Church & Dwight Co. Inc (CHD) — Q4 2022 Earnings Call Transcript

I'll call everybody to attention. Hey, we haven't been together for a few years. The last time we were down here was January of 2020. So it's been three years. It's really great to see so many familiar faces in the room. We've got a great show for you today. I'm going to start off with the safe harbor statement. I encourage everybody to read that when you have some time. And here's who is here from management today, which is virtually the entire management team. So when we're done with the presentation, everybody will come on up, fill the stage, and then we can do Q&A. All right. We've got a pretty packed agenda. Some of it will be familiar to you, but these are all the things we think we want you to walk out of the room knowing more than when you walked in the room. All right. So, I want to start with a look back at 2022. So, as you all know, we had significant inflation this past year. We had $250 million of increases in COGS year-over-year '22 versus '21. And how we reacted to that is we increased prices both in '21 and in '22. And in some cases, we raised prices more than once. You saw that in laundry and also on litter. We had really great success this year with several of our brands. As you can see on the page here, ARM & HAMMER litter laundry detergent and BATISTE are at all-time highs, reaching shares. If you look at some of our more recent acquisitions, like ZICAM, THERABREATH, and HERO, acquired in 2020, '21, and '22, all had double-digit growth and all-time high market shares. Finally, we know we've experienced a black swan event over the past few years. We know there will be others in the future. So, we've done a lot of work in '21 and '22, spending a lot of money and effort getting ready for the next one. And we ended the year strong. The categories that we're in grew consumption in 13 out of 17. Just as a kind of a leave behind, these are the 17 categories that we compete in. You can take a look at which categories went up and which did not. All right. Now, here's a slide that we show every year, and this is a very different slide than we've seen in the 16 years that I've been with Church & Dwight. The first 15 years with Church & Dwight, every year we've had significant TSR. In many years, it's been double digit. This year, we went backwards. It's a disappointment to me, to the management team, to the Board and our shareholders. Granted, we have that disappointment. But now we're just going to dust ourselves off and take our sow's up. We got a great company with great brands, and we're looking ahead with optimism to ‘23, and we plan on starting another 15-year streak starting in 2023. So, why do we have so much confidence in our future? First off, we'll go left to right U.S. Barry is going to come up in a little while and talk about our plans for the U.S. business and why we expect growth in the future. Mike Reid is going to come up and talk to us about international; for a long time, international has been growing at 6% annually; that, by the way, is our model. He's going to tell you why we believe that will continue in the future. Innovation as well, Barry is going to talk about innovation. We're a very innovative company, and it's been a big contributor to our top-line growth for many years. Barry is going to take you through one innovation in particular, which is the hard ball new litter that we're launching this year; we think could transform the litter category. Surabhi is going to talk about how digitally savvy we've become and our plans for the future. Finally, the Evergreen model; everybody in the room, particularly long-term holders, are very familiar with our evergreen model: 3% top-line and 8% bottom-line growth. That model is healthy long term. We have strong fundamentals in 2023, and we think we'll return to that model in 2024. So, who are we? We're a $5.4 billion company. You can see how we split; we're largely a U.S. business; 77% domestic, and 70% international. Our Specialty Products business, which is our legacy business, is about 6% today. We have 14 power brands. Those 14 power brands make up 85% of our revenues and profits. One brand you won't see up there today is Flawless. That's a business that we bought four years ago. It obviously didn't turn out the way we had expected as disclosed in the release. But, as I said, these 14 power brands drive 85% of our revenues and profits. Here's our formula. We have a balanced and diversified portfolio. I'll take you through some stats in a minute. We have low private label exposure. The weighted average exposure is 12%. And innovation, Barry is going to take you through shortly, and we are an acquisitive company. We generate lots and lots of cash, and our first destination for that cash is a TSR accretive acquisition.

