Church & Dwight Co Inc: Form 10-Q for the period ended Mar 31, 2024

The following discussion of the Company’s financial condition and results of operations should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, which was filed with the SEC on February 14, 2024, and the unaudited condensed consolidated financial statements and related notes contained in this Quarterly Report on Form 10-Q.

Overview

We develop, manufacture and market a broad range of consumer household and personal care products and specialty products focused on animal and food production, chemicals and cleaners. Our well-recognized brands include ARM & HAMMER® baking soda, cat litter, laundry detergent, carpet deodorizer and other baking soda-based products; OXICLEAN® stain removers, cleaning solutions, laundry detergents and bleach alternatives; VITAFUSION® and L’IL CRITTERS® gummy dietary supplements for adults and children, respectively; BATISTE® dry shampoo; WATERPIK® water flossers and showerheads; THERABREATH® oral care products; HERO® acne treatment products; TROJAN condoms, lubricants and vibrators; SPINBRUSH battery-operated toothbrushes; FIRST RESPONSE home pregnancy and ovulation test kits; NAIR depilatories; ORAJEL oral analgesic; XTRA laundry detergent; and ZICAM cold shortening and relief products. Seven of those brands are designated as "power brands" because they compete in large categories, and we believe they have the potential for significant global expansion. Those seven brands are ARM & HAMMER®; OXICLEAN®; VITAFUSION® and L’IL CRITTERS®; BATISTE®; WATERPIK®; THERABREATH®; and HERO® and represent approximately 70% of our net sales and profits.

We sell our consumer products under a variety of brands through a broad distribution platform that includes supermarkets, mass merchandisers, wholesale clubs, drugstores, convenience stores, home stores, dollar and other discount stores, pet and other specialty stores and websites and other e-commerce channels, all of which sell our products to consumers. We sell our specialty products to industrial customers, livestock producers and through distributors.

We operate in three principal segments: Consumer Domestic, Consumer International, and our Specialty Products Division (“SPD”).

Recent Developments

During the first quarter of 2024, we exited the MEGALAC supplement portion of our Animal Nutrition business within our SPD segment. Net sales for the three months ended March 31, 2024 and March 31, 2023 were $7.1 and $11.4, respectively.

In March, we signed a definitive agreement to acquire Graphico, Inc. (“Graphico”) for an estimated $35.0. Graphico is a Japan-based distributor focused on consumer goods, health foods, and cosmetics, primarily in the Japanese market, which we have partnered with since 2008. We expect the acquisition to close later this year, and the acquisition is expected to contribute to greater expansion of our business in the APAC region.

Other

For additional discussion, please refer to Item 1A, Risk Factors, and Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K.

Results of Operations

Consolidated results

Net Sales

Net sales for the quarter ended March 31, 2024 were $1,503.3, an increase of $73.5 or 5.1% as compared to the same period in 2023. The components of the net sales increase are as follows:

(1) For the three months ended March 31, 2024, the volume change reflects increased product unit sales in all three segments.

(2) For the three months ended March 31, 2024, price/mix was favorable in all three segments.

(3) In the first quarter of 2024, we exited a product line in the SPD Animal Nutrition business.

Gross Profit / Gross Margin

Our gross profit was $687.0 for the three months ended March 31, 2024, a $65.0 increase as compared to the same period in 2023. Gross margin increased 220 basis points (“bps”) in the first quarter of 2024 compared to the same period in 2023, due to favorable price/mix/volume of 130 bps, the impact of productivity programs of 130 bps, and lower transportation costs of 80 bps, partially offset by higher manufacturing costs including labor and commodities of 110 bps and unfavorable foreign exchange of 10 bps.

Operating Expenses

Marketing expenses for the three months ended March 31, 2024 were $152.0, an increase of $29.7 or 24.3% as compared to the same period in 2023. Marketing expenses as a percentage of net sales in the first quarter of 2024 increased by 150 bps to 10.1% as compared to 8.6% in the same period in 2023 due to 200 bps on higher expense primarily from increased marketing spend to support new product introductions, partially offset by 50 bps of leverage on higher net sales.

