Church & Dwight Co. Inc (CHD) — Q2 2025 Earnings Call Transcript

All right. Thank you. Good morning, everyone. Thanks for joining the call. I'll begin with a review of Q2 results. I'll speak on the Touchland closing, strategic actions, and some thoughts on the macro environment. Then I'll turn the call over to Lee McChesney, our CFO. When Lee is done, we'll open the call up for questions. First, I'll begin with Q2 results. Organic sales grew 0.1%, exceeding our outlook of minus 2% to flat. Adjusted gross margin was down 40 basis points, also exceeding our outlook range. Adjusted EPS was $0.94, which was $0.09 higher than our $0.85 outlook. Lee will take you through the rest of the numbers shortly, but first, some highlights from the quarter. When we gave our outlook back in May, we were seeing category consumption data that indicated a deceleration from strong growth early in the year to turning negative in early April. The good news is that since then, things have begun to improve, with categories finishing positive in April and Q2 category consumption for our largest categories finishing around 2.5%. The macro environment has been volatile and uncertain, with tariff policies changing frequently. Consumer uncertainty showed up in early Q2 when consumer confidence hit a 12-year low. Since then, consumer confidence levels have started to recover as tariff policy appeared to stabilize. Not surprisingly, given that backdrop, our second-quarter sales finished slightly ahead of our outlook, which gives us confidence in achieving our full-year organic outlook of 0% to 2%. Our brands continue to perform well in this dynamic environment. We continue to drive both dollar and volume share gains across most of our brands. Our balanced portfolio of value and premium products and our relentless focus on innovation continues to position us well for the future. International continues to take share across the globe. Further, we continue to grow the online class of trade, with online sales as a percentage of global sales now reaching 23%. In July, we closed our most recent acquisition, Touchland. Touchland is the fastest-growing brand in the hand sanitizer category in the U.S. and is the #2 hand sanitizer in the category. Touchland experienced strong growth in Q2, outpacing the category and gaining share. We're excited to add Touchland as our eighth power brand and even more so excited to officially welcome the Touchland team to Church & Dwight. Now let's discuss the strategic actions we outlined last quarter. To drive shareholder value, the management team assessed each of our brands on a regular basis. As a result of these reviews, we often accelerate and increase investments in our strongest brands and move quickly to address opportunities for value creation. That review is what led to the strategic decision to exit FLAWLESS, SPINBRUSH, and WATERPIK showerhead business. Today, we'll provide an update on our vitamin business. We remain focused on our revitalization efforts, with multiple innovation and branding programs underway in 2025. While it's still too early to fully evaluate results, we can share at this time that we're seeing mixed results. There are some green shoots. We see our multivitamin business improving week over week, and our innovation has seen strong consumer reviews, and of course, we remain focused on executing our improvement actions. In addition, we are undertaking a strategic review of the business, including streamlining our supply chain to strengthen our core business, potential joint venture and partnership opportunities, and divestiture options. The gummy vitamin business continues to be a drag on the company's organic growth. The good news is the gummy vitamin category grew almost 4%, which is the third consecutive quarter of growth. The bad news is our consumption was down around 25% as our TDPs declined. Now I'm going to turn my comments to each of the 3 businesses and the improved results from our teams in the second quarter. First up is the U.S. consumer business. Organic sales declined 1% with volume growth being offset by negative price mix. Volume growth was muted by continued retail destocking in Q2. We continue to expect slight impacts moving forward. Consumption was positive in the quarter for the U.S. business, with momentum improving, and we grew share in 5 of our 7 power brands. Let me provide a bit of color for a few of our important categories. First, with laundry detergent, ARM & HAMMER liquid laundry detergent consumption grew 3.2% in contrast to 1.3% category growth. ARM & HAMMER share in the quarter reached 15%. Moving to Litter, ARM & HAMMER Litter consumption grew 3.4%, while the category was up 4.1% as we saw heightened competitive promotions. Next is BATISTE, BATISTE continues to be the global leader in dry shampoo. And while consumption was down almost 7% in the quarter, we're confident in BATISTE's return to consumption growth in the future. There are a couple of factors contributing to the consumption decline, such as competitive price increases, economic pressure driving trade down, and we had some supply issues that are now resolved. This year, we're launching BATISTE Light as a leading brand; our innovations continue to attract new users to the category and increase household penetration. Over mouthwash, THERABREATH continues to perform extremely well. While the mouthwash category was down in Q2, THERABREATH consumption grew 22.5% and continues to be the #2 mouthwash with a 21% share. Remember, we believe there's a lot of runway here. Our household penetration for THERABREATH currently sits around 11% versus the category at 65%. HERO once again outpaced the category with consumption growth of 11.4% compared to the acne category growth of 1.5% and remains the #1 brand in acne care with a 22% share. Equally important as HERO continues to gain share in acne patches. And similar to the THERABREATH story, we believe household penetration growth is key for this brand. It sits at 9% versus the category at 28%. HERO continues to launch innovative solutions and patches and is entering the growing body care segment in 2025 with the Mighty Patch Body. Looking ahead, we're excited about our pipeline of new products, which remain a key driver of our success. In 2025, we expect continued innovation to power our growth and build on momentum, especially in several core categories where we're leading the way. Now turning to international SPD. Our International business delivered sales growth of 5.3% in the quarter; organic increased 4.8% due to a combination of higher volume, price, and mix. Growth was led by HERO, THERABREATH, and FEMFRESH and was broad-based, with all of our subsidiaries delivering growth. We were able to grow share in all of our power brands in the quarter, which is a great achievement. Finally, SPD organic sales increased 0.1% due to a combination of higher price and product mix offset by volume. We continue to be excited about the growth opportunities in this business. Looking ahead, our full-year organic growth outlook continues to be 0% to 2%, while category consumption has improved. There remains uncertainty around the U.S. consumer and global economy. We expect our Q2 brand share momentum to continue, supported by our new product launches, our distribution gains, and sustained full-year investment in marketing. Adjusted EPS, we continue to expect 0% to 2% growth, which includes the Touchland acquisition, the cost of the product recall, and the wind down of the 3 exited businesses. I'll close by saying that category consumption is looking a bit better than 3 months ago, and our brands are strong. They're doing well. We're gaining both dollar and volume share across much of the portfolio. We have a healthy mix of value and premium offerings. We're well equipped to navigate the current environment. The strategic actions we're taking will position the company well for the future, and we continue to be on the hunt for the right acquisitions. I'd like to thank all the Church & Dwight employees for executing well in a volatile environment. And now I'll hand it over to Lee for more detail on the quarter.

