quarter, we announced our first quarter earnings today. Our organic growth was 9.2%. You see the spectacular numbers for domestic, international and specialty products. The spectacular numbers were due, in part, to pantry loading by consumers in the month of March because of the COVID virus. You can see that our metrics were also really good for the quarter. Gross margin expanded 60 basis points. Marketing was down a little bit, 8.3%. We moved some of our marketing spend in March out to the second half of the year where it would be more efficient. And finally, EPS was up 18.6%, and cash was up 70%. So just a spectacular quarter. We withdrew our guidance for the full year. The statement that appeared in the press release appears on this particular slide. And the reason for that is simply because of all the uncertainties with respect to COVID-19, and you'll see that's a common practice across many industries. The dividend, we increased our dividend by 5.5% this year. So we've paid a dividend for 119 consecutive years. It's a fabulous record. That concludes my remarks right now. And now we'll open the floor for questions from shareholders that were submitted online.

First question. Mr. Chairman, the Carpenter Union Pension Fund with combined assets of $70 billion have a collective ownership position of 296,500 shares of company common stock. As long-term shareholders, we appreciate the company's efforts to promote the safety of company employees and to address the difficulties faced by customers and other important stakeholders during the COVID-19 pandemic. On the topic of executive compensation, could you or the Chair of the Comp Committee address the issue of long-term compensation in today's market environment? Specifically, while it is early, is there any thought to reducing the dependence on stock options as the sole vehicle for long-term compensation?

The use of stock options has been a long-standing practice at Church & Dwight. And if you look at the performance of the company over the years, whether you look at 1-, 3-, 5- or 10-year total shareholder return CAGRs, the company's results have been unparalleled. So we do think that the use of options perfectly aligns management with the -- with our shareholders. If the share price goes up, both management succeeds as do our shareholders. Thank you for the question.

Question number two, is the company experiencing any supply chain disruptions?

Okay. That's a good question. The answer to that is that upstream, we have some suppliers of both raw and package materials and co-packers that have had temporary shutdowns, generally for 1 or 2 days because of COVID in order to sanitize their plants. We've had one in particular that has been shut down for a couple of weeks, and now has come back online. For our part, in one of our plants, we've reduced our production and outsource some of the production to co-packers in order to make sure that the employees in that plant could be kept safe.

Okay. Question number three, what are some future plans to further diversify the product line? And what does that look like?

Yes. That's a good question. We diversify our company through acquisitions. So if you went back 10 years, even longer, when I joined the company, we only had 6 or 7 power brands. Today, we have 12 power brands. So many, many acquisitions over the years gets us into other categories. So whenever you buy a new business and get into a new cat, you open a new door to growth. So the answer is, because M&A is our #1 criteria and destination for cash, we do expect to continue to diversify in the future through acquisitions.

Is the stocking up or pantry loading of items unique to U.S. customers? Or do you see it happening in other countries?

Yes. That's another good question. No, we have seen this in other countries, particularly if we look at North America, in Canada and Mexico and many European countries as well. So it is not simply a U.S. phenomenon.

No further questions.

Okay. Thank you for attending today's meeting. You may now disconnect.