Church & Dwight Co. Inc (CHD) — Q4 2020 Earnings Call Transcript

Thank you all for joining us today. I'm going to begin with the safe harbor statement. I recommend that you read it at your leisure. We have an entire management team on the call today available for Q&A after the formal pitch. We have a lot of slides and several presenters, but I'm going to give you the short story upfront. 2020 was a turbulent year. We emerged from 2020 much stronger as a company. We like to say that we do our best work when we're in a jam. That's true for 2020. We protected our people. We found a way to run the plants and warehouses safely. We set production and shipping records. We figured out how to make hand sanitizer in our U.K. plant. We operated the company with 2,000 remote employees. We pivoted our marketing messages to support a 60% increase in e-commerce sales. We installed new packaging lines with the assistance of off-site engineers using Google Glasses. We added overflow warehouses. And we validated new suppliers and co-manufacturers. In our communities, we delivered masks and hand sanitizers to hospitals where we live and donated to food banks. And recently, our Mason City, Iowa plant loaned an ultra-cold freezer to a local hospital to store the COVID-19 vaccine. Consumer demand drove huge sales growth, which enabled us to overcome significant incremental COVID costs and incremental U.S. government tariffs, but it also gave us the opportunity to invest in our future, which we did in the second half. Looking ahead to 2021, we are optimistic that the vaccine will help the global business environment. We operate in many categories, and we do expect pluses and minuses, depending on the category. All in, we expect to deliver 3% organic sales growth and 6% to 8% EPS growth in 2021. And this is on top of almost 10% organic growth and 15% EPS growth in 2020, which exceeded our 2020 outlook when we last spoke in October. Our evergreen model is intact. Before we start the formal part of the program, here is a brief video that is a look back on 2020.

Welcome to our biggest business, Consumer Domestic, with over $4 billion in sales. As you have heard from Matt, we plan to deliver another year of growth in 2021 on top of an outstanding performance in 2020 and in line with our evergreen model. There are five distinctive drivers for growth in 2021. Number one, tailwinds on vitamin gummy category growth, accelerated by strong brand VITAFUSION. Second, WATERPIK. Despite dental offices and many retailers being closed for part of the year, we sold slightly more power flosses in 2020 than in 2019. Removing these roadblocks, growth will be even stronger. Three, flawless sales will benefit from new products, a great influencer boost and a rebound of footfall. Four, some brands will rebound where social distancing really impacted sales. With vaccines coming, consumers will socialize more. And five, last, but most importantly, we strengthened our brands and improved our media spend effectiveness. We create brands consumers love. 2020 was a year of dramatic changes how consumers use media, which allowed us many tests and learn experiments, feeding our predictive data models and giving us confidence that our media dollars will be again more effective in 2021. But let's start with tailwinds. We are in the right categories. We saw growth in 12 of our 17 categories, average 9.8% overall. We saw an over 50% growth in vitamins, double-digit growth in baking soda and single-digit in many other categories. The only category of double-digit decline is power flosses and that is in the Nielsen universe. This is important, as Nielsen only measures about one-quarter of power flosses sales, and I will show you numbers from the whole universe later. We have high expectations for category growth in 2021, and I will speak to them in more detail.

Church & Dwight has delivered consistent new product innovation year-in and year-out in support of our global growth objectives. 2021 is no different. We have a super lineup of brand-building innovation. So much so, we do not have the time to take you through the fullness. So we have curated a few of our favorites. Every new product is born from a consumer insight. 79% of consumers want germs removed from their laundry, introducing OXICLEAN Laundry & Home Sanitizer. This product kills 99.9% of bacteria and viruses. It also removes germs, odors and stains. Check out this video. Consumers have been hyper-focused on cleaning household surfaces. Introducing OXICLEAN multipurpose disinfecting sprays. This product kills COVID. It is powerful, cleaning and disinfecting without chlorine bleach. Two-thirds of consumers find flossing difficult and only 16% floss daily. Introducing WATERPIK Sonic-Fusion 2.0, the most successful new product launch in power flosser history just got better. It has two times the bristle speed, greater flossing power, multiple head sizes and two brush speeds. Here's another consumer insight. Consumers with smaller bathrooms struggle with counter space and outlets. Introducing Waterpik Ion, the same amazing clean, unplugged. This product is 30% smaller than traditional plug-in models, has 90 seconds of water capacity and with the lithium-ion battery that lasts up to four weeks with a single charge. One more consumer insight is that consumers are becoming more confident in doing beauty routines at home and they are aware of the cost savings. Introducing finishing touch FLAWLESS facial cleanse and salon nails. And one last consumer insight, 33% of consumer’s plan to purchase more immune support supplements, introducing VITAFUSION Super Immune Support, it is the only gummy to deliver over 100% daily value of the top 3 immune ingredients, Vitamin C, Zinc and Elderberry. It also includes a new ingredient, Manuka honey. This is the first VITAFUSION item in the cough and cold aisle. VITAFUSION has been increasing the amount of new items it has been launching. 2021 will be no different, we have an exciting list of new items coming.

