Goodness you seem very angry. I would suggest too that part of the problem is that your dd1 can sense this and has heard it and wants to protect you and therefore is punishing her dad by refusing to see him. She is also probably saying what you want to hear on some level as she sees your reaction to it.
How long has he had the children that they come back 'smelly'? Have they perhaps been running round a lot and got hot? My ds gets very hot and yes smelly/sweaty when at soft play centre for example. Or do you mean cigarette smoke smell? Or what?
If they're not staying long/overnight then smelly isn't really because of him. It won't harm your dc to go one night without a bath either if they are staying overnight with his. From what you've said I don't think it sounds like they are staying overnight though...?
Just because he doesn't have the same standards of cleanliness as you on the odd occassion he does have them doesn't mean he can't see them. And if he's not even having them overnight I can't see what the problem is tbh.
Bascally unless there are welfare reasons that contact shouldn't go ahead a court will strive to encourage and order contact at that age yes and you will have to comply and make the dc available for whatever the court orders.
If he takes this to court you will need to show that you are encouraging the dc with contact because if you are being obstructive the court won't look kindly on you. Yes you can voice your concerns, state the dd1 is refusing, that you have worries for dd2 and in general but unless you have anything current or substantial it won't wash sorry.
By seeking contact he is showing an interest in his dc. Many NRP make only minimal effort or vanish completely. So he's not quite as useless as some are if he's trying to keep contact despite your best attempts to stop it...
If you think he is taking drugs you can ask for the court to get him to have a drugs test. A hair test will reveal non recent use.
If you think he can't care for them and that his mum no longer can help with supervised contact then you can ask the court for contact at a contact centre to start with. But why not suggest it to him as an option first. Ask him to look into it and arrange it and you will make the dc available. If he goes to court sying he wants contact but hasn't done this when you've asked they'll tell him to go do it. But if he goes to court and you've refused any contact you'll look like the bad guy.
As to the toilet/baby incident... Having worked at a play group I can tell you that lots of girls find it facinating on seeing their dad's willy and feel the need to share it. I remember one girl telling anyone who would listen 'my dad's got a willy and he stands up to wee'.
If your ex needed a wee while out so took dc with him, or dc1 walked in at home and saw, or for whatever reason it happened then it stands to reason she will ask questions about what she saw because she's never seen anything like it before.
What would you have liked him to say exactly? Put on the spot I think perhaps he answered as he saw appropriate. You don't know what questions dd1 asked and you only have her version of what happened I assume and she probably only remembered a little of what was said and with you questioning her about it it must seem like something strange or wrong possibly. But 6 really isn't too young to know a bit of basic info on male/female bodies and why they are different. imo at any rate. I think you are being a bit over the top in your reaction to that. But like you said you were ranting then so probably just lots of things skewing your view at this point on something that probably isn't that big an issue really.
It's hard when you feel like you're trying to protect them and while you believe he doesn't have a bond with dd2. But some parents do find it hard to bond with a baby but find it easier as they get older. You are fixing on how things where and not giving them a chance to actually bond.
At the end of the day he's her dad and she's asking to see him. You should allow and encourage it or he will get contact in court, even if it is at a centre to start with because of your concerns at this point. But that will move quickly if he proves himself reliable, able to meet their basic needs and wants to see them and they are in no danger when with him.
Sorry probably not what you wanted to hear.