Church & Dwight Co. Inc (CHD) — Q4 2016 Earnings Call Transcript

Okay. Thank you, operator. Okay, welcome everybody and everybody that's joining online. We have the whole management team here with us today. We appreciate the opportunity to tell the Church & Dwight story. I'm going to provide some color on five of our categories. I'm going to talk about our 2017 innovation and consumer insights that led to that innovation. If you read the press release, you know we closed a couple of bolt-on acquisitions recently. So, I'll say a few words about that. Rick is going to get up and give us the thinking on 2017 and then we'll have Q&A with the whole management team. Okay. Here's the safe harbor statement, which I encourage everybody to read and let's just jump right in. For those of us who know us, or know the story, but if you're new to the story, we started in 1846 with ARM & HAMMER baking soda. Today we're a $3.5 billion diversified company with dozens of brands and we have 10 brands that represent 80% of our revenues and profits, and we're a serial acquirer. If you go back to 2004, our sales were $1.5 billion and today we're a $3.5 billion company. And we have a very specific acquisition criteria. Just to kind of roll through them, we buy number-one or number-two brands, high-margin brands, we like asset-light businesses and we're able to leverage our extensive supply chain, and these brands always deliver a sustainable competitive advantage. We're primarily a U.S. company, so that means we have less exposure to currencies and the opportunity to grow internationally, which has been reflected in our stellar results over the past couple of years. We're pretty balanced in our split between household and personal care pretty much 50-50, and we also have a specialty products business and an animal nutrition business as well. We've delivered stellar results to our shareholders over time. Now, I'm going to talk about five categories, so I want to start with laundry, right. Laundry has been a growing category, and the growth has been driven by unit dose over time. If you go from 2013 and 2014 the category was down and then started to grow in 2015 and 2016. So let's take a closer look at 2016, particularly in the quarters. So in Q1, we had unsustainable organic growth of plus 6%, meaning it's going to be a tough comp for the first quarter of 2017, while Q4 shows a slowdown. This is the first quarter in two years that has seen negative pricing in this category, concentrated in the liquid part. Looking at competitor activity in Q4, there were elevated promotions, where Simply Tide increased promotions to 60%, Sun to 43%, and ARM & HAMMER and XTRA both were promoting in the 30s. Despite this level of spending, ARM & HAMMER laundry continued to grow share in Q4. The good news on XTRA is that we grew net sales and gross profit in 2016. On the share story, XTRA has been dragging on share while ARM & HAMMER and OXICLEAN grew. In 2016, we finally got some traction with our new triple-chamber pod and expect to make much more progress in 2017. Now, let's move on to litter. Litter has also shown growth historically, with volume mainly driving the category growth of 4.4% in 2016. Our innovation has been significant, like the original CLUMP & SEAL driven by odor control, and we've introduced ARM & HAMMER CLUMP & SEAL SLIDE, which has been a hit with consumers. In the vitamins category, we're entering the energy category with an energy gummy sourced from green tea. Moving to condoms, there's a noticeable shift to online, and we are launching TROJAN XOXO aimed at the female buyer this year. Finally, in dry shampoo, we have seen great potential for the category that has grown significantly, and have new variants coming out. As we deliver as a company, our diversified product portfolio yields a split of 60% premium and 40% value, with an expectation of share growth driven by great innovation, marketing, and a great sales team. In 2017, we have promising new innovations across categories, including the triple-chamber pod, Slide, the energy gummy, XOXO, and BATISTE. Marketing spending remains crucial for us, with a percentage of sales ranging between 12% and 13%. And we're the 18th largest advertiser in the U.S. I have more to cover, but I’ll pause here.

