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

So next up, we have Church & Dwight, which, like most other household product companies, have had a very strong start to the year. But beyond consumers stocking up, the company has also seen its vitamin franchise accelerate on health and wellness concerns and, of course, is set to benefit as consumer wallets become more constrained. We have the company's CEO, Matt Farrell; CFO, Rick Dierker; and CMO, Britta Bomhard, with us again this year. Thank all 3 of you so much for joining us again. I'll turn it over.

Okay. Thanks, everybody, for joining us. I'll go to the very first slide, which is the safe harbor slide. I'm going to encourage everybody to read it, and let's jump to the agenda. So we have a lot to cover with you this morning. I'm going to cover the first 5 -- first 4 items: a history of solid performance; our portfolio, which is very recession-proof; and talk about how we've performed so far in the COVID environment and life after COVID because I think that's probably what's on most people's minds. Britta is going to talk about the ARM & HAMMER Master brand and some innovation that we have coming in 2020. I'll come back and talk about how we run the company. And then Rick will talk about the financials. All right. Let's keep moving. History of solid performance. So I'm sure we have lots of long-term shareholders on the call today. So we have a lot of happy faces. So if you look back over 1, 3, 5 or 10 years, our total shareholder return has been stellar, and we're having a pretty good year this year, too. And you know we have an evergreen model. And we try to drive the organic sales 3% annually and 8% on the bottom line. If you look back over the -- over 10 years, this 11-year period, we've averaged 3.7% organic growth. Now if you look at earnings per share over the same period, you see we've been hitting or beating 8% EPS growth for the past 11 years. And now also look at the portfolio. So if you go back to 2009, you see that we had a spectacular year, and this was the last -- the Great Recession. So we had almost 5% organic growth in 2009 and almost 22% EPS growth in 2009. So let's look at then and now, how the company has changed and how it's similar. So if you look at the geographic split, we're pretty similar to 2009. 3/4 of the company was U.S. in 2009, still true today in 2020. Now if you look at the split between household and personal care, we're a little more personal care heavy right now. It was 40% in 2009, 49% today. Next would be the split between value and premium. This is very important as you enter an economic downturn. Back in 2009, 40% of our portfolio was valued. Today, it's exactly the same, it's 40% based on our projections for 2020. And now e-commerce. If you went back to 2009, I think that less than 1% you see on the left-hand side of the page is generous, which was probably less than 0.1%. So we were probably nowhere when it came to e-commerce skills back in 2009. Today, I'd say we're first quartile. If you look at our global sales for 2020, we expect 12% to be ordered online. And in addition to that, we would add pickup, buy online and pick up in store, what we normally know as click-and-collect, you could add another 10% to that. You wanted to get the total picture. Okay. So we have 4 more power brands today than 2009. We always talk about our power brands drive 80% of our revenues and profits. So we had 8 power brands in 2009 and 12 today. You can see on the bottom right, the years that we acquired those businesses. And when you buy new brands, they take you into new categories. So we're in 11 categories in 2009 and in 16 categories today. So what that does is it spreads your risk. There's no one particular category that you're going to be wholly dependent upon as you add new categories. And now let's look at the strength of the brands, especially in household. ARM & HAMMER is our master brand. That's a $1 billion brand, and Britta's going to talk to you a little bit more about that later on. But if you look at the market shares in 2009 versus 2019, so we've almost doubled the share in ARM & HAMMER liquid. ARM & HAMMER litter has been strong. And ARM & HAMMER baking soda, which is the category that we drive, we've had a constant 77% market share. And look at OXICLEAN. This is a prewash additive, going from 38% market share to almost 55% market share. Now let's turn to international. International looks very much like it did back in 2009, 80% personal care and 20% household. But the Global Markets Group has grown significantly. So Global Markets Group is a group that is our -- formerly referred to as our export business, where we ship products to over 80 countries around the world. That has been a huge grower for us. And if you see now on the right-hand side of the page that, that is 1/3 of our international business. And here's an illustration. We've been growing at 7%, 8%, 9% over the past 5 years. If you look at the second quarter, it's the Global Markets Group that continued to grow. We -- Global Markets group has a great presence in Asia Pacific. I think the recovery in Asia Pacific helped to deliver those numbers in the second quarter. Now private label. Private label is something that every consumer products company is concerned with. If you look at the weighted average private label share over the past 7 years or so, we're about 12%. So it's been consistent. And there are 5 categories where we have important private label exposure. As you run your eyes around the page there, they've been pretty stable: pregnancy test kits, baking soda, gummies, cat litter and ORAJEL. And now specialty products. If we went back to 2009 and looked at specialty products, you can see at the top of the page, less than 1% of the business was nondairy. 