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

Next up, we have Church & Dwight and we are fortunate to have the company's CEO, Matt Farrell; CFO, Rick Dierker; and Chief Marketing Officer, Britta Bomhard with us this year. They're going to be giving a presentation, so I'm going to hand it right off. Thanks so much for joining us.

Thank you, Lauren. Hey. Thanks, everybody, for joining us. I'm going to start with the first slide, which is the safe harbor statement. Encourage everybody to read that. Here's the agenda. Our slides are going to be posted to our website. So there's no need to try to take copious notes here today. So let's jump into the very first slide. Who we are? Okay. We've had a stellar record of providing a total shareholder return to our shareholders. If you look at the 2020, 3, 5, 10, 15 years, we've had just a stellar performance. So how do we do that? If you go to the next slide. We have an evergreen business model. We shoot for 3% organic sales on the top line and 8% on the bottom line. So now I think we ask, how have you been doing with that 3% top line? You can see for the last 10 years, we've averaged a little over 4% organic sales growth. The next slide will tell you, if you asked the question about EPS, you can say, well, 8% is our target. We've been averaging a little over 11% for the past 10 years. If you go to the next slide. The 3% breaks down, 2% for the U.S., 6% International, 5% Specialty Products. Britta is going to talk to you today about the U.S. business as well as our innovation. Barry is going to talk about International, and I'll come back and talk about Specialty Products. Now our company has 13 power brands. You see them displayed here. Now those 13 power brands on the next slide represent 80% of our revenues and profits. If you go to the next slide, you'll see how the portfolio splits. We've got half households, half personal care on the consumer side. Maybe we have a small Specialty Products business, about $300 million, and that's split 2/3 animal productivity and 1/3 bulk sodium bicarbonate. If you go to the next slide, you'll see the split between premium and value. This is important because people who have been long-term shareholders of Church & Dwight know that we perform well in virtually any economic environment. And as the split geographically is only 17% international, and that's important. Barry is going to talk to you about how much runway we have to grow internationally down the road. I think international will provide a disproportionate amount of our sales book in the future. And we're up -- we like to think that we're a very nimble organization. We only have 5,000 employees. We have very quick decision-making, and we adapt very quickly. And I think the best evidence of that is how we've performed during COVID. And a long history of growth through acquisitions. So we're known as a serial acquirer. You can see back in 2004, we only had $1.5 billion of sales to almost $5 billion in 2020. And virtually every year, we pick up 1 or 2 new brands. And for the year 2000, the only brand that we owned was ARM & HAMMER. And since then, 12 of those 13 brands have been acquired and all of them are either #1 or #2 in their categories. Next slide. And online is on everybody's mind. If you went back 5 years, only 1% of our sales was online. In 2020, we spiked from 8% in 2019 to 13% in 2020. And then we expect it to continue to grow in '21 and expect 15% of our global sales online. We do get questions about private label. We have a low exposure to private label, averaging about 12% on a weighted average basis. If you go to the next slide, you see the categories that we're most exposed to with respect to private label. And you can see those lines that have been pretty stable over the past several years. And we definitely have had headwinds in 2021. I'm sure this is redundant with any of the other presentations you're listening to today. Lots of cost inflation. We've had $125 million of unplanned cost increases in '21 versus '20. The other issue we have is supply chain. Now because the difficulty in us higher labor as well as our suppliers and co-packers getting labor, they've had the disruption in their production, which has also affected our ability to get material raw -- and packaged materials to make our product. The most recent wrinkle is Hurricane Ida. Generally, these things have about 6 to 8 weeks to work themselves through the system. We've had force majeures all year long and in the second and third quarter. This is just one more that we're going to have to deal with, and we'll update everybody at the end of October when we do our third quarter press release. And in reaction to the $125 million in costs, we've raised prices. So we've raised prices. Starting in July. We have another tranche coming in, in October. So that by October, about 50% of our portfolio will already have been priced up. We're looking at the remaining 50% right now to see where it makes sense for us to raise price in 2022. And even the places that we already raised price, we may be revisiting those in 2022 to see if we need to take price again. And next up is Britta will talk about the consumer business.