Thank you, Rick, and good day to everyone. We've just concluded a very productive quarter from our teams across the globe. As we shared during our first-quarter call, we remain focused on what we control in the second quarter, which positions us well as we look forward to the second half of 2025. Let's dive into the second quarter and our outlook. We'll start with EPS. Second-quarter adjusted EPS was $0.94, up 1% from the prior year. The $0.94 exceeded our $0.85 outlook, driven by stronger sales performance and good resiliency with gross margin. Reported revenue was down 0.3%, while organic sales were up 0.1%. This was on the high side of our May 1 outlook and reflects improvements in category growth and brand strength. Our second-quarter adjusted gross margin was 45.0%, a 40 basis point decrease from a year ago. Productivity and a higher-margin acquisition business mix contributed 170 basis points of margin growth, offsetting a negative 140 basis points from inflation and tariffs, 40 basis points from volume, price, and mix, and 30 basis points from the ZICAM/Orajel swab recall. It’s worth noting that a portion of our original tariff estimate, about 20 to 30 basis points for the second quarter, shifted to the third quarter due to changes in tariff rates and shipment timing. Moving to marketing, our marketing expense as a percentage of sales was 10.4%, or 30 basis points higher than Q2 last year. For the year, we continue to target 11% of net sales, aligning with our evergreen model. We are pleased with our share results in the first half of the year. For SG&A, Q2 adjusted SG&A decreased by 80 basis points year-over-year. Other expense dropped by $5.2 million due to increased interest income. We now expect other expense for the full year to be around $65 million on an adjusted basis, reflecting lower investment income following the Touchland acquisition. In Q2, our effective tax rate was 23.8%, down from 24% in Q2 2024, marking a 20 basis point year-over-year decrease. The expected adjusted effective tax rate for the full year remains at 23%. Cash from operating activities for the first six months of 2025 was $416.5 million, representing an $83 million decrease from last year due to working capital timing and lower cash earnings. Capital expenditures for the first six months stood at $39 million, a decrease of $37.6 million from the previous year. We continue to anticipate CapEx of roughly $130 million as we return to historical levels of 2% of sales in 2025. In Q2, the company executed a $300 million share repurchase through an accelerated share repurchase program. Now, let’s talk about our outlook. For the full year, we expect reported sales growth of approximately 0% to 2%, which includes the Touchland acquisition and the impact of lower sales from the businesses we are exiting. To quantify, that’s about $70 million to $80 million coming from Touchland and $78 million going out from the exited businesses. We expect organic revenue growth to be approximately 0% to 2%. This sales outlook reflects our brand and category growth momentum and considers a balanced macro view of the uncertainties in the U.S. and global economies. We continue to expect full-year gross margin to contract by 60 basis points compared to 2024 due to elevated input costs and tariffs, recall expenses, and unfavorable price and mix that exceed incremental productivity and higher-margin acquisition impacts. Looking ahead, Touchland is positive for margin rates, but the business exits mitigate that benefit for this year. We are maintaining our adjusted EPS outlook for 2025, expecting full-year adjusted EPS to be between 0% to 2%. This includes key elements highlighted after the first quarter, along with the Touchland, which is expected to have a neutral impact on EPS for 2025, the winding down of three business exits, and the costs associated with the product recall. For Q3, we anticipate reported organic sales growth of about 1% to 2%, adjusted gross margin contraction of around 100 basis points, mainly due to inflation and tariff costs, as well as the lower margins of the exited businesses. Marketing expenses will be higher sequentially compared to last year, leading us to expect adjusted EPS of $0.72 per share, a 9% decrease from last year's adjusted EPS. Cash flow from operations for the full year remains at $1.05 billion. In July, we expanded our revolver facility from $1.5 billion to $2 billion. This combination of cash flow and expanded credit facilities gives us excellent flexibility. Our M&A team continues to pursue accretive acquisitions that meet our strict criteria, focusing on fast-moving consumable products, similar to our recent acquisitions. To conclude, back on May 1, we communicated proactive actions to navigate 2025. As Rick and I highlighted, we've made great progress, and we're focused on sustained execution for the rest of the year. We're happy to take your questions now. Eric, we'll hand it over to you.