2/3 of the business was dairy and performance products. Performance products, by the way, is a bulk sodium bicarbonate. And then we had a business in Brazil that we divested just a few years ago. So on the right-hand side of the page, you can see how we look today. Performance products, which is bulk sodium bicarbonate, is still 1/3 of the business. The other 2/3 is the animal business. So if you go to the next slide, you can break out the animal business. We see it went from 1% nondairy to 27% today. And the reason why that's important, on the next slide, is -- well, before I get to that, I'd give you the international split. International was only 3% back in 2009, at 14% today. So we have a lot of runway outside the country for our animal business. I wanted to show you why it's important to break between -- to grow your nondairy business. If you look at the top of the page there, you're going to see the organic sales in '11, '14, '17 and '20. So you can see, it's a cyclical business largely driven by milk prices. And so then and now today, so it's a 75% domestic today, 84% in 2020. And this is total company, both SPD and the animal business. All right. And let's go on performance in the COVID environment. Okay. We've often said that we're in the right categories. If you look at '16, '17, '18, '19, you see around 3% weighted average growth. That rocketed in Q1. Why? Because a lot of the pantry loading and panic buying, still high in the second quarter with 4%, but it's very lumpy. Some categories were way up, and some are way down. So let's take a look at them. So gummy vitamins in Q2, the category grew 56%. If you look at the next slide, the reason why that's important is because we're the #1 adult gummy vitamin, VITAFUSION. And in the category in VMS, only 3% of VMS was gummies back in 2012. And today, it's 18% of total VMS. Next category will be baking soda. So baking soda consumption, up almost 40% in the second quarter. And if you ask, why? Well, people are home, they're baking more, cleaning more. And also, there was an early pool season in the U.S. Some illustrations here, baking soda, carpet deodorizer and also clear balance for pools. All right. Now going the other way. So dry shampoo, down 18% in the category in the second quarter. Beauty stores were closed and obviously decreased usage occasions. Why? Because of limitations on consumer mobility. If you look at condoms, here's another example of consumer mobility. There's a lot less sex in the second quarter. The category was down 13% because of social distancing, just -- there's less opportunities for people to connect. And finally, water flosser's down 26%. Dental offices were closed in early April. Dental offices are an important source of recommendations for our product, WATERPIK. The good news is dental offices are opening now. Okay, life after COVID. This is a fun fact. The average time it takes a person to create a new habit is 66 days. And obviously, COVID's been going on far longer than 66 days. So look at some of the -- what our consumer research is telling us. Here's a VMS on the left-hand side of the page, and you look at consumption in April, May, June, July and August. And you see it's 50% or better throughout that 5-month period. You see the quote down at the bottom, half the people who take an immunity supplement say they're going to -- they'll be taking them more often after COVID. And the expectation is that, that is going to stay high. The question is where will it plateau? On the right-hand side of the page, you see baking soda. So baking soda growth, you see the average here is 23% and but still is elevated in June, July and August of a little over 10%. If you read the quote at the bottom of the page, and this is -- if you look at the sources from the ARM & HAMMER baking soda community. Baking soda growth of 23% versus a year ago driven by consumers who are cleaning more and baking more. So that's the percentage of consumers who reported they were doing that. Next slide. Okay. Litter and laundry, obviously, big categories for us, huge consumption in March and then fell off in the second quarter. So if you look at litter, we often refer to litter as toilet paper for cats. It's no different than what you saw in the TP category for other paper companies. March was enormous. That fell off in the second quarter, starting to come back now. If you look at the July and August that they've gone positive. The other kind of interesting fact is that cat ownership has climbed up 5% versus pre-COVID. And on the right-hand side, the liquid laundry, again, liquid laundry was huge in the month of March, fell off in April, May, June, starting to come back in July and August. And another interesting fact on the bottom is, on average, a little over 40% of laundry purchases say they're using much more or somewhat more laundry detergent. And then here's the categories we spoke about earlier that are depressed. So you see all negative numbers on the top in these circles, April through August. The quote with respect to dry shampoo, lapsed users of dry shampoo say they will go back to using dry shampoo when social distancing is behind us. Water flossers, I mentioned that dental offices are starting to open. So you're starting to see the recovery in consumption there. And condoms, still down, and I don't think that's going to recover well until things get back to normal. Okay. Britta's up now with the master brand.

