Church & Dwight, the maker of popular household and personal care brands like Arm & Hammer, Trojan, OxiClean, and Nair, consistently deliver solid financial results and growth. During the call, Church & Dwight executives discussed the company’s performance, strategic initiatives, and plans for the future.
As investors and analysts eagerly awaited the latest updates, several key takeaways shed light on Church & Dwight’s growth trajectory and market position. This article will delve into the top six things we learned from the Q4 2022 earnings call, ranging from the company’s financial results to its product launches and expansion plans. So, let’s dive in!
Performance
2022 Fourth Quarter Results
- Net Sales growth +4.9%: Domestic +7.6%, International -4.4%,
- Organic sales +0.4%: Domestic +0.4%, International +1.3%
- Reported operating income growth -212.5%, Adjusted operating income growth +23.9%
- Reported EPS -$0.67, Adjusted EPS $0.62, -3.1%
2022 Full-Year Results
- Net Sales growth +3.6%; Organic Sales +1.4%
- Reported EPS $1.68, Adjusted EPS $2.97, -1.7%
- Cash from operations $885 million
Management Commentary on 2022 Full-Year Results
The latest management commentary for the 2022 full-year results highlighted the company’s success in surpassing expectations, despite inflationary pressures. The fourth quarter’s performance was awe-inspiring, with reported sales improving by 300 basis points. Half of this growth was attributed to organic sales growth. In contrast, the other half was attributed to a combination of foreign exchange (FX) and the HERO acquisition, which performed better than expected.
While the full-year gross margin was impacted by year-over-year inflation amounting to $250 million, the management notes that the gross margin has improved throughout the year. Furthermore, they expect this trend to continue in 2023, with a projected 100 to 120 basis points expansion in the gross margin. This positive trend is an exciting development for the company as it signals a road to recovery.
To further strengthen its position in the market, the company is investing in brands and people, which will be reflected in its increased marketing spend. The company plans to increase its marketing spend to 10.5% of sales, translating to a $30 million investment. This investment, coupled with incentive comp normalization of $30 million, will result in a 6% drag on earnings per share (EPS).
Despite these investments, the company significantly beat its cash flow projections. Cash from operations reached $885 million, surpassing the outlook of $800 million. The company’s cash earnings and improved working capital, primarily due to inventories coming back in line, were the primary drivers of this achievement.
The company projects a 5% to 7% reported sales growth for 2023, with 2% to 4% organic sales growth. The company plans to continue investing in marketing, resulting in higher SG&A expenses, while the operating margin is expected to remain flat. The effective tax rate is projected to be 23%, and EPS growth is expected to range from 0% to 4%.
Church & Dwight’s U.S. Business Performance
The company has established itself as a leader in growing and healthy categories and has demonstrated resilience in challenging environments despite the difficulties posed by supply chain disruptions. Church & Dwight has consistently managed to maintain and expand its market share. The company’s management attributes this success to its diversified portfolio of value and premium products, which enables it to attract new customers in tough economic times while retaining existing ones. Furthermore, Church & Dwight’s products have relatively low exposure to private label brands, which makes it easier for the company to grow its market share.
One of Church & Dwight’s primary categories, such as fabric care and litter, has outpaced the industry, resulting in a record-high market share for fabric care. Meanwhile, the company’s value-focused ARM & HAMMER brand is gaining popularity among consumers, particularly in challenging economic times. Church & Dwight remains committed to investing in new product development, including recent acquisitions such as ZICAM, THERABREATH, and HERO. Moreover, the company has launched a new marketing campaign, “give it the HAMMER,” designed to raise brand awareness and drive sales for its ARM & HAMMER products.
Question and Answer
During a conference call, Anna Lizzul from Bank of America asked Church & Dwight executives about the company’s marketing investment strategy and acquisition approach.
Church & Dwight CEO’s Matthew Farrell explained that the company’s M&A department is lean and does not have a team studying various categories for potential acquisitions. Instead, they know anything for sale in the U.S. consumer products market and have established acquisition criteria. Farrell also noted that the company’s ability to manufacture a wide range of products means they can consider a broad range of potential acquisitions.
Church & Dwight Chief Marketing Officer’s Barry Bruno then discussed the company’s approach to marketing investment, explaining that they have a classic brand classification system that categorizes their brands into seed, grow, and sustain categories. He noted that the company focuses its incremental marketing dollars on the seed and grow brands and makes hard choices about where to allocate its marketing investment. Bruno did not mention specific brands but used HERO as an example of a seed brand receiving additional investment.
Filippo Falorni from Citi asked a question about the impact of retailers reducing their inventory levels on the company’s business.
Church & Dwight CEO’s Matthew Farrell responded by saying that in the fourth quarter, the company had a major e-retailer significantly reduce their inventories and days of supply, which affected the company. However, he also notes that this pullback happened more mid-year in 2022 and that, more recently, more retailers have been reducing their inventories.
Church & Dwight Chief Commerical Officer Paul Wood chimed in, saying that, by and large, retailers are back to a ship-to-a-consumption model, which means they are shipping products directly to consumers rather than stockpiling them in warehouses. He mentioned that some retailers may have constraints at their distribution centers or difficulty getting products from their warehouses to their stores. However, he believes that overall, the industry needs more inventory on the shelves and that it’s just a matter of catching up.
Church & Dwight Chief Marketing Officer’s Barry Bruno added that the impact of reduced inventory levels was mainly felt in the third and fourth quarters of the previous year. He believes the company has moved past that and wants to focus on efficiently getting products through its warehouse and network.
Steve Powers from Deutsche Bank asked about pricing in the quarter and how the company’s pricing strategy will evolve in the future.
Church & Dwight CEO’s Matthew Farrell, an executive of the company, explained that mix and promotions had impacted pricing in the fourth quarter, particularly for WATERPIK, vitamins, and FLAWLESS. Church & Dwight CFO’s Rick Dierker, added that the negative mix from the year’s first half had also affected gross margin, as customers had traded down to lower-priced units in some categories. However, Dierker said the company felt confident about its pricing strategy and had already priced in inflation for most of its products. He noted that the company’s pricing department constantly monitored the market and adjusted prices accordingly. It has been successful in retail because of its transparency and data-driven approach. Farrell added that while the company was not afraid to raise prices, it had to consider category dynamics and competition and needed cost justification to go further.