Operator:

Good morning, ladies and gentlemen, and welcome to Church & Dwight's First Quarter 2024 Earnings Conference Call. Before we begin, I've 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 are described in detail in the company's SEC filings.

Matthew Farrell:

Good morning, everyone. Thanks for joining us today. I'll begin with a review of the Q1 results. And then I'll turn the call over to Rick Dierker, our CFO. And when Rick is done, we'll open the call up for questions.

Richard Dierker:

Thank you, Matt, and good morning, everybody. We'll start with EPS. First quarter adjusted EPS was $0.96, up 12.9% from the prior year. The $0.96 was better than our $0.85 outlook, primarily driven from higher-than-expected sales growth, gross margin expansion and a lower tax rate. Reported revenue was up 5.1%, and organic sales were up 5.2%. Organic sales were driven by volume of 3.7% and positive product mix and pricing of 1.5%. 70% of our organic growth was volume driven. And as Matt mentioned earlier, this makes 3 consecutive quarters of U.S. volume growth.

Operator:

[Operator Instructions] We'll take our first question today from Chris Carey with Wells Fargo Securities.

Richard Dierker:

Yes. Thanks for the question, Chris. You're right. April was around 6.5% consumption growth, really, really strong. And we said 3 things really driving a lower organic outlook of around 4%, which is probably in the grand scheme, HERO, lapping year ago distribution gains as we went national for HERO. It was probably the biggest one.

Christopher Carey:

Okay. That's helpful. The second thing would just be we're seeing an improvement sequentially in laundry volumes. Obviously, there's been some noise in this category with compaction with stepped-up promotional activity in the year ago base. How would you characterize your expectation for laundry sequentially from here?

Christopher Carey:

That's perfect.

Rupesh Parikh:

Also congrats on the nice quarter. So just going back to the vitamin category. Just curious what continues to weigh in the category? And then how should we think about expectations for the balance of the year versus, I guess, the double-digit consumption decline we just saw in Q1?

Richard Dierker:

Yes. I think Matt's comment was spot on in his prepared remarks. Usually, after Q1, we don't touch the outlook. Gross margin was so strong in Q1, we felt like we had to reflect that. And as a result, earnings was very strong as well.

Operator:

Our next question will come from Dara Mohsenian with Morgan Stanley.

Matthew Farrell:

Yes. And as far as our expectations for the year, we called the 4% to 5% organic growth for the year. And we expect just ballpark, about 2% of that driven from new product launches, which is a big number.

Andrea Teixeira:

So I was hoping if you can talk about like the dynamics as you set up shelves. If there is anything you would call out in terms of the -- of any pull forward in shipments and consumption? I understand that obviously, you had a very strong quarter, but you're guiding more conservatively into the second quarter.

Richard Dierker:

Andrea, it's Rick. I'll give you a couple of comments, and if Matt wants to add. So first of all, for the Q2 call, I went through a little bit of the details. But really, it's new product couponing and trade promotion is kind of a little bit of a step down or step up in Q2, so that's impacting net sales.

Nik Modi:

Just 2 quick questions. Rick, maybe on just the marketing guidance. I guess based on our math, the rest of the year would imply kind of reduced marketing, of course, off of very big increases from a year ago. But just wanted to get kind of philosophically, do you kind of saw the upside, would you have a bias to reinvest more given the consumer environment or -- would it be more flowing through to the bottom line?

Richard Dierker:

Yes. Thanks for the question, Nick. For marketing, we were up 150 basis points in Q1. We expect to be up in Q2. And then Q3 and Q4, but Q3 up probably, and then Q4 down. And why is that? We spent a lot of marketing in Q4 a year ago. We wanted to move and shift part of that to the front half as we supported our new product. So we did that in a meaningful way. Feel really good about that.

Matthew Farrell:

Yes. And just to add to that, Nick, as you know, we got a portfolio value brand. So to the extent that interest rates stay where they are, we have some defense against that. We have found that HERO and THERABREATH are really high [ ranks ], but we've really been unaffected by any decline in consumer sentiment over the past few quarters. So they seem to be somewhat resilient, and those are some of our bigger growers right now. So we still think we're pretty well positioned at least for the remainder of 2024.

Peter Grom:

I was hoping to just follow up on the 2Q organic sales outlook, Rick, you mentioned fully lapping pricing. You touched on the couponing many times throughout this call. So within that 4%, can you maybe unpack what we should expect from a price versus volume perspective?

Richard Dierker:

Thanks, Peter. In Q1, it was 70% volume and 30% price. And I just made the comment that on a go-forward basis, Q2, Q3, Q4 they'll likely be closer to 100% volume and minimal price, if anything.

Anna Lizzul:

What's the solid volume growth that you saw in Q1? I was wondering if you're seeing a more significant benefit from trade down. I think you mentioned some in laundry in response to Chris' question, but wondering if you're seeing this elsewhere as well?