All right, thanks, Matt. So, we're going to go through quite a few things: the Evergreen model, how we finished 2022, our discussions about 2023, and also talk about capital allocation and cash flow. First off, this is how we begin and end most presentations. This is our organic Evergreen model. We start off with 3% sales growth. We have gross margin expansion of 25 basis points. Our marketing is usually flat on a percent of sales but higher dollars. We leverage SG&A to get to 50 basis points, and then we expand EPS by about 8%. That is our long-term algorithm. So in Q4, what happened? We had a better-than-expected quarter. We were 300 basis points better on reported sales; half of that was organic, half was a little bit of FX, and the HERO acquisition did better than expected. So, thumbs up on reported sales growth; thumbs up on organic sales growth. Gross margin was a contraction as we expected. We stair-stepped better throughout the entire year in 2022, and we expect that to continue in 2023. Adjusted EPS was $0.62 at the high end of our range, and then cash from operations; I'll talk about that for the full year, but we significantly beat our cash flow projections as well. For the full year, we came in around 3.5% reported sales growth versus 3%, about 1.5% versus 1% on organic, and then gross margin was way down; you heard Matt say, $250 million of year-over-year inflation was the driver behind that. Now, moving to 2023, we try to simplify the outlook. We have the detailed outlook on the next page. But this is just a chance to take a step back, and say, how are we doing? Our outlook is 0% to 4%; the midpoint is 2% EPS growth. Before we get into the investments on marketing, SG&A and the impacts below the line, our core adjusted EPS growth is 10%, double digit. We're really pleased with how strong the business is performing. We've chosen to make investments in brands and people. We're increasing our marketing spend to 10.5% of sales, which is about a $30 million investment or a 3% drag on EPS. Cash is strong, up 5% or so to $925 million. Here's a track record of reported sales growth. I don't think we've shown this slide before. We usually just show organic, but we thought we'd show both. Over the last 10 years, we've averaged 6% in reported sales growth. In 2023, we expect no different: 5% to 7%. Organically, here's the 10-year track record. Our average is around 4%. Our organic Evergreen model is 3%, and our range in 2023 is 2% to 4%.

Thanks, Rick. Everybody, good afternoon. Nice to be back live with you here. I'm Barry Bruno. I lead our U.S. business, and I'm going to talk to you a little bit about our categories, our brands, a bit about innovation, and then a new marketing campaign. We call it 'Give it the HAMMER.' You might have noticed that when you walked in as we've wrapped the building in Orange today. So, pretty good work there that I hope you like as much as we do. I may be biased as I lead the U.S. business, but I think our future is pretty bright. We're leaders in growing categories. I'll show you deeper what's going on in those categories in just a little bit, but we're the number one or number two player in categories that are growing and healthy. We thrive in difficult environments. We've been through a lot over our 150-plus years in history and we thrive in those environments. We bring more consumers in, and they stick with us as we emerge from them. Our acquisitions have a lot of room to run. I'm going to talk with you a little bit about ZICAM, THERABREATH, and HERO. When I say that we're leaders in healthy growing categories, you can see what's going on here. Green means the category grew in that year, red means it contracted. We've added a few new categories over the years as we bought brands in the cold shortening, mouthwash, and acne patch categories, but healthy growth across each of those 6.4% weighted average last year. We also know how to hold and grow share, right? Seven of 14 last year is not ideally where we want to be. We had supply challenges in a number of them that held us back from where we'd like to be. Ultimately, we plan to do far better as we go forward, as we aspire to be better than seven out of 14. That's going to happen as our supply chain improves. You can see we were below 80% in Q1 and improved throughout the year. Some of those supply challenges have made share growth difficult. But as we get into the new year ahead, we see we're at 93% growing to 97% through the course of the year. That's good not only for us; it's good for our retailers as we bring growth back to these categories where, again, we're the number one or number two player. And you saw this before; we like difficult environments. We do pretty well in challenging environments. Our portfolio split 40% value, 60% premium allows us to bring new consumers in tough economic times and keep them. As Matt said about private label, we have relatively low exposure; only five of 17 categories have material private label. This is a look at consumption in Q4. So, in 13 of 17 categories in Q4, growth took place. You can see some categories that are new to us. If you look at the top cold shortening, if any of you navigated November, December without a cold, the cough, COVID, RSV, I commend you, many of your fellow compatriots here in the U.S. did not do so well, and you can see what drove category growth there.

