Church & Dwight Co. Inc (CHD) — Q4 2019 Earnings Call Transcript

Okay, gang. We’re going to get going now. Thank you all for coming today and thanks, everyone, who is dialing in from office or home. I’m going to begin with the Safe Harbor statement. I recommend everybody to read that at your leisure. Say who is with us today from management, we have our CMO, Britta Bomhard; our Head of International and Global New Products, Steve Cugine; our General Counsel, if you have any legal questions; Rick Dierker, our CFO; Rick Spann, who runs Supply Chain; and Paul Wood, who runs U.S. Sales. All right. So here’s – I’m going to give you a short story right now. So you don’t have to really pay attention to the other 150 slides. We had a terrific year. This is the second consecutive year that our company grew organic sales 4%. The U.S. posted 4% organic sales growth and 10 out of 12 of our power brands grew or held share. International posted 9.2% organic growth and continues to be a juggernaut for the company. And as we ended the year, organic growth returned to the Specialty Products business after two down years. Last time, we had an up quarter was Q4 2017. And the reason it turned positive is because the dairy market became healthy. And another encouraging sign is that domestic volumes turned positive in the fourth quarter. And finally, we had record cash from operations in 2019. So now looking ahead to 2020, we’re calling 3.5% organic growth, and that is net of exiting the low-margin gummy private label business. And consistent with our Evergreen model, we’re calling 7% to 9% EPS growth and that is top tier in CPG. Now I want to recap for a minute why Church & Dwight is a standout in the consumer space. Number one, we have an Evergreen model that our shareholders are very familiar with as our employees. Number two, we focus on cash. Number three, we have an ability to execute and that’s what drives our performance. We deliver meaningful top line and bottom line growth year-after-year. We have a very lean company with the highest sales per employee of any of our peers, and that sales per employee stat is an underappreciated metric. We are innovators with new product offerings across many categories year-after-year and we’re becoming digitally savvy. The 8% of our sales are online today and that does not include buy online, pickup in store. If we included that, it’d be much higher than 8%. But we made good choices when it comes to acquisitions. Those choices have led us to dry shampoo, gummy vitamins, women’s hair removal, water flossers and hair thinning solutions. So we believe there’s no better place to invest in CPG than Church & Dwight. So here’s our track record. Let’s go to the next slide. Here we are. So look at our last three, five and 10 years, we delivered double-digit TSR returns to our shareholders. And if you look at 2019, 8.3%, and that’s on top of a 2018 that was plus 30%. Let’s move on to the formal part of the program. So who we are, why we’re winning. Britta is going to come up and talk about them – give you an update for the master brand. And also Britta and I are going to ham and egg the consistent innovation story. Steve is going to come up and talk about international, I’ll kind of come back and tell you about animal productivity and how we run the company, and then we’re going to end with Rick on financials.

Okay. Hello, everyone. ARM & HAMMER is by far our biggest brand. It’s more than a billion dollar brand. So really important to us. And you might remember from last year, we presented our more Power to You campaign in this iconic institution. Now, I know most of you are pretty skeptical. You’re a little bit like my boss. Is this really working? So I thought, why don’t I share a couple of results first. Since we launched the campaign in 12 months, we’ve actually added 2.6 million households who are now buying ARM & HAMMER, and that’s an increase of 3%. And this picture you’re seeing is actually, it is currently nearly seven out of 10 households buying ARM & HAMMER. And if this room is representative, my ambition is actually to have three out of four households buying ARM & HAMMER. So you might remember, there’s not many where the U.S. is as united as having three out of four people agree that this is a great choice. But what’s more important? You could now say, well, but you get them in via promotions? No. Actually, we have people spent more money on ARM & HAMMER, and you see here they’re spending 5% more. So if you think about it, what is a great sign for brand health? More people buying it and spending more. So I think that’s very clear answer that ARM & HAMMER is very healthy and growing wonderfully, right? There we go. And I think for those of you who saw it last year, you might want to note that we have ARM & HAMMER every single one of our brands and categories. And I want to show you a couple of how we communicate about ARM & HAMMER. And for those of you who have seen some of our cats, they just got cuter. That’s a really distinctive campaign and it’s working really well for us. You might not have seen this campaign, because we just recently launched our ARM & HAMMER dental campaign at the very end of last year, it’s a very hard one to break through. So I hope, A, you appreciate how different it is to a normal dental commercial you might see; and secondly, it also illustrates that this campaign works in no matter what category. So let’s look at that one. Challenged and check, how well the plaque removal is currently on what you use. And moving on to our next, you might know, if you’re not part of the Burning Man crowd, and I’m pretty sure most of us here in this room aren’t, then this one is what we say is a great deodorant. This is a broad spectrum of what we can do with the ARM & HAMMER campaign on every single of those different categories, playing to what’s important and what’s the consumer insight, but still bringing it all together and driving the overall $1 billion brands.

All right. Obviously, I’m the expert on dry shampoo. So if you’re somebody with normal hair and you pick up an aerosol can of dry shampoo, that’s okay, that might make my hair dryer. So we said, “Hey, what’s going to appeal to women with normal to dry hair?” So we said, “Okay, we’re going to launch Batiste Waterless Cleansing Foam. So this is something that you rub into your hair and refreshes your hair and dries in 60 seconds, and we have four different variants we’re launching right now. And now WATERPIK. You also often hear us talk about WATERPIK water flossers. Well, WATERPIK, that business, we’re experts in water-jet technology. So that technology has been around for almost 50 years. And so now we’re coming out with a brand-new, the first-known FDA-registered showerhead. And the insight here is that, millions of Americans discuss massage with their doctors, it’s something that WATERPIK folks look into. So here it is, WATER FOR WELLNESS, this FDA-registered power pulse showerhead. And we’ve done nine clinical studies. And what those studies tell us is that, these particular showerheads soothes muscles, they increase flexibility and they promote better sleep. And here’s kind of a fun fact. The average shower is eight to 12 minutes. And what our consumers tell us is that, these benefits they start feeling after two minutes using these showerheads, really cool innovation.

