Yahoo Finance Church & Dwight Co., Inc. (NYSE:CHD) Q1 2024 Earnings Call Transcript
Church & Dwight Co., Inc. (NYSE:CHD) Q1 2024 Earnings Call Transcript May 2, 2024
Church & Dwight Co., Inc. beats earnings expectations. Reported EPS is $0.96, expectations were $0.87. Church & Dwight Co., Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen. And welcome to Church & Dwight’s First Quarter 2024 Earnings Conference Call. Before we begin, I’ve been asked to remind you that on this call, the company’s management may make forward-looking statements regarding, among other things, the company’s financial objectives and forecasts. These statements are subject to risks and uncertainties and other factors that are described in detail in the company’s SEC filings. I would now like to introduce your host for today’s call, Mr. Matt Farrell, Chairman and President and Chief Executive Officer of Church & Dwight. Please go ahead, sir.
Matt Farrell: Good morning, everyone. Thanks for joining us today. I’ll begin with a review of the Q1 results, and then I’ll turn the call over to Rick Dierker, our CFO. And when Rick is done, we’ll open the call up for questions. Q1 was another solid quarter for Church & Dwight. Reported sales growth was 5.1%, beating our outlook of 4%, thanks to stronger results across the Board from Domestic, International and Specialty Products. Organic sales grew 5.2%, which exceeded our 4% Q1 outlook, with volume accounting for a very healthy 70% of our growth. Gross margin expanded 220 basis points. At the same time, we increased marketing spending in the quarter and gained market share in a majority of our categories. Adjusted EPS was $0.96, which was $0.11 higher than our $0.85 outlook.
The results were driven by higher-than-expected sales growth, gross margin expansion and a lower tax rate. We continue to grow in the online class of trade, with online sales as a percentage of global sales now reaching 20.5%. In March, we signed a definitive agreement to acquire Graphico, our Japanese distributor, for approximately $35 million. We expect the acquisition to close later this year. Graphico’s annual sales are approximately $38 million. The business is based in Tokyo and has 59 employees. Since 2008, Graphico has partnered with Church & Dwight and driven OxiClean to be the number one powder pre-wash additive in Japan. The acquisition is expected to contribute to greater expansion of our business in Japan and the greater APAC region.
We intend to leverage the capabilities of the Graphico team to bring additional Church & Dwight brands to Japanese consumers. Now I’m going to turn my comments to each of the three businesses. First up is the U.S. The U.S. consumer business had 4.3% organic sales growth. 3.3% of that was volume-driven, making this the third consecutive quarter of U.S. volume growth. Five of our seven power brands gained market share in the quarter and private label market share in our categories remained relatively stable. Now let’s look at a few important categories in the U.S., starting with laundry. ARM & HAMMER Liquid Laundry Detergent consumption was flat, while the category grew 2%. Many of you may recall we had pulled back on promotional activity in Q4 and that continued into early Q1.
As our promotional activity normalized, ARM & HAMMER Liquid Laundry saw share gains late in the quarter and the brand has continued to perform well in April. Now elsewhere in laundry, ARM & HAMMER Unit Dose and ARM & HAMMER Scent Boosters both grew faster than their categories and grew share in the quarter. Our XTRA Liquid Laundry brand, which is our extreme value offering, grew consumption 6.3% and increased market share to 3.8%. Now regarding new products, we have launched two new products into the detergent category, ARM & HAMMER Deep Clean and ARM & HAMMER Power Sheets. The first, ARM & HAMMER Deep Clean, is our most premium ARM & HAMMER Laundry Detergent, entering the mid-tier of liquid laundry and delivering a superior clean at a price consumers’ can afford.
The second new product is ARM & HAMMER Power Sheets Laundry Detergent, which is launched -- which was launched online in August of 2023. ARM & HAMMER was the first major brand to offer this new unit dose form in the U.S. Now due to its online success, Power Sheets is now available in select brick-and-mortar retailers. Power Sheets continues to grow online. It now has 9,000 reviews with a 4.5 rating, and both Deep Clean and Power Sheets are off to a great start in 2024 and we’re excited about the early results we are seeing. Now over in litter, ARM & HAMMER Litter grew consumption 5% in Q1, which was in line with category growth. Our new lightweight ARM & HAMMER Hardball Clumping Litter is now expanding nationally after a successful in-market test in 2023.
We expect this new litter to help ARM & HAMMER capture a greater share of the lightweight litter category. Let me give you a couple of facts here. Lightweight litter today accounts for 16% of the clumping litter category. Our share of lightweight clumping litter has grown from 4% to 6% since year-end 2023, but that compares to our 29% share in regular weight litter, so still a long way to go. Turning to Personal Care, BATISTE continues to see strong consumption growth, with consumption up 19% in Q1, growing share to 47.5%. BATISTE continues to be the global leader in dry shampoo. We are meeting consumers’ desire for long-lasting results with the launch of BATISTE Sweat Activated and BATISTE Touch Activated dry shampoos, and so far consumers are posting excellent reviews for both of these new innovations.
Now Mouthwash. THERABREATH Mouthwash and HERO continue to perform extremely well. THERABREATH is the number one alcohol-free mouthwash brand and is now the number three brand in total mouthwash with a 16% share. THERABREATH recently entered the antiseptic segment of the category with the launch of THERABREATH Deep Clean Oral Rinse, which represents 30% of the category. HERO continues to drive the majority of growth in the acne category and has grown to become the number one brand in the larger acne category with 19% share. HERO continues to launch innovative solutions and patches combined with adjacent consumer needs such as the recently launched Dissolve Away Daily Cleansing Balm. Now there are two businesses, Gummy Vitamins and WATERPIK, that created a drag on total company organic growth in Q1.
