Church & Dwight Co., Inc. (CHD) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Church & Dwight Third Quarter 2026 Earnings Conference Call. Before we begin, I have 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. Rick Dierker, President and Chief Executive Officer of Church & Dog. Please go ahead, sir.

Good morning, everyone. Thanks for joining the call. We delivered strong third quarter results, and I want to start off by thanking all of our Church & Dwight employees around the world for executing so well in a volatile environment. I'll begin with some thoughts on the broader environment and then review our Q3 results, and then I'll turn it over to Lee McChesney, our CFO. And when Lee is done, we'll open it up for questions. Starting with the broader environment, conditions remain challenging, including inflationary pressure related to the Middle East conflict and increasing global transportation rates. That said, our teams continue to execute with excellence. Our portfolio of value and premium brands. They are performing well, and we remain focused on offering consumers high-quality, solution-oriented products at the right value. Our power brands drove our third consecutive quarter of industry-leading organic sales growth supported by innovation, distribution wins and targeted marketing investments. Turning to the quarter. We exceeded our outlook across key metrics. Net sales increased 1% ahead of our outlook of a 1% decline. Organic sales grew 5.1%, well above our 3% outlook with growth across all 3 divisions. This performance was driven primarily by volume growth of 4.6% and positive price and mix of 0.5%. Gross margin was up 46.8%, up 170 basis points and adjusted EPS was $0.92, up almost 14% and above our $0.89 outlook. Innovation and distribution gains continue to be key drivers of our organic growth performance. Our '26 innovations across the power brands are performing very well, and we remain confident that our relentless focus on innovation will continue to drive industry-leading growth on shelf and fuel market share expansion. Now I'll turn my comments to each of the 3 divisions. First up is the U.S. consumer business. Domestic organic sales increased 4.4%, driven by 3.6% volume growth and favorable price and product mix of 0.8%. Growth was broad-based across our Household and Personal Care portfolios, led by ARM & HAMMER liquid laundry detergent, THERABREATH mouthwash and toothpaste, ARM & HAMMER cat litter and Waterpik water flossers. [indiscernible] mouth is also off to a great start. This quarter, we had such broad-based growth. I didn't list them all, but 6 brands contributed in a meaningful way. The ARM & HAMMER brand, which had another quarter of growth, with Laundry heading record shares across total laundry, ARM & HAMMER laundry detergent consumption grew over 4%, and the category grew about 2% in the quarter. Promotional levels for the category were elevated. However, ARM & HAMMER gained share as the value segment in laundry continues to be fit for purpose in this economic environment. Next up is litter. Continued fantastic results as ARM & HAMMER cat litter consumption grew 5.4% and share increased 0.6 points to reach 24%. While category promotional levels declined slightly, they do remain at historical high levels. Our ARM & HAMMER cat litter dual defense with Microban clumping litter launch continues to do very well. Now turning to the personal care side of the business. THERABREATH continues to contribute considerably to our overall performance as the brand gained 3.5 share points to reach a record share level of 26.8%, which further solidified our #2 position in total mouthwash. Even with that growth, household penetration remains relatively low at only 14% compared to the mouthwash category of 65%. THERABREATH Complete is now the top-selling new rents nationally and we recently launched portable rents sachets for freshness on the go. THERABREATH toothpaste is building trial and an everyday regimen through a robust marketing campaign with strong average consumer ratings of 4.5 stars. HERO is expanding its acne expertise in the cleansers with a lineup designed to balance efficacy and gentleness. HERO consumption outpaced the patch category in the quarter, and we're confident that the cleansers launch will lead to share gains in total acne. In fact, in the last 4 weeks, that is happening. Facial cleansers represent a $650 million category and account for approximately 30% of the total active category. Lots of runway for HERO as again, we have relatively low household penetration at 10% compared to the category at 30%, which gives us great confidence in the continued growth of the brand. Turning to Waterpik. That business had double-digit sales growth in the quarter and is gaining share in 2026. As we discussed on the last quarter, touch land sales growth in the U.S. has slowed from our original expectations due to competitive products growing in channels that we did not compete in. The good news is that our plans to expand distribution in the U.S. are on track. And as a reminder, a significant opportunity remains on household penetration in the U.S., where TOUCHLAND is only 6% compared to the category, which is around 47%. Additionally, the international rollout for TOUCHLAND remains significant. We recently launched TOUCHLAND in the U.K. and Australia, and the early results have been excellent. We have plans for a much broader distribution in '27 and '28. Turning to international. Organic sales delivered another strong quarter of growth and grew organically 7.8% and driven by volume growth of 9.1%, partially offset by lower price and product mix of 1.3%. Again, similar to the U.S., growth was broad-based, was led by THERABREATH, BATISTE, TOUCHLAND and OXICLEAN. In fact, 9 brands in International had double-digit growth. Global e-comm was once again a strong contributor. Revenues grew 20% in the quarter and global online sales now represent 25.9% of total consumer sales. Our SPD division also delivered strong results, organic sales growth of 5%, reflecting volume growth of 2.9% and higher price and product mix of [ 2.1 ]. These balanced global results contributed to our overall great organic growth performance in the quarter. This is now our 11th straight quarter of organic growth in the SPD business. Regarding 2026, I continue to be very pleased with our performance in the first 9 months of the year. Our brands remain strong. Our portfolio is more focused following the strategic actions we completed in 2025, our operating fundamentals continue to support volume growth, market share gains and gross margin expansion. Looking ahead to 2027, I'm also very optimistic about the company's performance. We have momentum as we enter the year. Our teams are advancing our 2030 growth initiatives focusing on expanding ARM & HAMMER, increasing THERABREATH and oral care and scaling our international business. I look forward to sharing our first formal update on these initiatives at our Analyst Day at the end of January. And with that, I'll turn the call over to Lee for more detail on the quarter.