Can you provide some insight into the vitamins and the strategic review you are conducting? What factors might influence your decision-making process? This could involve the feasibility of potential outcomes. It’s clear that you need to establish partnerships, but there’s also the concern of possible dilution from a complete divestiture. Additionally, how do you view Touchland, considering its rapid growth and margin improvements as a potential counterbalance to a fully dilutive divestiture? Can you share more on how these decisions might unfold and their potential impact over the next 12 to 18 months? I have a follow-up question as well.

Yes. Sure, Chris. Look, we were pretty clear in the release that we've put 3 different options out there, and those options in no particular order would be a divestiture. That's probably the cleanest option. The second one would be a joint venture partnership with a partner. We've seen that happen in the industry a few times as well. The third one is to radically shrink that business and make it even more profitable, which would require supply chain reorganization and implications that enable speed and even faster decision-making because I think everyone sees it, but it's not just Church & Dwight. It's the vitamin businesses that were put into all these CPG companies that need to be run and managed a little bit differently. I think we have the ability to do that. It just has to change the organization around it and the structure we would have. So we need a few months to go through that. The good news is some of the activities we've started on are working. I was clear about that in the green shoot comment. For example, we’ve been putting a lot of focus on multivitamins and innovation. As we look at our performance, we were probably down 24%, 25% for April and May. Looking at June, we were down in the teens. The last couple of weeks, we were down single digits. For the first time ever, our units were actually positive. So there are things that are working. It's all about having a speed and urgency mindset.

Okay. Fair enough. And then just from a category perspective, we've seen good consumption trends in your Laundry business. Can you just expand on what's going right and some of the strategies that you're implementing to put up some nice market share performance?