SG&A expenses were $230.0 in the first quarter of 2024, an increase of $22.2 or 10.7% as compared to the same period in 2023. SG&A as a percentage of net sales increased 80 bps to 15.3% in the first quarter of 2024 as compared to 14.5% in the same period in 2023. The increase is due to 150 bps on higher expenses, partially offset by 70 bps of leverage associated with higher sales. The higher expenses for the three-month period ended March 31, 2024 are primarily due to growth investments in our international division and R&D.

Other income increased $1.7 for the three months ended March 31, 2024 as compared to the same period in 2023 primarily due to higher investment income.

Interest expense for the three months ended March 31, 2024 decreased $3.8 to $25.0, as compared to the same period in 2023, primarily due to lower average outstanding debt.

Income Taxes

The effective tax rate for the three months ended March 31, 2024 was 19.9%, compared to 24.4% in the same period in 2023. The decrease in the tax rate is primarily due to the benefit from higher stock option exercises.

On October 4, 2021, members of the Organisation for Economic Co-operation and Development (“OECD”) agreed to a global minimum tax rate of 15%. On December 20, 2021, OECD published its model rules on the agreed minimum tax known as the Global Anti-Base Erosion (“GloBE”) rules. The GloBE Rules are designed to be implemented into the domestic law of each jurisdiction to ensure large multinational enterprise groups are subject to a minimum effective tax rate of 15% in each jurisdiction where they operate. On December 15, 2022, the European Council approved its directive to implement Pillar Two of the GloBE rules regarding a 15% global minimum tax rate. January 1, 2024 marked the official effective date of the 15% global corporate minimum tax imposed by Pillar Two. Based on current legislation and available guidance, we have evaluated the impact of Pillar Two and determined there is no impact to the Company.

Segment results

We operate three reportable segments: Consumer Domestic, Consumer International and SPD. These segments are determined based on differences in the nature of products and organizational structure. We also have a Corporate segment.

The Corporate segment income consists of equity in earnings of affiliates. As of March 31, 2024, we held 50% ownership interests in each of Armand and ArmaKleen, respectively. Our equity in earnings of Armand and ArmaKleen, totaled $1.1 and $4.4 for the three months ended March 31, 2024 and 2023, respectively, and are included in the Corporate segment. Certain subsidiaries that are included in the Consumer International segment manufacture and sell personal care products to the Consumer Domestic segment. These sales are eliminated from the Consumer International segment results set forth below.

Segment net sales and income before income taxes for the three months ended March 31, 2024 and March 31, 2023 are as follows:

(1) Intersegment sales from Consumer International to Consumer Domestic, which are not reflected in the table, were $5.6 and $3.6 for the three months ended March 31, 2024 and March 31, 2023, respectively.

(2) In determining income before income taxes, interest expense, investment earnings and certain aspects of other income and expense were allocated among the segments based upon each segment’s relative income from operations.

(3) Corporate segment consists of equity in earnings of affiliates from Armand and ArmaKleen for the three months ended March 31, 2024 and March 31, 2023.

Product line revenues from external customers are as follows:

Household Products include laundry, deodorizing, and cleaning products. Personal Care Products include condoms, pregnancy kits, oral care products, skin care and hair care products, cold and remedy products, and gummy dietary supplements.

Consumer Domestic

Consumer Domestic net sales in the first quarter of 2024 were $1,165.2, an increase of $48.3 or 4.3% as compared to the same period in 2023. The components of the net sales change are the following:

The increase in net sales for the three months ended March 31, 2024, includes growth from THERABREATH® mouth wash, HERO® acne treatment products, ARM & HAMMER® cat litter, ARM & HAMMER® baking soda, XTRA® liquid detergent and BATISTE® dry shampoo, partially offset by declines in VITAFUSION® and L’IL CRITTERS® gummy dietary supplements and WATERPIK® water flossers and showerheads.