All right. Well, thank you, Rick, and good day, everyone. We appreciate you joining the call. As Rick just shared, our teams delivered another strong quarter in 2026. Against the backdrop of ongoing industry headwinds and uncertainty, our team has delivered 3 quarters of 5% plus profitable organic growth. A big thank you to our team members and all of our retail and distributor partners for driving growth, really well done. So let's get into the details. We'll start with EPS. Third quarter adjusted EPS was $0.92, an increase of 13.6% versus last year, and it was above our outlook of $0.89, stronger-than-expected sales and continued gross margin expansion fueled the earnings growth, enabled healthy levels of marketing and supported our SG&A investments. Organic sales in the third quarter grew 5.1%, well above our outlook of approximately 3%. Growth was broad-based and primarily volume driven, with volume growth of 4.6% and positive price and mix of 0.5%. Our Consumer Domestic business organic sales increased 4.4%. Our Consumer International business increased 7.8%, and our Specialty Products business increased 5%. This steady and broad-based growth continues to demonstrate the strength of our portfolio of categories or innovation that drives true incremental growth and the execution mindset of our commercial teams. Let's now turn to gross margin. Our third quarter gross margin increased to 46.8%, an increase of 170 basis points versus last year. Productivity delivered 150 basis points, our acquisition mix and portfolio actions drove 160 basis points and 40 basis points was a combination of volume, price/mix and FX. These positive contributions were partially offset by the headwinds from inflation and transportation costs of 180 basis points. In this quarter, our marketing investment levels reached 11.9% of sales as we continue to invest behind our brands and new products. Adjusted SG&A was $261 million or 16.3% of net sales, an increase of 110 basis points versus last year. The increase reflects acquisition-related amortization in our SG&A investments in international, e-commerce and AI capability building. Adjusted income from operations increased $27 million or 10.1% to $298 million, reflecting our strong profitable growth results. Let's now turn to cash flow. Cash from operations for the first 9 months of 2026 was $841 million, which drove a healthy cash flow conversion of 114%. Capital expenditures totaled $92 million through the third quarter, and we expect full year capital expenditures to be approximately $125 million or about 2% of sales. And as for the third quarter -- as of the third quarter, total debt was $2.2 billion and cash on hand was $447 million. Our Board of Directors approved a new share repurchase program authorizing up to $1 billion of common stock repurchases. This program has no expiration date and replaces the prior authorization. This program is consistent with our disciplined approach to capital allocation. It gives us additional flexibility to return capital by continuing to invest in the business and pursue strategic acquisition opportunities. Let's now turn to our 2026 outlook. As detailed this morning in our press release, we are raising our sales expectations and tightening our adjusted EPS outlook. Our outlook reflects the strong year-to-date growth and our confidence in continued fourth quarter momentum. It also includes the latest impact of the Middle East commodity pressures in the latest transportation rates that have both increased further over the past 90 days. Overall, our outlook for 2026 includes approximately $150 million of inflation, which brings us up to $50 million more than we had in our original outlook at the beginning of 2026 and $20 million more than our July outlook. And this outlook assumes roughly a crude oil price of $100 a barrel. Now our teams have continued to focus on delivering incremental productivity and leveraging an RGM toolkit to mitigate this pressure, which has helped us -- helped our business deliver gross margin improvements every quarter in 2026. So for '26, we now expect organic sales growth of approximately 5% at the high end of our prior range of 4% to 5%. We now expect adjusted gross margin to expand approximately 100 basis points, inclusive of the latest cost headwinds. And our market investments remain at approximately 11% of sales, reflecting our continued commitment to brand investment. SG&A as a percentage of sales is expected to remain above 2025 levels including acquisitions, our target investments and growth initiatives, AI capabilities, e-commerce and our international business. The adjusted tax rate is expected to be approximately 21%, and we now expect adjusted EPS of approximately 7% tightening on our prior range of 6% to 8%. Our cash from operations outlook remains approximately $1.175 billion. If we turn to the fourth quarter, we expect organic sales growth of approximately 4% and adjusted EPS is expected to increase 17% to 19% versus last year. To close out our remarks, let me reiterate, we are very pleased with our third quarter performance and remain confident in our ability to deliver an improved 2026 outlook. Our strong portfolio, continued share gains and disciplined execution position us well as we look forward to 2027. Matt, we are now ready for questions.