Hello, and good morning to everyone. So ARM & HAMMER, as you know, is our oldest long-standing brand with more than 170 years. And the question is, can we keep it healthy in the current circumstances? And I think we're proud to say that in the last 12 months, including COVID times, we've actually increased household penetration by 3%. And that means that we now have 72% of U.S. households. That means 3 out of 4 U.S. households using ARM & HAMMER baking soda. And that means the mission we have on baking soda on ARM & HAMMER in general is to be the helping hand people can't live without. So we have a clear brand purpose. And let us show you how we're living into that brand purpose. What was parents' biggest worry over the summer? It was with summer camps canceled, how to keep the kids entertained in a meaningful world. And did we have a solution for that. As you might remember, we are partnering with STEM initiatives already with our Odyssey of the Mind. And so we had a natural extension. We launched a free virtual summer camp to keep the kids entertained and give some time back to parents. Let's look at what that looked like. Jill, I don't have sound. So I think even without sound, I don't know whether anybody else had sound, but you can get the storyline from this. So we've engaged a couple of influencers who shared with their communities in a very fun, light-hearted way different activities you could do with your kids. And that was an outstanding success. It was the second-highest sign up we've ever had of consumers. #1 was actually an Earth Day activation where we send seedlings, tree seedlings to people's homes. So this one was the second highest. And the good news is we are maintaining that contact with our consumers. And we're going to have, over the whole course of the year with school still being in complicated situations, activities for you to do with your kids and keep them interested. And as you can see, we are building brand love early and for the long term, so that ARM & HAMMER will stay relevant and keep growing in relevancy over the next 170 years. And I hope you've seen how we do that already and how this has continued to drive our biggest brand and our success. The next, what I want to talk to you about is innovations. So we are building the brand also by innovation. You might remember that ARM & HAMMER as the brand with the widest distribution and categories. So we've been making laundry detergents since the 1970s, and we are continuing to innovate. Again, a big trend on consumers' minds is how do I, next slide, please, work against the harsh chemicals. And people are trying to reduce the number of chemicals in their products, but they obviously do not want to compromise on cleaning efficacy. So we launched an ARM & HAMMER product right on trend, which is ARM & HAMMER CLEAN & SIMPLE. And what's so unique about it is that it only has 6 ingredients. Now you might not know it, but the average laundry detergent has a minimum of 20, if not more ingredients. And so we can clearly say it has no unnecessary chemicals, and there's no compromise on efficacy. It has the same efficacy as our ARM & HAMMER with OXICLEAN, our best seller. And consumers' reviews of the products already show that where we have a 4.5 average rating. So this really hits the consumer need. Next one, I want to talk to you about our second big category, which is cat litter. And we brought baking soda to cat litter in the 1990s. And it's hard to innovate here, but next slide, consumers do know that when the litter is wet, it smells. So we found a solution for that. We are introducing ARM & HAMMER CLUMP & SEAL ABSORBx. And this is new because at the last conference, we couldn't yet tell you what it is. It is a unique new material for us. It rapidly absorbs wetness in seconds and forms rock-hard clumps, which means the smell is immediately captured. It's dust free, and it's also lighter than our regular litter. So it is an absolutely world innovation. And therefore, we had to make it a breakthrough communication as well. We needed to show consumers 7 things. One, it's -- this is dry minerals, i.e., how do we set it in the right kind of environment? How do we incorporate what makes our cat litter so successful, a very clear product demo. At the same time, bringing across that it's a lightweight, which is relevant for all consumers. And last but not least, make it part of our ARM & HAMMER master brand campaign as we continue to build for the long success. And I think we found a very entertaining way. So let's look at that. [Technical Difficulty] Maybe not. I could try to act the TV commercial, but I wouldn't be as convincing.