Consumer Domestic income before income taxes for the first quarter of 2024 was $239.2, an increase of $10.5 as compared to the first quarter of 2023. The increase is due primarily to the impact of higher sales volumes of $21.0, the benefit of productivity programs of $18.2, favorable price/mix of $9.2 and favorable interest and other expenses of $5.8, offset by higher marketing expenses of $24.7, and higher SG&A expenses of $19.7.

Consumer International

Consumer International net sales were $255.0 in the first quarter of 2024, an increase of $24.4 or 10.6% as compared to the same period in 2023. The components of the net sales change are the following:

Excluding the impact of foreign exchange rates, sales growth is driven by HERO® acne treatment products and STERIMAR® nasal congestion relief in Europe, STERIMAR® nasal congestion relief in Mexico, STERIMAR® nasal congestion relief, ULTRAMAX® antiperspirant deodorant, and THERABREATH® mouth wash in the Global Markets Group (“GMG”) business, and HERO® acne treatment products and OXICLEAN® stain removers in Canada.

Consumer International income before income taxes was $33.0 in the first quarter of 2024, an increase of $4.1 as compared to the first quarter of 2023. The increase is due primarily to a favorable price/mix of $10.1, the impact of higher sales volumes of $6.4, favorable foreign exchange rates of $0.6, and lower manufacturing and commodity costs of $0.2, partially offset by higher SG&A expenses of $6.9, higher marketing expenses of $6.0, and unfavorable interest and other expenses of $0.2.

Specialty Products (“SPD”)

SPD net sales were $83.1 in the first quarter of 2024, an increase of $0.8 or 1.0% as compared to the same period in 2023. The components of the net sales change are the following:

(1) In the first quarter of 2024, we exited a product line in the SPD Animal Nutrition business.

Net sales increased in the first quarter of 2024 primarily due to strong growth internationally and growth within the domestic non-dairy segment.

SPD income before income taxes was $10.8 in the first quarter of 2024, an increase of $4.0 as compared to the same period in 2023, due to favorable price/product mix of $3.4, the impact of higher sales volumes of $1.1, and lower marketing expenses of $1.1, partially offset by unfavorable manufacturing costs of $1.6.

Corporate

The Corporate segment includes equity in earnings of affiliates from Armand and ArmaKleen in the first three months of 2024 and 2023, respectively. The Corporate segment income before income taxes was $1.1 in the first quarter of 2024, as compared to $4.4 in the same period in 2023.

Liquidity and Capital Resources

On June 16, 2022, we entered into a credit agreement (the “Credit Agreement”) that provides for our $1,500.0 unsecured revolving credit facility (the “Revolving Credit Facility”) that matures on June 16, 2027, unless extended. We have the ability to increase our borrowing up to an additional $750.0, subject to lender commitments and certain conditions as described in the Credit Agreement. Borrowings under the Credit Agreement are available for general corporate purposes and are used to support our $1,500.0 commercial paper program.

As of March 31, 2024, we had $349.7 in cash and cash equivalents, and approximately $1,495.0 available through the Revolving Credit Facility and our commercial paper program. To preserve our liquidity, we invest cash primarily in government money market funds, prime money market funds, short-term commercial paper and short-term bank deposits.

In the first quarter of 2024, we repaid the remaining $200.0 of our Term Loan due December 22, 2024 with cash on hand.

The current economic environment presents risks that could have adverse consequences for our liquidity. See “Unfavorable economic conditions could adversely affect demand for our products” under “Risk Factors” in Item 1A of the Form 10-K. We continue to manage all aspects of our business including, but not limited to, monitoring the financial health of our customers, suppliers and other third-party relationships, implementing gross margin enhancement strategies and developing new opportunities for growth. We do not anticipate that current economic conditions will adversely affect our ability to comply with the financial covenant in the Credit Agreement because we currently are, and anticipate that we will continue to be, in compliance with the maximum leverage ratio requirement under the Credit Agreement.

