Church & Dwight Co. Inc (CHD) — Q4 2017 Earnings Call Transcript

Okay, everybody. It is game time. And I want to thank everybody for coming today. We have lots of familiar faces in the crowd. We had a terrific fourth quarter and concluded another solid year at Church & Dwight. Our projection for next year is 16% to 18% EPS growth. This is among the best in consumer packaged goods (CPG) and reflects the efforts of our employees as well as the team that's here today. I'm sure many of you have heard us say in the past that we think change is our friend. If you look at our portfolio, you'll see that we have a lower exposure to private label than most CPG companies and we also have a lower exposure to promotional categories. Finally, we make good choices when it comes to acquisitions, and that results in us riding trends such as dry shampoo, gummy vitamins, hair thinning, and more. These are the reasons why we expect to continue as a standout in CPG. Investing in the consumer space is a wise choice with Church & Dwight. Now, I want to get into the formal part of the program. First is the Safe Harbor Act or Statement, which I encourage everybody to read. We have a balanced portfolio between household and personal care brands and have a thriving specialty products business. We operate in the land of giants but we are a nimble organization capable of making quick decisions and communicating easily. We have a long history of growth through acquisitions, accruing brands that complement our portfolio since the year 2000. Our model is to buy number one or number two brands that are high growth and high margin. In 2017, we acquired our 11th power brand, Waterpik, the number one power flosser and shower-head replacement. We are looking for 20 by tomorrow. Regarding the state of the business, Q4 was up 3.4% organically with double-digit EPS growth and a great quarter for cash. All three businesses are performing well: Domestic, International, and Specialty Products. Our report shows transparency in our shares performance with seven of our eleven power brands growing in 2017. We would say that categories we are in, on a weighted average basis, are growing and that serves as a nice tailwind for us. We have low exposure to private label, which means we have strong stability in our categories. Innovation is always a strong suit for us. SLIDE was a fantastic product launch for us in 2017 and we're expanding on that innovation in 2018. Other innovations include an unscented variant of Clump & Seal lightweight litter, gummy probiotics, and expansions in our first response pregnancy kits. We have strong growth in Batiste as well, driven by the market need for dry shampoo.

Happy Monday, everyone! I want to talk a little about the digital capabilities we're building. In 2015, 1% of our sales was online, which doubled to 2% in 2016, and accelerated to 5% in 2017, ranking us highly among our peers. This growth is due to our investment in digital advertising and our efforts to ensure every product has strong online reviews. We've seen great results across various campaigns, including our New Year, New Me campaign. At Vitafusion, we have more than 50% market share in the gummy category on Amazon. Online shopping offers a tremendous distribution opportunity for us. We are increasing our advertising focus on digital channels. Over 35% of our advertising spend is now digital, aiming for high product ratings, and enhancing our product pages to engage with consumers online. This year has brought us significant consumer insights that we utilize to improve our messaging and targeting. Our predictive modeling efforts are already showing results, with sales improvement of up to 12% over last year for certain brands. We are also focusing on tackling consumer pain points like stain management aligning with our stain fighting products. The future is very promising for us as we harness our digital capabilities more effectively.

I'm excited to share the international story. We have subsidiaries in Canada, Mexico, Brazil, the UK, and others. The international business has been a historic grower for the company, performing well within our Evergreen range. Back in 2013, I was tasked with developing a new strategic plan to tap into this growth engine. Since implementing this plan, we've seen consistent growth in our international markets, and we expect to establish a new Evergreen target of 6% moving forward. We have focused our strategy on select brands tailored to both developed and emerging markets, capitalizing on the expanding middle class in places like China and Southeast Asia. Our Asia-Pacific business has grown 30% last year, offering substantial growth potential. We have created sales and marketing headquarters in key regions around the world to support our growth, especially in emerging markets. We've seen impressive growth from exporting our products overseas and expect that to continue.

I want to share with you three trends that are creating opportunities in our animal productivity business. The first is the amount of resources we consume as a species, which is growing unsustainably. By 2050, we will need to feed nearly 10 billion people, a challenge that demands improved productivity. Our approach is rooted in leveraging technology to drive these gains while keeping the welfare of the animals at the forefront. Our business has grown by innovating in animal feed, assisting livestock producers with healthier growth strategies which meet recent consumer demands for antibiotic-free food production. We have built a solid track record of developing natural solutions in animal nutrition and are excited to continue pursuing this path. We finished 2017 with over 10% of our sales coming from non-dairy products and expect that number to rise in 2018.

We are committed to improving our operational efficiency and have renewed our focus on our Good to Great program. We plan to enhance our delivery through additional efficiencies in our supply chain while still ensuring we maintain strong margins.

I want to discuss our outlook for the upcoming year, including our steady growth rates, and how we've managed gross margin amidst various pressures. We have maintained our robust cash flow generation and have solid strategies in place to continue that trend. Our focus on operating margin has been consistent and is principally related to our recent acquisitions and their integration.

I want to emphasize that we have a very clear vision for the organization going forward. We are committed to our Evergreen model – sustaining consistent growth, maintaining strong cash flow, and capitalizing on our competitive advantages. Our aim is to achieve meaningful growth while continuing to innovate with our existing products. Thank you for your time and attention today.