Why don't you just keep rolling, Britta?

Yes, I think that's what we're going to do. Jill, just advance to the next slide. And I will leave you with this cliff hanger, where I can tell you that our consumers love the commercial, and I hope you just check it out on YouTube. It's under ARM & HAMMER ABSORBx, has amazing reviews, and it's set to dry -- it's a Western-style cat showdown, which we can roll out as entertaining across all different touch points of the consumer, and I just invite you to watch it. Sorry about that. Let's move on to the next one because I want to make sure we cover financials. So VITAFUSION, big innovation. It's our #1 adult gummy vitamin. And we launched a couple of new products there. Next slide. This is for the Health [indiscernible]. So people who want to take care of themselves, exercising while they can, but they're worried about not doing enough to keep themselves healthy. And we've launched a couple of new products here, which are fully on trend. Next slide. So you will see in this first half, we already came with trendy ingredients like apple cider vinegar, or organic multivits for prenatal. We also had our first licensing with social media star. And in the second half, we are now coming with POWER ZINC, which is known or got good press during COVID time, or for kids, an Elderberry version. And with that, I think we skip the TV commercial, which is also great. But I want to give Matt time to talk about how we run the company. Matt, over to you.

Yes, ready for the next slide. Okay. So many of our long-term shareholders know, we have 5 operating principles, where we are a friend of the environment, but there are 4 things that we leverage: brands, people, assets and acquisitions. Next. Okay. So we have 12 brands that make up 80% of our revenues and profits. These are #1 or #2 brands in their categories. So these are brands consumers love. And with respect to friend of the environment, over 80% of consumers say they are mainstream or extreme green. Just to give a little bit of history. Back in the 19th century, the company, which was founded in 1846, was already a friend of the environment. In 1907, we started to use recycled paperboard. And then in the 1970s, we were first to use or to tape-remove phosphates from laundry detergent. And then more recently, we've started to use renewable energy. You can see that on the slide here, the Green-e designation that says that 100% of our global electricity is offset by green energy. And we started to plant trees in the Mississippi River Valley through Arbor Day. And our 3 goals are water is reduced but -- water or wastewater 25% by 2022. And with respect to solid waste, we want to increase our solid waste recycling to 75%. And finally, the big one is, is with respect to air, where our goal is to be 100% carbon neutral by the end of 2025. And we've been getting recognition from that from lots of third parties. So we feel good about that. And number three is highly productive people. So we have the highest sales per employee of any CPG company in our peer group. And if you look at how people are incented, we have a simple compensation structure, net revenue, gross margin, cash from operations and EPS. Kind of rolling here, huh? Right. Yes. Of the 4 that I mentioned, all employees are incentive to gross margins, 25% of all employee bonus. Then if you do those 4 things well, you -- advance the slide, Jill. I want to move on from the assets. I want to get to Rick's presentation. I just want to quickly roll through the M&A. So we leverage acquisitions. If you do the first 4 well, when you do the fifth, you're going to get great shareholder returns, which you saw at the beginning of my presentation. And now if you look, we had $1.5 billion in sales back in 2004, $4.4 billion today. So it's been a very important part of our history of our revenue growth. We have 5 criteria, #1 and #2 share, high growth, high margin. We want to be asset light. We want to leverage our competencies, and it needs to have a long-term sustainable advantage. 11 of our 12 brands were acquired since 2001. And we also have learned to integrate businesses. In the past, we did full-scale integrations. More recently with WATERPIK, we left them stand-alone. And with FLAWLESS, it was a partial integration. And simple strategy here is 12 power brands today, 20 tomorrow. All right. Rick's up with financials.