There's a great market share performance. 5 of 7 of our power brands gained share in the quarter. We continue to do well. July also looks good. I would say, a lot of confidence in our growth in the back half. I'm incrementally even more positive today than I thought 90 days ago. Category growth is improving; our share gains are working. A lot of confidence in the 2.5% back half number. Even July, I would say, came in above that number. So a lot of good work and efforts across many of our brands, especially in Laundry. We want to have the right sizing strategy; a lot of consumers are trading up into larger sizes. It’s crucial to ensure the price points on those sizes are correct so you can promote them effectively at times. Laundry and Litter have a similar pricing-sizing value equation, and we're really good at that, enabling us to move quickly.

I guess just going back to the retailer destocking comment. Is there a way to quantify the magnitude of that headwind and then whether it was broad-based across retailers and categories? And then I have one follow-up question.

Yes, Rakesh, it's Rick. In Q1, we noted that there was about a 300 basis point drag on our net sales compared to the consumption numbers. For Q2, we estimate that this will be around 100 basis points. I believe there may be a slight impact in Q3 and Q4 as we move forward. However, inventory levels are looking good. As we've heard from other competitors, when sales increase more quickly at clubs, online, or at mass retailers, there is less inventory required in the system. Additionally, when category growth is somewhat below historical averages, the need for inventory also decreases. While there is a slight impact, I wouldn't categorize it as a material impact moving forward.

Great. And then my follow-up question, just on Touchland. Now that the acquisition is closed, I would be just curious on what you see as the bigger priorities for the balance of the year for that business.

Yes, yes. We're super excited about Touchland. I think, again, like you can't track that business as well because it's sold largely at Sephora and Ulta and Amazon. But when we look at our numerator data or even the Amazon data, it’s driving category growth. Half of all category growth is coming from Touchland. We're attracting new users and household penetration is still a great story, with a 6% household penetration for Touchland versus the category at 37%. They have incremental kind of near-term innovation on different fragrances and whatnot for hand sanitizer. The body mist is also off to a good start. Going to international is off to a good start as well. There’s more to come later on, with other categories of innovation, but it is just a pleasant surprise, is what I would say. The team is energized, and the connections we're making with Touchland are helping them move with speed as they go after new opportunities.

I kind of wanted to follow up on the organic sales outlook. But just in the context of what you're seeing from a category standpoint, you touched on it in Chris' question, the consumption is improved, and we can see that in the data. But I guess the commentary seems to be at odds with a lot of what your HPC peers are discussing here in the last 12 hours or so. So I know everyone has different subcategories and regions. But can you just talk about what you're seeing and maybe why it could be different? And how you see that evolving through the balance of the year?

Yes. And you got to remember, I think we were kind of early, like we normally are, about calling what was happening last quarter. Some of our peers called that kind of this quarter. Back when I talked in May, I was a little bit more cautious because we were seeing negative category growth for those first few weeks of April. As time goes by, the category growth for our largest categories, although not all of our categories, is closer to 2.5% for the third quarter. We talked about this before as well. Just the volatility that was happening, the University of Michigan Consumer confidence, and all the turmoil in the world on tariffs brought uncertainty. While some of that has been mitigated, we believe there has been a little bit more confidence in category growth that is going to be closer to 1.5% to 2% as we move forward for the year. It also matters what categories you're in. Some of our competitors are in different categories than we are. They have other risks to private label and other pricing risks. But for us, we see that more often than not, our categories are growing 3% over a long period of time. They are growing slower than that this year, but better than what we expected maybe 90 days ago. Meanwhile, our tactics and strategies on innovation, pricing, promotion, and our marketing spend are helping us gain share.

Peter, all I would add is, to your point, to Rick's point, we tried to lay out for the rest of the year back on May 1 and here today, there are steps to our improvement. The second quarter really hit those marks, actually a bit higher. For the back half, we got 2.5% organic implied, and we have steps to that in 3Q and 4Q. We feel very comfortable with the back half based on everything we see today.

Makes sense. And I guess just a point of clarification, Rick. I mean on that 2.5%, I think you mentioned before that it's running ahead of that in July. I just wanted to clarify that's a total company organic comment. And I guess, if that's the case, is there any sort of reason why you would anticipate organic growth kind of decelerating to the 1% to 2% guidance that you framed for the quarter?