Thank you, Matt, and welcome, everyone. So as you see, we have a target of 2% in our evergreen model. We've so far always delivered more than that. And on the next slide, you will see what should give you confidence in 2021 that we have key growth drivers. Number one is obviously vitamin, continues its growth journey. And not only that people are taking supplements, but the conversion to gummies. Second, dental offices are back and that fuels our WATERPIK price. The beauty-at-home trend continues benefiting there. And we have some brands which are recovering from the COVID extremes of social distancing and lockdowns like BATISTE and Trojan. And then we have, obviously, our long-term strong growth driver, which is building brand equity and using media effectiveness to make our brands better known with consumers, and you see our biggest 3 brands, ARM & HAMMER, OXICLEAN and VITAFUSION named here because we have great brand equity metrics. Next slide, you will see that you are not -- don't have to take my word for it, but what you're seeing here that we've been growing consumption in 13 out of our 16 categories in Q2 of 2021. But let me give you a couple of the innovations who are also helping to drive back drugs. So number one is that germs and viruses on everybody's mind, not only in the bathroom and the kitchen, and we have a fantastic innovation, which is on the next slide, OXICLEAN Laundry and Home Sanitizer. And it has its extraordinary claim that it kills 99.9% of bacterian viruses, including the virus that kills COVID -- that causes COVID-19. And what better than to see some advertising for it. [Presentation]

And as you can imagine, such a great claim we're taking further than just into OXICLEAN Home Sanitizer, if you go to the next one, you can see that we are launching 2 great cleaning products, multipurpose disinfectant sprays with the similar claim. And what's more important, they are both without chlorine bleach, which is a concern to consumers. Next slide. And we are, I think, other innovations as well. Most of us know how well how confident we feel in great fitting close. So we are bringing great fitting condom. We are launching Trojan Ultra Fit, a new lines of condoms tailored to fit for a better feel. And if you look at the bottom of those designs, you can see the different shapes of those condoms. Next slide will show you that we also had something for those consumers who are not using condoms, who are actually hoping to get pregnant and we have a unique consumer insight knowing that some of them test frequently, 6 or more times. We've generated a particular product for them, which is on the next slide, First Response Comfort Check. And this is the first one, which allows you with several test strips to frequently test whether you're pregnant or not. Next slide. We also know that consumers find flossing difficult and only 16% floss daily. And so you might remember from the past that WATERPIK SONIC-FUSION is our #1 and best-ever innovation for WATERPIK. And it just got better with our 2.0. And if you see what we've done, we've upped our flossing experience, but we even higher upped the brushing experiences with different brussel speeds, different head sizes and brush speeds. So very confident that our growth in SONIC-FUSION will accelerate going forward. Next slide. We also know that there's new beauty routines in everybody's life. And if you go to the next page, you will see that we are launching near bladeless shave. It is very unique because it's actually a beauty routine where you lever your legs and then you remove the product. So it's a much more cosmetic application, and we've used that for a complete refresh of the near brand. So I'm very proud to show you in a minute the new advertising, which, if you're aware is fully in line with where we are today in more younger kind of positioned brands who are also body-positive. And for those of you who know the near brand for a long time, there's even a little not to our very old, short shorts TV commercial. [Presentation]

So we've really hit where consumers feel today because we're seeing that in engagement rates to this campaign online. And as we're talking about change consumer beauty routines, they have learned to do beauty at home and are aware of the cost savings. So we're taking advantage of that with the launch of the new FLAWLESS pedi and manicure, one of our At-Home Beauty solutions. Next slide. Other trends which we are very aware of is that people are currently very concerned about their immune system, and that they're looking for this extra support. So we are launching VITAFUSION Super Immune Support. It includes vitamin C, zinc and elderberry, delivers over 100% of that daily value. And what's more important, it's the first VITAFUSION item in the cough and cold aisle. So we are expanding the VITAFUSION footprint. The next innovation might also be something for this audience here because we know that everybody currently struggles due to stress with brain health. And we have a product just for that, which is the new VITAFUSION Brain Food, which has focus -- benefits in the focus and stress area. And if you go to the next slide, you will see that we are also understanding the stress and anxiety everybody is facing in the current environment, and that's why we are launching a very trendy ingredient, VITAFUSION Ashwagandha, which has highly relevant stress benefit and it is a very trending ingredient and has an exceptional great taste. And if you might remember, VITAFUSION is the best tasting gummy. So we are seeing our consumers responding to great ingredients with the VITAFUSION taste. Next slide. And with that, I can round off saying you are aware that we've upped our innovation stream, but particularly in the vitamin gummy areas, you can see that over the last couple of years, we have really doubled down on innovation, and that will continue to fuel our growth, not only in 2021 but also going forward into 2022 and beyond. And with that, I would like to hand over to Barry Bruno. And some of you might have read the news, so Barry is going to be my successor as CMO, and I'm very delighted because I know that he loves brands as much as I do, and I trust he will grow our portfolio even more than I have. So I hand over to Barry.