On October 28, 2021, the Board authorized the Company's share repurchase program, under which we may repurchase up to $1,000.0 in shares of Common Stock (the “2021 Share Repurchase Program”). The 2021 Share Repurchase Program does not have an expiration and replaced the 2017 Share Repurchase Program. The 2021 Share Repurchase Program did not modify our evergreen share repurchase program, authorized by the Board on January 29, 2014, under which we may repurchase, from time to time, Common Stock to reduce or eliminate dilution associated with issuances of Common Stock under its incentive plans. There have been no stock repurchases in 2024.

As of March 31, 2024, there remains $658.9 of share repurchase availability under the 2021 Share Repurchase Program.

On January 31, 2024, the Board declared a 4% increase in the regular quarterly dividend from $0.2725 to $0.28375 per share, equivalent to an annual dividend of $1.135 per share, payable to stockholders of record as of February 15, 2024. The increase raises the annual dividend payout from $267.0 to approximately $276.0 on an annualized basis.

We anticipate that our cash from operations, together with our current borrowing capacity, will be sufficient to fund our share repurchase programs to the extent implemented by management, pay debt and interest as it comes due, pay dividends at the latest approved rate, and meet our capital expenditure program costs, which are expected to be approximately $180.0 in 2024 primarily for manufacturing capacity investments in laundry and litter to support expected future sales growth. Cash, together with our current borrowing capacity, may be used for acquisitions that would complement our existing product lines or geographic markets.

Cash Flow Analysis

Net Cash Provided by Operating Activities – Our primary source of liquidity is the cash flow provided by operating activities, which is dependent on net income and changes in working capital. Our net cash provided by operating activities in the three months ended March 31, 2024 decreased by $10.1 to $263.0 as compared to $273.1 in the same period in 2023 as higher working capital was partially offset by an increase in cash earnings (net income adjusted for non-cash items). The increase in working capital is primarily related to higher accounts receivable balances, as we reduced our accounts receivable factoring program in response to higher interest rates, and higher incentive compensation payments in 2024 compared to 2023 partially offset by a lower investment in inventory. We measure working capital effectiveness based on our cash conversion cycle. The following table presents our cash conversion cycle information for the quarters ended March 31, 2024 and 2023:

Our cash conversion cycle (defined as the sum of DSO and DIO less DPO) which is calculated using a two-period average method, increased two days from the prior year. The increase is due to higher accounts receivable balances, as we reduced our accounts receivable factoring program in response to higher interest rates, and lower accounts payable generally due to timing of payments partially offset by a lower investment in inventory. We continue to focus on reducing our working capital requirements.

Net Cash Used in Investing Activities – Net cash used in investing activities during the first three months of 2024 was $46.8, primarily reflecting $46.3 for property, plant and equipment additions. Net cash used in investing activities during the first three months of 2023 was $29.6, primarily reflecting $25.0 for property, plant and equipment additions.

Net Cash Used in Financing Activities – Net cash used in financing activities during the first three months of 2024 was $209.1 reflecting $200.0 of net debt payments, $69.0 of cash dividend payments, partially offset by $59.9 of proceeds from stock option exercises. Net cash used in financing activities during the first three months of 2023 was $311.7 reflecting $255.6 of net debt payments, $66.3 of cash dividend payments, partially offset by $10.2 of proceeds from stock option exercises.