[Operator Instructions] Your first question comes from the line of Anna Lizzul with Bank of America.

Rick, your portfolio is clearly performing really well with innovation across categories, which has elevated your mix and made it a bit more premium over time. So I was wondering if you could talk about innovation on the value tier, especially in light of some higher promotional activity you mentioned from peers. And then on the cost side, I wanted to ask how we should start thinking about gross margin expansion into early 2027, just given the heightened inflationary environment and the pressure that you might be seeing there?

Yes. Thanks, Anna. So I think innovation has become a core competency of Church & Dwight. We just had Carlos Linares, who was our -- of R&D for many years, retired. And what he brought to this company, I think, was just a great multifactor way to innovate. And so we have built this muscle. And it's not a muscle that we've built just in personal care, it's in household as well. And we've gone through the ARM & HAMMER strategy and part of that is a good, better, best strategy for laundry and for litter. And there's a lot of work going on with household innovation, you'll see some stuff coming in 2027. But in fact, I just sat through 2028, probably 2 weeks ago, when I was really encouraged about the entire innovation portfolio but especially household for 2028. So I think it's broad-based. We always want to compete on innovation. Value is not just price. It's what the consumer is getting when you intersect value and price. So that's how you win with innovation over a long period of time. And then, Lee, you want to take the forward-looking.

Yes. So I mean, to your point, we certainly know what commodities are today. That's certainly what everyone's faced in the business. And we have some good confidence as we look forward here. If we look at productivity levels of where we are today, we're going to have a record level of productivity in 2026. And as we sit here today, we're actually -- at the same time last year were actually a little bit favorable to that. So that's a good start for next year. We have our RGM toolkit has served as well this year. And teams have rallied around that for '27 as well. And then certainly, we have a nice positive drive towards good mix from innovation and from the portfolio. So all those things are in play and again, it's all against the backdrop of the inflation we see today. So as we said, we're optimistic for '27 and we'll continue to respond to the macro environment.