Thanks, Britta, and thanks for 8 great years of partnership together. We'll miss you for sure, and big shoes to fill. Okay. You guys are seeing this slide. I'm going to tell you the international story in 5 minutes or less. We are the growth engine at 6% organic year-over-year. And as a reminder, we break our business up in our subsidiaries. So you can see Canada, Mexico, Australia and Europe, that's also U.K., Germany and France. And then our global markets group, which we operate through distributors, in over 130 countries around the world. Next slide. How have we done against that 6% organic target? Well, we've done pretty well. You can see where we've been on a pretty good run from 2015 through 2020, exceeding our Evergreen model. Through the first half of 2021, we're exceeding it as well. And I'll tell you that our demand remains really strong while supply remains constrained. So we feel confident we could be doing even better. Next slide, Jill. So how did that 6.7% play out in the first half? Well, our subsidiaries that I mentioned earlier, they're growing faster than category averages. We're gaining share. They were up 3.8%. GMG continued its strong growth of 13.5%. And when you conduct a weighted average of the 2, that's how we get to the 6.7% for the first half. So that's the past. Looking at the future, it probably won't be a surprise to many of you on the call that 95% of the world's population lives outside of the United States. You can see here markets where over 1 billion consumers live, whether we're talking about India or China or parts of Southeast East Asia, there are huge populations outside of the U.S. And that's what gets us excited about the future. We did a quick study of our top 10 CPG company average. They get about 60% of their sales internationally, while we still only get 17%. So we've got about a 42-point gap to what we think are our fair share here. Next slide. So what are we doing about it? Well, Global Markets Group, that remains our investment hub emerging markets serve as our long-term growth drivers, our subsidiary markets, they're delivering growth above average. We're still gaining market share there. There are profit drivers and then really acquisitions, WATERPIK and FLAWLESS are still hugely under-indexed internationally, both of them are growing at double digits this year, and we see that going long into the future. To make it real for you, here are a couple of accomplishments in the first half of 2021. So we've almost doubled the size of our team in China and now have the ability to sell directly to consumers there. We opened a new office in Mumbai. I haven't even been able to visit it myself because it's opened during COVID, but we've got our first employees on the ground in this important market. Pricing. You've heard about all the COGS headwinds we're facing. We've added dedicated pricing headcount for international for the first time in the first half of 2021. Local manufacturing, we're not just shipping from the U.S. anymore, we've got local manufacturing in Asia. So we're close to our consumers and our customers and consumers replenish all of that demand faster than ever. And last but not least, thanks to Britta and our marketing team who came up with a great, and more power to you, marketing campaign. We've rolled it out globally around the world. For the first time ever, we've got a truly global marketing campaign, building awareness of ARM & HAMMER in 130 countries now. We're doing all of that while staying committed to our commitment to improve profitability as well. So you can see here going from a 12% to a 12.5% to a 13%, 50 bps year-over-year operating margin improvement. So in closing on the international story, we believe we're the engine for growth. We've got a long runway to get to our fair share. If there's anyone takeaway here, it's that 17% for CND versus 49% for our top 10 competitors that comes from out of the U.S. Recently acquired brands, we've got miles to go still on WATERPIK and FLAWLESS. Emerging markets, they're still relatively new to us. We're investing in headcount and resources there and actually continuing to invest in all of international, so we can keep this great growth going. So that's the international story in 5 minutes or less.