Great. Thank you, Matt. I'm going to go through three things with you guys. First, the quarter, then the full-year 2016 results, and then we'll spend some time on the 2017 outlook. The quarter saw 2.7% organic sales growth. Remember our outlook was 1% to 2%, so we overdelivered on all three divisions. Consumer organic, which includes international and domestic divisions, was 3.5% for the quarter. Our organic growth was largely volume-driven at 3.2%. Gross margin was up 60 basis points, and operating margin was up 50 basis points. EPS was up 7% to $0.44, which beat our outlook of around $0.42. A note on the recent announcement regarding the sale of our Brazilian chemical business; there is a small charge in 2016 of $0.02 and a similar charge in 2017, but overall it's a positive focus on our consumer business in Brazil. From a phasing perspective, you'll see the stair-step down through the quarters, but it's up in Q4, which is a good sign. Now discussing the full-year results, we had 3.2% organic growth, with domestic at 3.1% and international at 10%, which is a record for that division. The specialty products division saw a reliance on milk pricing, while we noted that it went up about 6% sequentially from Q3 to Q4, so we expect growth from that division in 2017. EPS for the full year was up 9% to $1.77 with cash a little over $600 million. We focus on gross margin year-over-year, driven by productivity gains and our initiatives to enhance our supply chain. We discuss free cash flow because it speaks to our strength in cash generation, and we had a stellar free cash flow conversion rate, exceeding 120%. Now looking ahead to 2017, we expect to see 3% organic growth, broken down to 2.5% to 3% for domestic growth, 4% to 5% internationally, and around 2% to 3% for the specialty products division. We anticipate a slight increase in gross margin of 60 basis points, even with some moderate inflation and higher promotional spending. It's exciting to offer a growth outlook that aligns with our long-term strategy, which is positioned for highlights in both product innovation and market expansion. I look forward to discussing further details during the Q&A session.

Okay. All right, gang. Come on up. It's not often you get the entire management team, so don't be bashful to ask some questions. We had a terrific fourth quarter and just a really fabulous 2016. We're optimistic about 2017. So now we'll take your questions.

Can you guys bridge the organic growth and that negative 1% Nielsen to the roughly 3% in the consumer domestic business you did?

Yeah. I used to masquerade as the finance guy, so I’m going to let the finance guy do that.

Yeah. I think I might be able to provide some clarity. So, you’ll see there in the Nielsen data, it has been relatively weak and that’s really track channels. So, we were slightly negative in track channels. However, we reported a 2.8% organic growth from the consumer domestic division, and that entire delta can be explained by two factors—about 300 basis points total, with about half coming from club channels and the other half from online channels. It's reasonable to believe this trend might continue, but keep in mind that our Q1 comp is based on Q1 last year, which had about 5% organic growth. Therefore, we’re projecting a Q1 organic growth of 1% to 2%.

Okay. And then what percentage of sales is e-commerce now?

We've just said in the past, we're right in line with the 1% to 3%. So it's growing very quickly.

Just on the laundry section, can you give your thoughts on the impact of Henkel's acquisition of Sun and how it may affect the laundry category moving forward?

That's a crystal ball question. There are conflicting views on how this will develop. On one hand, there's a perception that it will drive promotional activity, while on the other hand, there's hope for rationality in the category, leading to a balance. We’ll need a few quarters post-acquisition to gauge any concrete impacts on the laundry space.

Could you elaborate on the strategy to turn around XTRA's performance in 2017?

XTRA has struggled for three years. However, it did grow profit in 2016. Key to turning it around will be getting a more competitive stance in terms of promotions.

Can you comment on the market share performance? I noticed you lost market share in six of your largest ten brands?

Marketing is around 12% of our sales. We have to decide how to allocate it between brands. Some brands can withstand less marketing support while others require more. We are committed to deploying smart marketing resources to achieve appropriate effects.

Could you talk about risks seen in other categories as online sales grow?

Lower barriers to entry definitely exist in categories like beauty, but in personal care categories like condoms, trust in the brand is essential, limiting disruption by smaller firms. For categories where comfort is an issue, online retail becomes a significant opportunity, enabling us to drive sales creatively.

With the recent acquisition costs averaging significant multiples, especially for smaller categories, what's the strategic goal for these acquisitions?

We spent $290 million on those two acquisitions. We paid a little under 12 times revenue, and we believe synergies will be below 10 times, making it a sound strategic move that aligns with our targets.

How should we view the international growth outlook moving forward?

International expansion has become a significant growth engine for us. We anticipate notable progress, particularly through new marketing offices and strategic acquisitions in key brands. We aspire for international to represent a more substantial upward trajectory in our overall portfolio.

In summary, we are optimistic about our international future, aiming for $1 billion in that segment while maintaining sustainable growth through strategy and strong brands.

In terms of gross margins for 2017, we're projecting a modest increase despite inflation. The key components of that include acquisitions, productivity, and operational efficiencies, while we continue monitoring promotional pressures.

Thank you all for your time today. We had a super fourth quarter and are optimistic about what lies ahead for 2017. We appreciate your engagement and look forward to your continued support.