Thank you, Barry. Hi, everyone. So good to see you. I'm flattered to be here leading digital at Church & Dwight. My name is Surabhi Pokhriyal. Digital acceleration is actually a stated and acted-upon priority for us. Because this is a new section, I'll do a little bit of a state of the union on what the industry is seeing and then give color on what Church & Dwight is seeing. You will notice here, we say 70% of all purchases in the U.S. are going to be digitally influenced by 2027. Just for context, 60% of all sales in 2023 are already digitally influenced. What that means is not just the sales that we do on Amazon, Walmart.com, Target.com, and so on, but also sales happening in brick-and-mortar because of how the consumer feels inspired to make decisions in-store based on the digital knowledge they have. In the last few years, as we pivot to digital as our choice of channel to communicate with consumers through social, search, and programmatic, we want to make those authentic relatable relationships and truly make it more informative and entertaining. The proverbial marketing funnel has flattened because the consumer has the right to go from inspiration to buying within milliseconds. So, on the right, we are actually doing campaigns where consumers can be inspired about, say, OXICLEAN in this case, and go buy it at a retailer of their choice, all from within the creative media. We're seeing millions of clicks happening that way, which is flattening the marketing funnel.

Thanks, Surabhi. Great to be here. My name is Mike Read. I run the international and Specialty Products business for Church & Dwight. I want to talk about how we’re doing internationally, along with just a few updates on our Specialty Products business. From the Evergreen model, we're planning to grow 6% organically each year. Just to give you a little makeup of the business, we're about $900 million in sales, basically divided into two parts: our subsidiary markets, which are direct models that we sell directly to retail in Canada, the U.K., France, Germany, Australia, and Mexico—that's about 65% of our business—and the rest runs through our Global Markets Group, which we call GMG, where we work with more than 400 partners and distributors globally. We have a very strong track record of growth against that 6% evergreen model going back to 2015. We did take a little bit of a step back in 2022. We had really strong demand and orders in the system, but we did have some supply challenges we referenced earlier, along with some drag within our China market largely due to lockdowns. Overall demand is really strong; our portfolio is performing extremely well. I think as supply chain recoveries and as China starts to recover, we'll be poised to take advantage of that and get back on our evergreen model.

Okay, all right. Thanks, Mike. I can try to bring it home here. You haven't seen this slide before; we're talking about how we run the company. This is a snapshot of our consumer business. We have seven SPUs; the first six on the left side are the U.S. businesses, and international is on the far right. This is how we break down all the brands that we manage. Most of the power brands are listed here. You may be wondering why ARM & HAMMER appears for Fabric Care, Home Care, and Personal Care. In Fabric Care, we have ARM & HAMMER detergent. In Home Care, we have baking soda and litter. Over in Personal Care, we have toothpaste and others. These are all broken down into very manageable businesses. We have one-third of the business as GMG, our export business, and two-thirds are subsidiaries. I just want to repeat the acquisition criteria in case you missed it previously. So, we invest in brands that are number one or number two in their category. You're not going to see us invest in a brand that's number four or five and tell you that we're going to drive that to number one—that's not going to happen. The brands are number one and two for reasons. We focus on high-growth, high-margin, fast-moving consumables. We're asset-light in our preference; we want to leverage our substantial footprint, and it needs to have a long-term competitive advantage. I want to end on the look ahead. In the release, we said we've got strong fundamentals going into 2023. We have top-line strength, both reported and organic. We have gross margin expansion. We've got a terrific new product pipeline; you only heard about one today, but there are many others as well. We're jacking the investment in advertising; that's going to help us not only in ‘23 but also in future years. Rick took you through capacity expansion, and finally, we generate lots of cash. So, we're on the hunt for our next power brand. With that, I'm going to bring up the rest of the management team, and we'll do some Q&A.