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    Church & Dwight Co Inc (CHD)

    Q3 2023 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$91.96Last close (Nov 2, 2023)
    Post-Earnings Price$85.30Open (Nov 3, 2023)
    Price Change
    $-6.66(-7.24%)

    What went well

    • Positive Volume Growth Expected to Continue: Church & Dwight achieved positive volume growth of 2.7% in Q3, the first increase in eight quarters, and expects this positive trend to continue in Q4 and over the next 4 to 5 quarters.
    • Strong New Product Pipeline for 2024: The company has one of its best new product lineups coming in 2024, which is broad-based and anticipated to drive future growth and strengthen their market position.
    • Gross Margin Expansion Towards Pre-COVID Levels: Church & Dwight is experiencing gross margin expansion and expects to regain more margin in 2024, moving closer to the pre-COVID high watermark of 45.5% achieved in 2019.

    What went wrong

    • Specialty Products Division (SPD) is expected to be a drag in Q4 and potentially into Q1, affecting overall growth and profitability.
    • Pulling back on certain promotions, especially in the laundry segment, may lead to lower volumes and sales in Q4, which could impact organic growth.
    • Higher SG&A expenses due to increased incentive compensation and investments, including R&D and expanding product registrations, may pressure margins and earnings in the near term.

    Q&A Summary

    1. 2024 Outlook
      Q: How do you feel about the business and momentum into 2024?
      A: Management feels great about the business, highlighting strong numbers posted in Q3, including 5.8% organic growth for the consumer business. They expect another 4% organic growth in Q4, despite a drag from the Specialty Products Division (SPD). They anticipate consecutive quarters of volume growth over the next four to five quarters. Gross margin expansion is expected next year, though not fully back to the prior high watermark of 45.5% achieved in 2019. They also mentioned having one of their best new product pipelines coming in 2024, which is broad-based.

    2. Gross Margin Expansion
      Q: Can you preview the gross margin bridge for Q4?
      A: The gross margin is expected to have a big tailwind from price/volume mix in Q4. The price component will come down a bit, but the volume and mix will increase due to acquisitions like HERO blending into the portfolio. Productivity will be slightly lower due to timing, and there will be some headwinds from manufacturing costs and year-over-year inflation.

    3. Pulling Low-Profit Promotions
      Q: Are you discontinuing unprofitable promotions to improve margins?
      A: Yes, management has decided not to repeat certain unprofitable or low-profit promotions, particularly in the laundry business. These promotions were isolated to Q4 last year, and pulling them back results in lower volume but improves profitability.

    4. Specialty Products Segment (SPD)
      Q: What is the outlook for the Specialty Products segment?
      A: The SPD is expected to be a drag in Q4, reducing the contribution from the consumer business. This weakness may continue into Q1 as well.

    5. HERO and THERABREATH Growth
      Q: How are HERO and THERABREATH performing and what are future plans?
      A: Demand for both products is exceptional. HERO is expected to benefit from a full year of distribution gains in 2024 and will be launched in dozens of countries next year through the Global Markets group. THERABREATH is gaining more shelf space as retailers respond to strong consumer demand, with resets happening in 2024.

    6. Accelerated Q4 Spending
      Q: Is the accelerated Q4 spend mostly SG&A?
      A: Yes, the increased spend in Q4 is mostly in SG&A, including higher incentive compensation and investments in growth initiatives. For example, fast-forwarding product registrations for HERO to enter 40-50 new countries rapidly.

    7. EPS Guidance and Share Repurchase
      Q: Do you need to achieve $0.64-$0.65 in Q4 to meet EPS guidance?
      A: Management acknowledges that they typically repurchase shares annually to offset share creep but did not do so this year. They may get ahead of that in 2023 for 2024, which, along with rounding, accounts for differences in EPS calculations for Q4.

    8. Clawing Back Lost Earnings
      Q: Are you trying to recover the earnings shortfall from '22/'23?
      A: They view 2022 as the last year of a three-year COVID event, with 2023 impacted by issues in WATERPIK, vitamins, and FLAWLESS businesses. Considering these as three isolated incidents, the business has rebaselined to grow from here. WATERPIK has stabilized, and while vitamins are still declining, there is a path to stabilization next year.

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