First WATERPIK. The good news for WATERPIK is consumption for our water flosser business is healthy. However, flosser shipments were affected by retailer inventory adjustments in the first quarter. This combined with lower showerhead consumption accounted for a 1% negative drag on organic revenue growth, but we expect this to be transient. The second is Gummies, which also created a 1% drag. The Gummy Vitamin category declined 5% in Q1, which was actually worse than our expectations for the category and our consumption was down even greater, down 12%. We continue to move forward with our plan to stabilize our vitamin business through changes to packaging, messaging and greater market investments that we’ve talked about with you in the past.
I will close my comments on the U.S. by saying that overcoming the drag from these businesses still -- and still posting a 5% organic sales growth for total company just illuminates the strength of our portfolio. Turning now to International and Specialty Products, our International business delivered organic growth of 8.8% in Q1. This was driven by strong growth in the subsidiaries, just a few call-outs, especially Mexico, Germany, U.K., and France, and we all -- and also had growth from our global markets group. And finally, Specialty Products. Specialty Products organic sales increased 7.2%, primarily due to record sales in our Eurasia business as SBD continues to expand globally. I want to wrap up my remarks by reiterating that the company is performing well with all three divisions delivering strong growth and I want to thank our global employees for their great efforts each and every day.
Now we rarely raise our full year outlook after only one quarter, but given our fast start, we raised our outlook for gross margin and EPS growth and we have confidence in our new full year forecast. And now I’m going to turn it over to Rick to give you some more color on the quarter.
Rick Dierker: Thank you, Matt, and good morning, everybody. We’ll start with EPS. First quarter adjusted EPS was $0.96, up 12.9% from the prior year. The $0.96 was better than our $0.85 outlook, primarily driven from higher-than-expected sales growth, gross margin expansion, and a lower tax rate. Reported revenue was up 5.1%, and organic sales were up 5.2%. Organic sales were driven by volume of 3.7%, and positive product mix and pricing of 1.5%. 70% of our organic growth was volume-driven, and as Matt mentioned earlier, this makes three consecutive quarters of U.S. volume growth. Our first quarter gross margin was 45.7%, a 220-basis-point increase from a year ago, primarily due to productivity, volume, mix and pricing, net of the impact of higher manufacturing costs.
Let me walk you through the Q1 bridge. Gross margin was made up of the following; positive 130 basis points impact from price volume mix and a positive 130 basis points from productivity. This was partially offset by 10 basis points from currency and 30 basis points from inflation. Moving to marketing, marketing was up $29.7 million year-over-year. Marketing expense as a percentage of net sales was 10.1% or 150 basis points higher than Q1 of last year and led to share gains. For SG&A, Q1 adjusted SG&A increased 80 basis points year-over-year. Other expense all in was $20.9 million, a $2.2 million decrease, primarily due to lower outstanding debt and higher interest income. We now expect other expense for 2024 to be approximately $80 million.
For income tax, our effective rate for the quarter was 19.9%, compared to 24.4% in 2023, a decrease of 450 basis points due to a high level of stock option exercise in Q1 of 2024. We continue to expect the full year rate to be approximately 23%. And now to cash. For the first three months of 2024, cash from operating activities increased to $263 million, a decrease of $10.1 million with higher cash earnings offset by higher working capital. We now expect full year cash flow from operations to be approximately $1,050 billion, up slightly from our previous $1 billion outlook. Capital expenditures for the first three months were $46.3 million, a $21 million increase from the prior year as capacity expansion projects proceed as planned. We expect 2024 CapEx of approximately $180 million as we complete the major capacity investments that were initiated in 2023 and we expect capital spending to return to historical levels of 2% of sales in 2025.
And now for the full year outlook. We continue to expect the full year 2024 reported inorganic sales growth to be approximately 4% to 5%. We now expect full year EPS in the range of 8% to 9% growth. This is up from our previous 7% to 9% and is inclusive of costs related to the exit of a Megalac business, as well as Graphico transaction costs. We now expect full year gross margin to expand approximately 75 basis points, up from previous range of 50% to 75% basis points. Given our outstanding Q1 margin expansion of 220 bps, this outlook implies moderate gross margin expansion for the remainder of the year. We continue to expect an increase in manufacturing costs to be more than offset through productivity, mix, higher volume and carryover of product pricing.
We continue to expect marketing as a percentage of net sales to be approximately 11%. SG&A is now expected to be flat as a percentage of net sales compared to 2023, reflecting the investments we are making in our International and e-commerce infrastructure and costs related to the Graphico acquisition Matt discussed earlier. For Q2, we have a strong outlook and expect reported sales growth of approximately 3.5%, organic sales growth of approximately 4%. We had a really strong April from a consumption perspective, so some might be expecting a higher organic growth outlook. Our 4% outlook reflects higher coupons and trade promotion in support of new products, we’re fully lapping 2023 price increases and we’re lapping a year ago distribution gains for HERO.
Moving on to the rest of the P&L, we expect moderate gross margin expansion in the quarter in Q2 as we have less of an impact from carryover pricing. Increased marketing spending support our innovation pipeline, higher SG&A expense and a significantly higher tax rate of 24% compared to the prior year of 17.9%, which benefited from a high level of stock option exercises. This represents a roughly $0.07 drag on EPS. As a result, we expect adjusted EPS of $0.83 per share, down 10% versus last year’s adjusted Q2 EPS. And with that, Matt and I would be happy to take any questions.
See also
25 Best Self-Help Books for Women According to Reddit and
15 Biggest Aircraft Carriers in the World.
To continue reading the Q&A session, please click here.