Yes, I would maybe add 1 or 2 comments to that. I think the other thing that's kind of not unique but kind of normal is we actually get fixed cost leverage next year, right? This year, our reported sales growth was essentially flat to up 1%. Organically, we're doing great. But remember, we shed $400 million of businesses. Next year, our organic and reported numbers will be a lot closer, and that provides some leverage. And as Lee said, we had a record year of productivity. Looking at what we know right now, we expect another record year next year for productivity. So those are great tailwinds.

Your next question comes from the line of Peter Grom with UBS.

Happy Friday. Your 2 top line-related questions, Rick. First, maybe just to start, would love to get some perspective on what you're seeing from a category standpoint. Obviously, there's a lot of moving pieces across different categories but curious if you've seen any major shifts as we move through the quarter. And I know a lot can change between now and January, but just any thoughts on how you see category growth progressing over the next, call it, 12 to 18 months? And then I guess just related to that, the 4Q organic sales guidance, a bit of a step down versus what we've seen year-to-date despite an easier comparison understanding, you have a track record of over-delivering. But Curious if that's just simply conservatism given the external environment? Or is there something else driving that view?

Yes. Thanks, Peter. I think first of all, categories I'm actually a little bit more bullish on these days. I think we started the year saying category growth of around 2%. Q1, Q2 and Q3 now have all kind of been at or above 2.5%. Like we had a strong Q1 of around 3.5%. Q2 was 2.7%, and then Q3 was 2.5%. So outlook for categories is closer to 2.5%. And also, I would say, as we look forward, in 2027, we think it's around 2.5%. So that's all a good thing. On Q4 organic sales look, 4% is still super high compared to the rest of the industry. Maybe we're being a little conservative. I would say our trends are very strong as we look at October even.

Your next question comes from the line of Bonnie Herzog with Goldman Sachs.

Okay. I had just a quick follow-up on gross margins and then another question. But first, how hedged are you on commodities heading into next year? Are you guys below your typical levels? And then I did have a question on your pricing and promotions. As we think about the consumer, consumption remains pressured and stretched consumer wallet. So could you talk about how you're thinking about pricing for the rest of this year and into next year? Also with gas prices still elevated, what are you seeing in terms of promotional intensity in your categories? Are there certain categories that are still more impacted than others?

Yes. Why don't I take the pricing and promotion question, and then Lee can circle back on gross margin and hedging. So look, the consumer is still stretched. A lot of inflation happening out there. You're right, gas prices are up, disposable income, that means disposable income is down. when you have this amount of inflation, typically promotional levels kind of retread a bit. That hasn't happened largely, I think, because manufacturers have spent back kind of tariff refunds to help extend promotional spending. As I said, kind of in my prepared remarks, in laundry, as an example, a mountain deal for the category went from the mid-30s typically to around 40. We also did that. We're gaining share in this environment. The value part of the segment is growing, but promotional spending is up versus historical levels for laundry and litter. But elastaticities are still strong. So when that happens, you do see the volumes kind of come in and react. I guess my comments on pricing and inflation in general is we've been very clear. We are, first and foremost, going after productivity. And you just heard me say we had record productivity this year. We think we're going to have record productivity next year. That's what we do first and foremost. We then do at least said. We look at our revenue growth management and promotional spending and when inflation is elevated, typically promotional levels do come down. That's what we've seen. That's what I've seen over the last 20 years. And then the last is price. And I'll say, if inflation maintains at this type of level, historically, the perspective is companies have to move. If it's not transitory, if it's structural, then it starts to make its way throughout the entire kind of cost picture. But we hit #1 and #2, the hardest. And then if we need to, then we look at number three. Lee, do you want to talk about hedging and gross margin?