Well, there's always a comp. I would just say that our month of July was the easiest comp that we had if you look at the quarter. But it just gives us confidence because you have 1 month behind us and it had a great month. So maybe it’s conservative, but it’s what we think the environment is right now. It’s so volatile that there’s no reason to take the full year up after another 3 months. We’ll see how the next 90 days go, and I'm just trying to convey that we’re off to a strong start.

I was wondering if I could follow up on Peter's question here. Just we're hearing from peers in the space to expect an acceleration in the second half. While you don't have meaningfully different comps in the back half, I was wondering how you're looking at the consumer environment and your expectations for improvement or maybe lack thereof here. We're also seeing a variety of strategic actions from peers as well, including increased promotional spend and marketing support. I was wondering if you can further comment on your initiatives there.

Sure. On the consumer, my answer is pretty much what I gave Peter, a lot of confidence in our growth. It's not just a category story for us; it's also a share story, right? We're driving growth in mouthwash, even when the category is growing slower than that. We're taking share. Same thing with acne and acne patches. A lot of our brands are not just 1 or 2 of them gaining share over time. If you look back at our long track record, in about 10 years plus, we tend to gain share about 2/3 of the time periods we're looking at. So that's that. In terms of the other part of your question, we are crystal clear that we're going to be spending the marketing that we kind of always spend with our Evergreen model. We think this is the right time, that’s the right amount, around 11%. We’re protecting that. That’s part of the reason that even when we came out in the first quarter and lowered our earnings for the year pretty early, we said we were going to protect that marketing spend. In Q3, actually, it's the highest quarter of the year between 12.5% and 13%. We’re investing behind the business. We’re investing behind the brands and innovation. Some innovations launched in the back half that we’re proud of as well, all of which will be supported. So that’s kind of where we’re at; we feel like we’re in a good spot to continue to gain share over time.

Could you share your thoughts on the potential to return to the Evergreen OSG targets after this year, considering this year may be an exception? We’ve seen some weakness earlier in the year, but things seem to be getting better incrementally, although we're not fully back to Evergreen. Given the volatility and various factors in play, how do you view organic sales growth looking forward, especially since there’s a relatively easier comparison to be made with this year's inventory reductions?

Yes. Thanks for the question, Dara. Look, it’s called an Evergreen model for a reason. Our goal is to hit our Evergreen model each and every year, year after year. And we’ve been a model of consistency in doing that. I think this year is an aberration. When you have categories like we said before, that all of a sudden, for the last 10 years, have grown around 3%, it started out growing in Q1, 1.5%. In the first couple of weeks of April negative, that gave us pause. I think the volatility in the world today, the pressure on the consumer, and the uncertainty around the tariff situation moved categories in a bigger way. I have a lot of confidence in the Evergreen model for not just 1 year or 2 years, but that is what we’re supposed to do each and every year. Some brands grow faster than the Evergreen model, while we've made portfolio decisions on other brands that were growing at a lower rate than the Evergreen model. I think that does nothing but strengthen the portfolio and the company over the long term.

Great. That's helpful. And then just on BATISTE, it's been a great growth brand in recent years; slowdown in Q2, you sound more optimistic in the back half. You touched on it a bit, but can you just give us a bit more detail on what's happened here in the last few months and sort of the plans for the back half and the optimism you have there?

Yes, sure. Well, it’s never one thing; it’s always multiple factors. Partly, we had some supply chain challenges that we're back and resolved. We're introducing some innovation, and we need to ensure the advertising and trial generation activities align correctly. Some of those changes disrupt the category from a pricing size perspective. We also had a competitor take a massive price increase and introduce different sizes as well. But we have to make sure we're really clear: BATISTE is the leader in the category. It’s brought innovation not for just a year but for decades, and consumers delight in BATISTE. We have led that category with innovation and with value as we traded people up to larger sizes. So even though we face challenges, we are working hard, and I have a lot of confidence we’re going to get back to share gains in BATISTE in the medium-term future.

I actually wanted to circle back with a question on the promotional environment. We've seen increased couponing activity across broader HPC, and scanner data suggests that sales on promotions have been rising. So just curious to hear what you've been seeing in your categories and if you expect the promotional landscape to get even more aggressive in the back half of the year? And I guess in that vein, Rick, how should we think about net price realization going forward, especially within your Consumer Domestic segment?