Thanks, Steve. It's been an honor to work alongside you these last seven-plus years here in International, and I can assure you that the Cugine-effect is felt far beyond just us here in International and your work over 20-plus years has impacted the entire Church & Dwight organization. You will be missed by so many, Steve, but I think, most of all, by me. As you saw, under Steve's leadership, we've built International into an $820 million business that's growing faster than ever. And as a reminder to this audience, we think about our international business in two buckets: our subsidiaries where we have fully staffed Church & Dwight teams on the ground, in Canada, Mexico, U.K., France, Germany and Australia; and our Global Markets Group, which covers 130 other markets via distributors who represent our brands. I'm going to get into both shortly. However, this chart shows the relative size of each in net sales. As you've seen, GMG has been on a tear and now represents 34% of all international sales, followed by Canada and our European subsidiaries and then our Australia and Mexican subsidiaries. From a growth standpoint, our subsidiaries grew plus 4.8% in 2020, and GMG continued its stellar run with explosive growth of plus 19%. What's noteworthy here is that our international business is much more heavily weighted towards personal care products than our U.S. business, which makes these results even more impressive in an environment where COVID slowed down many personal care categories. For some additional context, our subsidiaries have been delivering outsized growth, more than double historical CPG category averages. And some of our key subs are now, for the first time, approaching scale, which we'll talk about as a margin improvement enabler a bit later.

Thanks, Barry. I'm going to run you through the animal productivity story right now. You heard me speak earlier about what our evergreen model is. It's 3% annual organic growth, 2% from the U.S., 6% from international and 5% from specialty products. Our Specialty Products business is a $300 million business. Two-thirds is animal productivity and one-third is specialty chemicals. If you look at the animal productivity piece, you'll see it's split between animal dairy and animal nondairy. Historically, dairy has been the biggest part of the business. The three types of products we produce are prebiotics, probiotics and nutritional supplements. Now why is that important? It's because the consumer is moving away from wanting to consume food that is produced with antibiotics. The dairy business has been cyclical. As I said before, it's been the biggest part of the business. If you look at this chart, in 2011, 2014, 2017, those were up years. So typically, it's a three-year cycle. The expectation was that 2020 was going to be a big up year. It didn't happen. Why? Because of the pandemic. So we expect a strong year from the dairy business in 2021. Now if you look at dairy versus nondairy, we were monolithic back in 2015. Less than 1% of our sales were from nondairy. In 2021, we expect it to cross 30%. So just wrapping up here, we have a trusted brand. All of those products I described are ARM & HAMMER products. We're aligned with the consumer trend to move away from antibiotics to prebiotics and probiotics. We've moved from dairy to other species, catalyst wine and poultry, and we have a lot of runway internationally. Now I'm going to talk about how we run the company. It's pretty simple. We have five operating principles: One, leverage brands; two, friend of the environment; three, leverage people; four, leverage assets; and finally, leverage acquisitions.

Okay. Thanks, Matt. I'm going to go through 4 items today. First off, is the evergreen model like we always do? Number two is 2020 results, both for the quarter and the full year. The third thing will be the 2021 outlook. And then the fourth will be the capital allocation discussion. So first off is the evergreen model, and our shareholders know that we've been talking about this for a very long time. 3% top line, 8% bottom line. And we have a detailed model to go through as well. So 3% for net sales growth, 25 basis points for gross margin expansion; flat marketing as a percentage of sales, which is typically higher dollars as we grow the top line; and then we leverage SG&A by 25 basis points. That gets us to 50 basis points of operating margin expansion and about 8% EPS growth. Now moving to 2020. So we ended the year in a fantastic way. Q4 2020 was 10.8% organic sales growth, 11% domestic organic sales growth, 14.9% for international and minus 1.2% for SPD. Gross margin was down 280 basis points, but in line with what our expectations were. Remember, our outlook was down 250 basis points for the quarter. Now that 280 included a 40 basis point drag because we recognized some of our supply chain workers as the pandemic spiked again in Q4. And then marketing change was up 140 basis points in the quarter as we invested behind our brands to enter 2021 with momentum. SG&A was leveraged by 70 basis points. Despite higher amortization and investments, the top line helped us leverage SG&A in a big way. And then EPS was $0.53. Our outlook was $0.50 to $0.52. So we beat the midpoint of the range by $0.02. Moving to the full year 2020, organic was 9.5%; domestic was 10.7%; international, 8.6%; and SPD was 0.4%. So just really a strong year to have a 10% organic full year number. Gross margin was 45.2%, or down 30 basis points, really driven because of COVID and incremental tariffs, but we'll get into the detail in a minute.

Appreciate it. Thanks, Olivia, for the question. Yes. Let me start with Oxy sanitizer, right? I think, as Steve mentioned, the right product, right time, right place and definitely lends itself to the incrementality question that you're asking. So one of the strongest launches we'll have on the acceptance front, and so feel very good there. In terms of the other categories, great question, too, because while the headlines are supply and demand, some incredible work by the sales and the commercial team in other categories to strengthen the foundation and some great wins from shelving and placement and brand positioning on condoms, vitamins, BATISTE, laundry and laundry additives throughout the year as well. So we've been busy at work to strengthen the foundation and really excited about some of the things that have already hit market and some yet to come. So it's been a strong year on those elements, Olivia.