Sure. So as Rick and I talked about, I got lots of things that help drive gross margin improvement. We've always done a healthy amount of hedging in key areas. We talked about earlier this year as some of the inflation came along. And then with all the volatility, we paused a bit, but we've been back at it and hedging going in into '27. I would say at this point right now, we're actually slightly hedged a bit more than we were at this time last year. But you have to consider that we hedge certain key things that we purchase. Right now, you're just seeing inflation everywhere. So the impact is helpful, but certainly, just the overall inflation bucket is larger as we look forward here. But that's all part of the math we talked about earlier that we're looking at and facing into for '27 with all of our tools.

Your next question comes from the line of Rupesh Parikh with Oppenheimer.

So on the HERO business, I was just curious how that continues to perform in international markets.

Yes. Sure. Rupesh, International, it's actually a great growth driver. We should have listed it in the release for international, maybe that was just an oversight. But it's definitely a net sales driver, consumption is up, sales are up. In the U.S., gained share in patches. Last 4 weeks, we gained share in all of acne. Cleansers are off to a good start, 4.85 stars consumer reviews. Sales were slightly down in the U.S., but that was -- consumption was up, but sales were only slightly down because remember, 1/3 of that business is online, and some of that shifted as Prime Day had shifted from July to June. So we feel great about here. We feel great about the innovation coming for HERO. So a lot of positive things.

Okay. Great. And then I guess my follow-up question, just on TOUCHLAND. Your team has cited slowing growth for that business. Where are the updated growth expectations for this year? And I guess we'll probably opt to wait for next year. But just curious as you think about international, just I don't know if there's a way to think about the level of growth going forward when you incorporate some of the international opportunity?

Yes. On TOUCHLAND, I would say the business is going to be close to flattish all in. But with the confirmed distribution gains that we've already heard about in the U.S. and with the international launch plans, which are underway now, we expect growth in 2027. So that's the good news.

Your next question comes from the line of Chris Carey with Wells Fargo.

One clarification question first. What was the tariff refund benefit in Q3? Did it come through? Is there any remaining impact in Q4? Maybe it's within that net inflation number, but I just wanted to confirm that. And then I have a follow-up.

Yes. Sure. So Chris, it was a net about $15 million in the third quarter. And in the fourth quarter, we expected to be about $5 million.

Great. And that lives in that inflation figure that you gave in the quarter?

Yes. It does, yep.

Yes. Okay. The bigger question with your -- one of your key strategies is to expand the oral care business. I get the question a lot. How long can THERABREATH sustained growth. I realize you gave some tidbits about household penetration, but maybe you could just expand a bit as we head into next year. Secondly, on the toothpaste side of the business, the growth has been very strong. You obviously got, I think, the distribution you thought you would get -- you did get -- as of last call, you were still in that assessing whether it was the distribution and you were still assessing kind of repeat demand. Can you give us a sense of these 2 items really on -- within the concept of the Oral Care business and how durable you think above-average growth can be going into 2027 given your multiyear plan that you laid out at the prior Investor Day.

Yes. I'll give you some color. We're going to go through a lot more detail in January on the growth initiatives. But basically, on their THERABREATH mouthwash, we think there's still a ton of room to run. We're within 6 or 7 share points of LISTERINE these days. We're growing double digits. The category is flat. We're winning with innovation. We're winning with on the shelf space. We're winning with the marketing and reaching the consumer. Our repeat rate is fantastic. Customer loyalty is growing. So across the board, we believe that THERABREATH mouth flash has still a long runway. And the 1 fact that I continue to hit again and again is just household penetration for THERABREATH versus the category. And I think that's a good approximation. Meanwhile, that's just talking about the U.S., THERABREATH is a fantastic brand globally. It is starting to win globally. We just introduced that actually, in Japan, remember, we bought Graphical, our distributor a few years back and now we're putting a few of our brands through the distributor like Waterpik, like HERO, like THERABREATH. I think THERABREATH has already reached like 15% or 20% of their sales in a matter of 12 months or less. Like so that trend, that need, problem solution brand for mouthwash is not just a U.S. trend or need. That is a global consumer need. So a lot of optimism about the global expansion of THERABREATH. Meanwhile, THERABREATH pace, like I said last call, off to a great start. We have a 1 share already on the paste, repeat rate is closing in on 30%, which is actually really good for a toothpaste innovation because there's high brand loyalty for toothpaste typically. So we got trial, and now we're getting repeat rate up, and we're laser-focused on that. Meanwhile, I think I'll hold any other further comments to January on how each of the initiatives are going. But I would just say I expect those growth initiatives to be tailwinds in '27, '28 and '29.