Yes, Bonnie, good question. I think, look, whenever we talk about promotion, where we focus is really our household business, Laundry and Litter. That’s the predominant amount of promotion. Litter has spiked up above historical averages. Looking back at many quarters, it typically has gone anywhere between 15% and 18%; it’s spiked to 21% in the quarter. We were actually down a little bit. Nestle was up dramatically as they promoted lightweight litter in a big way. For Laundry, it’s been pretty consistent with the previous few quarters. It typically stays in the low 30s. For the last 12 months, it’s consistently in the low 30s, we were up a little bit, but still in that low 30s range. I think in general, Laundry has been pretty rational compared to some of the elevated litter promotions. Vitamins are promotional, but that’s again a smaller business than the other two for us.

Bonnie, if you look at the second quarter, you see a bit of negative pricing. But again, the majority of that was related to our recall, so that’s a nominal amount so far, just right in line with Rick’s comments.

Great. I'm going to start with a short-term question, but you had mentioned that July, you had a particularly easy comp and saw good growth off of that. Can you talk about the comps for August and September, if there are any call-outs there? And then across your categories, peers have discussed trade-down both within their portfolio and out of their portfolio. To what extent is trade-down a factor for you, both in terms of the negative trade-down from black to orange in Litter versus factors that are a tailwind to you, like laundry?

Yes. I’ll take the second one first, Olivia. I think trade-down overall is a benefit for us. We’ve said this a few times, but there needs to be more recessionary type behavior and discussion before trade-down really happens. The consumer still is resilient, even though they face this inflation over the past few years. Typically, when recessionary behavior occurs, that’s when orange box outpaces the black box. So right now, we’re doing really well. You see it in our share scorecards; our value brands are growing share as consumers are tight. Our premium brands that solve problems continue to gain share as well. That includes THERABREATH and HERO. Absent the recall, Orajel is doing well. It’s a cross-section. You asked about July and we’re not going to make a new practice of talking about specific months. I wanted to give a sense that there’s confidence in our outlook of 2.5% in the back half.

Two quick ones. At least I hope they're quick. To follow up on Lauren's question, Rick, you guys sound fairly benign on the promotional environment. I'm asking this in the context that there are competing narratives. You're sounding benign; your key competitors are saying things are ramping, and Nielsen data would also suggest that. What do you have embedded in the back half for promotion levels, particularly for household, where you see most of the promotion? If your answer is we expect more of the same, which you characterized as relatively flat, how much cushion do you have to respond? Because it seems like your competitors are ramping.

Yes, I mean, look, you can ask all about promotions, I kind of gave you the answer. Q1 and Q2 are within historical norms in Laundry. There’s not much more to say. Some competitors were lower on promotions in Q2 2025, but remember, it’s all about the net price point, and they also took price, so look at what the net price is. Our promotional levels are consistent with the last 3 or 4 quarters and for the back half, promotions have already been set. They’ve been sold in for a while now. In this environment, we saw it further afield than most; 6–9 months ago, we were seeing how promotional volumes weren’t as effective. So we made plans in advance for the promotional calendar, and I have a lot of confidence in our Laundry business. Our Laundry business in June and July continues to gain share.

Okay, very good. And I know the call is going long here. Just on the Vitamin business to come back to that. Can you talk about how you balance the timeliness to get something done and naturally getting the best value you can for it and minimizing the potential risk that there's another leg down in the business? If this goes 2, 3, or 4 quarters, how do you protect against another leg down? Your comments there would be helpful as well.

Yes. Look, we're running this business like we're going to own it forever. The amount of time and energy we spend on innovation doesn’t change; the promotional pricing, that programming doesn’t change. They want VITAFUSION and L’IL CRITTERS to be successful. It’s a big brand. We’re going to continue to show them the innovation and explain why we believe it can grow categories after we get through this TDP down cycle. They are good brands. We’re spending an inordinate amount of time for a small business, and that weighs into my thinking on how much time the organization spends versus the benefit, and that’s part of the strategic decision too. Okay. Well, thank you, everyone. Like Lee and I said, a lot of confidence as we look forward. The company is doing extremely well in a tough environment. We’ll talk more at the end of October on our next call. Thank you.