Yes. Thanks, Barry. I'm going to run you through Specialty Products and particularly animal productivity story. Specialty Products business, we expect to grow 5% annually. That's a long-term goal. If you go to the next slide, you'll see that the business is a $300 million business, half of it is dairy. 8 -- this is last year's numbers, so 18% was nondairy, and the rest is both sodium bicarbonate, what we call specialty chemicals. If you look at the next slide, you'll see that the products that we make are not antibiotics, prebiotics, probiotics, nutritional supplements. Why is that important? Well, because consumers are moving away from consuming meat that's produced with antibiotics. We've had a cyclical business historically. It seems like a 3-year cycle, 2011, '14, '17. You would have expected 2020 to be up by the COVID hit, but we do have a cyclical business because it's largely tied to dairy. Next slide. Nondairy in 2020 was 18%. We expect it to be 24% in 2021. So that's a good thing. We'll have a more balanced business going forward. smooth things out. Next Slide. And with respect to Specialty Products and animal productivity, they're all -- all these products are labeled on ARM & HAMMER. We're consistent with the consumer trend away from antibiotics. We've moved into other species by way of acquisition. So it's not just dairy, it's also cattle, swine and poultry. That's important because the population of the world is going to grow to over 9 billion by mid-century. So there's going to be a lot of opportunity to sell our product, and a lot of that opportunity outside the U.S. We make reference here to global growth. Now how we run the company? If you're a long-term shareholder, you know these 5 things: number one, leverage brands; two, friendly environment; three, we have super productive employees; number four, we're asset-light. If you do those 4 really well, you get great -- good returns. But if you top that with acquisitions, you get great returns, as you saw from my very opening slide. If you go to the next slide, you see we already covered our 13 power brands. These are the ones that we get all of our attention, all of our focus. The next slide, you see a friend of the environment. If you go back to the 19th century, we're putting bird trading cards in our baking soda boxes, not baseball cards. In the early 20th century, we started to recycle paperboard. And if you go to the next slide. In the last few years, we started to use some renewable energy for our electricity demands, both globally and we've been planting millions of trees in the Mississippi River Valley through Arbor Day. From fifth grade, science that trees take CO2 out of the atmosphere. If you go to the next slide, you'll see what our targets are. Most proud of the one on the bottom, we intend to be 100% carbon neutral by the end of 2025. As far as waste goes, we want to be able to recycle 75% of our waste by the end of this year and then water reduction of 25% by 2022. If you go to the next slide, you'll see with my reference to highly productive people, just look at these numbers. Our revenue per employee is approaching $1 million per employee, which is a fantastic. We're about $5 million top line company with about 5,000 employees. If you go to the next slide, you'll see how everybody is incentive. We have 4 targets: net revenue, gross margin, cash from operations, EPS. We've had these 4 targets for years and years, and it promotes financial literacy within the company. And our long-term incentives are all stock options. So if the stock performs, the management wins and but so do our shareholders. If you go to the next slide, asset-light was number four. Rick will take you through this later that our evergreen target is about 2% of sales as of our CapEx. Now finally, if we move on to M&A, which is #5, through the next slide, the first 4 give you good returns. #5, if you do the acquisitions, well, it give you great returns. Now you saw this slide earlier, a long history of acquisitions. We have very specific criteria. We buy brands that are #1 or #2 in their category. They need to have an -- be able to meet or exceed our evergreen retarget of 3%, margins that are at or above our company gross margins, around 45%. Asset light, we don't like to buy plants, we like to be able to leverage our existing supply chain footprint, and they have to have a sustainable advantage that's going to be here for years to come. If you go to the next slide, the shorthand with respect to acquisitions is 13 brands today, 20 tomorrow. Just stick around for a few years and that number will grow. And now I'm going to bring up Rick for the financials.

Great. Thanks, Matt. We'll go through 4 things: we'll go through the evergreen model, talk about our outlook as of a month ago, speak on cash flow and then end on capital allocation. So first off is evergreen model. This is our long-term shareholders know this very well. We've been growth through this for many years, 3% top line, 8% bottom line. And then the details on this page. So 3% top line, gross margin expansion, marketing dollars higher, but usually this percentage flat, leverage SG&A, and it leads to operating margin expansion of 50 basis points and then 8% EPS growth. Now our outlook as of a month ago was 5% net sales growth, 4% organic sales growth. This is higher than our typical evergreen model and higher than our original outlook for the year. Consumption is strong. Domestic is 3%; international, 6%; and SPD is 9%. Adjusted EPS growth is 6%, a little bit under our evergreen model; higher inflation, $125 million of incremental COGS this year as well as a higher tax rate. Gross margin, first half, second half story. For the full year, our outlook is down 75 basis points. But in the second half, we're up, and we're largely up because we've been able to take price on more than 50% of the portfolio as of October 1. Going to cash flow. So our 10-year average on free cash flow conversion or our free cash flow divided by net income is over 120%. Many companies target 100%, and some 90%. So Church & Dwight produces and generate so much cash that we put to work. Next slide, please. And part of the way we do this is working capital improvement. So our cash conversion cycle, receivables, plus inventory minus payables, has gone from 52 days back in 2009 to around 16 days is our latest estimate for 2021. If you strip out some of the recent acquisitions like for WATERPIK and FLAWLESS that have Chinese supply chains, long supply chains, then it would be closer to 5 days, which is just a great accomplishment. And we have a strong balance sheet. We've mentioned a few times today that we're going to probably end the year around 1.3x lower, so just a lot of financial firepower. And here's an example. We believe we could do up to a $4.5 billion deal and maintain our investment-grade rating. And then moving to capital allocation. Here are the 5 prioritized uses of cash flow: number one, far and away, TSR through M&A; number two, CapEx for organic growth in our productivity program; number three, new product development; number four, debt reduction; and number five return cash to shareholders. And then the next slide is going to show some of the examples of CapEx for capacity. So in 2020 and 2021 and 2022, we're going to be spending incremental dollars on laundry, litter, vitamin capacity, technology investments. And one more slide, please. And that's how it compares to our 2% evergreen model for CapEx. So in 2021, it's closer to 3%, and it will be again in 2022 as we're spending on those capacity-driven projects. But over time, we're not a capital-intensive company. And then to wrap up the financial section, we end on the dividend. We had a 5% dividend increase in 2021. But even more impressive, there's 120 consecutive years of dividends, just to a power of consistency for Church & Dwight. And with that, I just want to say thank you for joining us. We'll talk again in late October for our Q3 earnings call.