Your next question comes from the line of Nik Modi with RBC Capital Markets.

Rick, can you just -- I wanted to follow up on that operating leverage question. You said you'll start seeing it next year because you're going to be lapping the loss of the revenue. But I suppose you're also spending a lot of money to try to fix those businesses before you sold them. So if you can maybe give us some context on if that will be a meaningful contributor for next year, at least over the next 6 to 12 months? And then if you could just provide any more distribution clarity on TOUCHLAND? Like are you going mass broad? Is it going to be more targeted? Any context would be helpful.

Yes. Okay, Nik. My comment on the question before, I think from Bonnie was really like, help us understand why we think we have some positive tailwinds on gross margin. We have multiple positive tailwinds on gross margin, one of which is just being able to leverage our fixed costs. And I think 2026 versus 2025, you're right. We had some higher spending that was happening. A lot of that higher spending was actually happening in the marketing line and the gross to net line, not necessarily on the cost of goods line. So that payable is already good and done with. And then as we move forward, we're going to have real revenue growth, and you should expect some leverage, and that's a tailwind. That's really the only point, not really trying to quantify that. It's just a normal tailwind for any business. We have real growth. The second question on TOUCHLAND. I would say it's a little bit broader based than where we're at now. It's going to be in a couple of different classes of trade, which is good. It's one big step in the right direction, and we already have confirmed acceptances for that. And meanwhile, in the beauty class of trade, we're working hard on making sure we have innovations and exclusives in order to differentiate that a bit. So I would say I'm really, really happy with the progress we've made, and I'm optimistic.

Great. Just one quick follow-up on that. Is the spacing going to be with beauty and mass or -- because I know that was a big debate point, like I'm just curious where you all sell out on that in terms of where it actually is being placed at retail.

Yes, that's where we expect it to be.

Your next question comes from the line of Andrea Teixeira with JPMorgan.

I was just hoping if you -- we can elaborate a little bit more on the pricing. You mentioned, obviously, there could be like the pressures, obviously for 2027 will be higher. I was wondering if you can comment on how to position now into next year. You have had tremendous success with your productivity program you just alluded to. The pressures being higher for you being able -- kind of like I want to summarize it is, please correct me if I'm wrong, that you're still looking for margin accretion, I don't think you took that back from your evergreen model into next year. So just to think as we put in pricing into next year, how we should be thinking? If not, it will be only with innovation? Just if you can help us think about your negotiations at this point.

Yes. Thanks for the question, Andrea. I'm not going to make any more comments on pricing than what I've already made. And just to reemphasize, I said, first and foremost, we focus on productivity. And we've done that in such a good way this year, hitting record levels. We expect to have record levels for next year. And we can see around the corner at that already. Number two, we expect promotions to come down over time as inflation is sustained at these levels. And then number three, I just said that if inflation remains at these levels. Typically, the industry is priced in those examples when it becomes more structural, not transitory. That's the extent to which I'll talk about about pricing. Our evergreen model is to have gross margin expansion. Revenue growth and margin expansion are the 2 things that are the lifeblood of any organization. And you have to have all the right things in order to do that though, you have to have a productivity program. You have to have the right innovation, you have to have consumer moving innovation that people want to pay for. So we have some great tailwinds and our goal each and every year is to expand margin.