Market risk

For quantitative and qualitative disclosures about market risk affecting the Company, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II in the Form 10-K.

a) Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) at the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this report, are effective to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the United States Securities and Exchange Commission (the “Commission”), and (ii) accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding the disclosure.

b) Change in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurring during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

CAUTIONARY NOTE ON FORWARD-LOOKING INFORMATION

This report contains forward-looking statements, including, among others, statements relating to net sales and earnings growth; gross margin changes; trade and marketing spending; marketing expense as a percentage of net sales; sufficiency of cash flows from operations; earnings per share; the impact of new accounting pronouncements; cost savings programs; recessionary conditions; interest rates; inflation; consumer demand and spending; the effects of competition; the effect of product mix; volume growth, including the effects of new product launches into new and existing categories; the decline of condom usage; the Company’s hedge programs; the impact of foreign exchange, and commodity price fluctuations; impairments and other charges; the Company’s investments in joint ventures; the impact of acquisitions and divestitures; capital expenditures; the Company’s effective tax rate; the impact of tax audits; tax changes; the effect of the credit environment on the Company’s liquidity and capital resources; the Company’s fixed rate debt; compliance with covenants under the Company’s debt instruments; the Company’s commercial paper program; the Company’s current and anticipated future borrowing capacity to meet capital expenditure program costs; the Company’s share repurchase programs; payment of dividends; environmental and regulatory matters; the availability and adequacy of raw materials, including trona reserves and the conversion of such reserves; and the customers and consumer acceptance of certain ingredients in our products. Other forward-looking statements in this report are generally identified by the use of such terms as “may,” “could,” “expect,” “intend,” “believe,” “plan,” “estimate,” “forecast,” “project,” “anticipate,” “to be,” “to make” or other comparable terms. These statements represent the intentions, plans, expectations and beliefs of the Company, and are based on assumptions that the Company believes are reasonable but may prove to be incorrect. In addition, these statements are subject to risks, uncertainties and other factors, many of which are outside the Company’s control and could cause actual results to differ materially from such forward-looking statements. Factors that could cause such differences include a decline in market growth, retailer distribution and consumer demand (as a result of, among other things, political, economic and marketplace conditions and events), including those relating to the outbreak of contagious diseases; the impact of new legislation such as the U.S. CARES Act, the EU Medical Device Regulation, new cosmetic and device regulations in Mexico, and the U.S. Modernization of Cosmetic Regulation Act; the impact on the global economy of the Russia/Ukraine war or increased conflict in the Middle East, including the impact of export controls and other economic sanctions; potential recessionary conditions or economic uncertainty; the impact of continued shifts in consumer behavior, including accelerating shifts to on-line shopping; unanticipated increases in raw material and energy prices, including as a result of the Russia/Ukraine war or conflict in the Middle East; delays and increased costs in manufacturing and distribution; increases in transportation costs; labor shortages; the impact of price increases for our products; the impact of inflationary conditions; the impact of supply chain and labor disruptions; the impact of severe weather on raw material and transportation costs; adverse developments affecting the financial condition of major customers and suppliers; competition; changes in marketing and promotional spending; growth or declines in various product categories and the impact of customer actions in response to changes in consumer demand and the economy, including increasing shelf space or on-line share of private label and retailer-branded products or other changes in the retail environment; consumer and competitor reaction to, and customer acceptance of, new product introductions and features; the Company’s ability to maintain product quality and characteristics at a level acceptable to our customers and consumers; disruptions in the banking system and financial markets; the Company’s borrowing capacity and ability to finance its operations and potential acquisitions; higher interest rates; foreign currency exchange rate fluctuations; transition to, and shifting economic policies in the United States; potential changes in export/import and trade laws, regulations and policies of the United States and other countries, including any increased trade restrictions; increased or changing regulation regarding the Company’s products and its suppliers in the United States and other countries where it or its suppliers operate; market volatility; issues relating to the Company’s information technology and controls; the impact of natural disasters, including those related to climate change, on the Company and its customers and suppliers, including third party information technology service providers; integrations of acquisitions or divestiture of assets; the outcome of contingencies, including litigation, pending regulatory proceedings and environmental matters; and changes in the regulatory environment in the countries where we do business.

The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by the United States federal securities laws. You are advised, however, to consult any further disclosures the Company makes on related subjects in its filings with the Commission.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Item 1A, “Risk Factors” in the Form 10-K, which could materially affect the Company’s business, financial condition or future results.