Okay. Thanks much. Good morning, everybody. Matt, if you'd put yours on mute. So we start off with the evergreen model like we do for every discussion. So our long-term shareholders know that we're at 3% organic sales growth and 8% EPS growth. And the detail of the model is 25 basis points of gross margin expansion, typically flat marketing as a percentage but higher dollars each and every year as revenue grows and then leveraged SG&A. And we get to 50 basis points of operating margin expansion, and that leads to 8% EPS growth. A little detail on the gross margin drivers. You've heard before about our good-to-great program. That's our productivity program. Supply chain optimization, that's like network optimization, acquisition synergies and, of course, accretive new products. Matt shared this slide earlier, but it's just a good reminder of the long history of organic sales growth. And we've averaged close to 4% over this time period. And back in '09, when the last recession hit, we had one of our top organic years at 4.8% for the company. And right now, our outlook is 7% to 8% in 2020. And then same thing with EPS. Long time double-digit or high single-digit EPS growth. And then back in 2009 was one of our best years ever at 22%, and our outlook in 2020 is 13%. And so there's a detail of the outlook, 9% to 10% on a reported basis, sales growth, 7% to 8% organic and 13% adjusted EPS growth. And then how it breaks out first half, second half, a lot of momentum happened in the first half, 8.8%; in a full year 7% to 8%; and still a very strong 6% growth in the second half as implied. And then gross margin, we talked about this on the call. We were up 150 basis points in the first half, right, largely because we had great productivity gains, but we also pulled back on trade and couponing as we were in out-of-stock situations and didn't want to drive incremental demand. In the second half, we're down 150 basis points as we have normal amount of promotion -- promotional activity. We have new product support like couponing for the 2 products that Britta just showed you on CLEAN & SIMPLE and ABSORBx. We also have the impact of fullest accounting. That's about a 75 basis point drag in the back half. And we have incremental manufacturing and distribution capacity investments. I'll talk a little bit more about that in a few minutes and then higher WATERPIK tariffs and COVID costs. And those same reasons are what impacts EPS. So very stellar EPS growth in the first half, flat in the second half as we make those investments and have those items like tariffs and new products support. But it equates to 13% for the full year, which is a great result. I'd be remiss if I didn't talk about cash. Free cash flow conversion for Church & Dwight is industry leading however we talk about it. The peers average 90%. Some companies target 100%, and we've been consistently above 120%, so 126% this past year. And we do that in a few different ways, but one of those ways is working capital management. Our cash conversion cycle has gone from 52 days in 2009 all the way down to 19 days. And then for a second, we strip out those 2 acquisitions that are -- largely have supply chains based in China, it's actually closer to 8 days. So we've been making great progress, and we will continue to do so. We have a strong balance sheet, extremely strong balance sheet, underlevered, we're going to end the year under 1.5x, probably closer to 1.1, 1.2x. So we have a lot of firepower. And the math on that firepower is, as we continue to do well and as we continue to build cash balances, the acquisition power continues to increase. So we're up to around a $4.4 billion type of deal to remain investment-grade is our math. Now capital allocation is always important. Here are the 5 things that we always talk about. Number one, far and away, is still TSR accretive M&A, and we spend a lot of time focused on that. Number two and four, we swapped. So as you saw on the previous page, our debt reduction, we're going to be close to 1.2 debt to EBITDA. So we moved that down to number four. And then number two is now CapEx for organic growth in G2G, largely more for capacity. And I'll talk about that in a second, but we're going to spend $100 million this year, close to 2%, and we're going to bump that up a little bit in the next 2 years in order to help with laundry, litter and vitamins. Number three is NPD. Number four, of course, is debt reduction now and number five is return cash to shareholders, dividend or buyback. The CapEx. We're not a capital-intensive company. And over time, we've been sub-2% or slightly above 2%, and our outlook for 2020 is 2%. But when we have added capacity, like in 2009 or 2011, we've pumped above that. And so in 2020, we've taken all source of capacity and third-party manufacturing options as demand has spiked in certain categories. We added a line for laundry. Our unit dose manufacturing in-house is coming online soon. Baking soda, as Matt said, demand has been outstripping our supply. So we've been doing some debottlenecking there. And then of course, cleaners has exploded as a category and VMS as well. So all those things we've taken action on already. And in 2021 and 2022, we're going to take further action on laundry, litter, baking soda, vitamins, our network capacity with distribution centers and some technology investments. And so we'll bump up to around 3% or 4% of sales for CapEx. And then to end the financial presentation, we had a 5.5% dividend increase, long track record of dividend increases and 119 consecutive years of paying dividend. Okay. And I think with that, we'll move on to our breakout sessions. Thank you very much for your time.