Thank you, Matt. Excellent. So I’m pleased to be here to share with you the fabulous international growth story. So, as Matt already talked about, the Evergreen target for international is 6% per year. In 2014, we delivered $535 million in sales. We finished 2019 at $756 million in sales. The important note here is that, we firmly believe that we’ve reached global scale. There isn’t a market that we’re not in today and where we can’t reach with ourselves through our existing subsidiary markets or through our GMG business. I think even more impressive than the size of the business is that we tripled the organic growth rate from roughly 3% to about 9%. So significant, the larger business tripling the growth rate. This is an important chart that we show every year, but there’s some new information here. Our Global Markets Group is now 33% of the total business. For the first time, it is the largest segment within the international business, followed by Canada, Europe, three countries, Mexico, and Australia. We have grown historically well above our Evergreen target of 6%. In 2019, we hit 9.2%, an outstanding year, and we leave the year with momentum delivering 10.6%. So we feel the wind at our back. Let’s break that down in a little more detail. Our subsidiary markets delivered 5.2% and our GMG business, a whopping 19.2%. Our subsidiaries are largely in developed markets. So 5.2% in developed markets is really outstanding performance. Our brands are healthy, whether they be in emerging markets or GMG or in our subsidiary markets.

All right. Thanks, Matt. Good afternoon. So we’re going to go through three things. We’re going to go through the 2019 results for the quarter, for the full-year and then go through the outlook. And before we do that, we’ll just start with Evergreen model, we – because we always do. 3% top line growth and 8% EPS growth. And then the drill down for that is 2% organic net sales growth, 25 basis points of gross margin expansion, flat on marketing as a percent, higher dollars typically with revenue growth. We leverage SG&A and we get to 50 basis points of operating margin expansion and then 8% EPS growth. So that’s the backdrop. So how did we do? In Q4, you heard from Matt already, you saw in the release this morning, 4.4% organic revenue growth. Domestic was 3.5%, international was 10.5% and SPD for the first time in eight quarters with positive organic growth, which is great. Adjusted gross margin was 170 basis points up. I’ll walk through the detail of that in a minute. Marketing was up 240 basis points. So that’s the highest spend rate we’ve had in 2019. Just $37 million more year-over-year. It’s a very significant increase. SG&A was up largely because of the acquisition. Our TSA agreement as well as the amortization with that deal. Adjusted EPS was $0.55 versus the $0.54 outlook.

I finally beat someone taller than me. So I guess, two questions. I remember, I don’t know, maybe it was 10 years ago, compaction was a pretty big deal for Church & Dwight from a margin perspective. So I was hoping to get some perspective from you on the new product launch and what that means for shipping costs and just packaging costs and how you think about that? And then the second is, when it comes to FLAWLESS, I know there’s kind of conflict right between the As Seen on TV and the merchandising aspect. And so just thinking longer-term, is there a plan to like completely migrate this to a in-store and digital and online product where you don’t have that comp, because you guys have really execution, merchandising, display activity. So just – was hoping to get some clarity on the long-term plan there?

Well, I’ll take that one first. Yes, I mean the plan for FLAWLESS system migrated from As Seen on TV brand and completely into the wet shave aisle and completely vacate that part of the store. Because in a lot of stores, it’s not in a very attractive place. So if you look at one major retailers by automotive. But when we bought it, we said no, this is a brand that’s going to have legs at long-term and it belongs to wet shave aisle. And one major retailer is getting behind it right now. So over time, that’s what you’re going to see happening. It’s happening right now in 2020. Your other question was about compaction. So when compaction happens, there is one major retailer that drove that many, many years ago, that’s not on the horizon right now for the industry. I mean, right now, one would argue that the biggest form of compaction is pods. So that pods at some point – if pods at some point plateau, I think, it’s possible then we would go back to, it may be a major compaction for liquid laundry detergent, but that is clear enough on horizon right now.

Yes. Sticking on the laundry side, maybe first on CLEAN & SIMPLE. Can you give us a little more color? Is this incremental shelf space? How cannibalistic do you expect it to be? And then also, I mean – and maybe it’s in the plans, there is not a pod form coming out, I guess on the initial launch. Well, it seems that Tide is coming at you with the Tide Simply version of pods. So maybe the thought behind that of is, are you seeing pods in your category start to level out where it’s not as important? Do you not see this as big of a threat? So any more color both around what the shelf space looks like and how you expect this to interact with the core brand and then also just from the pod standpoint, the competitive launch?

Okay. So on the promotional environment, we’ve talked about every quarter, and as many of you know the promotional environment generally talking about the household side of the house and not a personal care. And when we say household, it’s about laundry and we’re talking about litter. I’ll take litter first. The litter category is pretty tame right now as far as the promotional environment. So if you look at sequentially, it was pretty much flattish and even year-over-year, there is no story there. So we think it’s steady as you go in litter. I think you got to keep in mind is that, in the litter category these hard fought price increases, it’s unlikely that the suppliers are going to want to deal that, that the hard one increased back to the consumers. So I wouldn’t expect that to change in 2020.

Okay. All right. It looks like we might be done. Hey, I want to thank everybody for coming today. We had great questions and looking forward to talking to you at the end of the first quarter.