Matthew Farrell:

Well, with respect to the consumer, you've probably heard us say on other calls that our big barometer is always unemployment. And unemployment has been consistently low. Yes, the interest rates have risen, but they've been high now for a while. So we don't see any change other than maybe people are disappointed that they're not coming down as fast.

Matthew Farrell:

Yes. Well, look, the predominant portion of our portfolio that is valued is laundry and litter. And in laundry, we have -- obviously, we have ARM & HAMMER, but we also have XTRA, an XTRA group in the first quarter, it was in my prepared remarks. So we feel real good about that. And that may be an indication of more pressure on the consumer when you see the deep value brand growing.

Bonnie Herzog:

All right. I had a quick follow-up on Laundry. Curious to hear how you guys think about managing the balance between driving share and profitability? I guess I'm thinking about it as you step up trade spend and also as you -- especially as you look at it in the context of curtailing some of the ineffective promos you mentioned earlier.

Bonnie Herzog:

Okay. That's helpful. And then I just had another question on international business. Your sales growth in the quarter was quite strong at nearly 9%, and the growth really seems pretty broad-based and balanced. So just curious to hear, how much of the volume growth was driven by distribution expansion versus just maybe strengthen your existing markets?

Richard Dierker:

Yes. The second thing that's helping international is a couple of these new brands, HERO and THERABREATH. And typically, it takes us 2 to 3 years to get new brands, new acquisitions out internationally, and we're doing it rapidly, and there's been a great response to many countries and many distributors for those brands.

Operator:

Our next question will come from Olivia Tong with Raymond James.

Matthew Farrell:

Yes. Well, if you go back a few years, the way we got established in Germany was, we had a very small distributor that had introduced BATISTE into Germany. And that while, that being the basis for starting a very small subsidiary in Germany, which has grown over time. This one is different in that, GRAPHICO is a public company in Japan, obviously, a micro cap.

Olivia Tong Cheang:

And then just thinking through about the M&A environment overall?

Olivia Tong Cheang:

Great. And then just one on -- following up on Bonnie's question around promotion. You talked about it continuing to creep up, but still obviously well below pre-COVID norms. Is your expectation that it does get back there or just continue to show creep through the year? And then on the couponing, still point of clarification, is this more than normal or more a function of the timing of new products and the trial building couponing that goes with that to support the launch?

Matthew Farrell:

Yes, one thing to keep in mind, [ Bonnie ], is -- all its price increases that went through the last couple of years, they were really unusual for all CPG and food companies. So yes, that does obviously make it more expensive for the product, but didn't necessarily expand gross margins for people.

Operator:

Our next question will come from Lauren Lieberman with Barclays.

Javier Escalante Manzo:

I do have a follow-up on the gap between retail sales that we see and the reported domestic number. You flagged WATERPIK as a point of impact. But we use [Ocana] and I believe that you guys do too. And the retail takeaway is more about 7%, 8%. And so there is a little bit of still kind of like a 2-point gap. Do you think that it's related to a slow retailer reorders as your competitor in laundry mentioned earlier in the season? And I have a follow-up.

Javier Escalante Manzo:

Correct. Yes. Correct. Exactly. Correct. Just trying to understand whether is this something of the accounting of the couponing or something weird that basically we are overstating your retail sales growth and therefore, your shipment growth?

Javier Escalante Manzo:

And when it comes to the gross margin getting better than expected, and I know that price mix was an issue -- was the driver. Is it more kind of like the change in the portfolio, meaning richer sales from HERO and THERABREATH, what was the driver of the better gross margin are there for the earnings bit?

Operator:

Our next question will come from Filippo Falorni with Citi.

Matthew Farrell:

Yes. Okay. When you think about THERABREATH and HERO, THERABREATH, we bought that business in 2021. And HERO in 2022. So for THERABREATH, resets this year, we're getting more doors. But I would expect that the distribution gains from a number of doors perspective is going to plateau for THERABREATH this year, and that we're going to be getting -- the way to look for distribution gains in the future are going to be more facings.

Operator:

Our last question will come from Brett Cooper with Consumer Edge Research.

Matthew Farrell:

Yes. Could you -- I didn't hear the first part of your question, I'm sorry.

Matthew Farrell:

Look, the volumes for this business continue to grow. So it's not a price-driven business. And the awareness in household penetration is still ahead of us for this brand. You may remember that when the -- back in -- before patches hit the scene, it was really ointments and lotions et cetera, that people were using to address acne.

Richard Dierker:

And I would probably say in all channels, we are growing and have positive growth even in channels that are declining because of some maybe macro or secular trends. So that bodes well for this brand.

Matthew Farrell:

Well, thanks for joining us today. We had a great quarter. So let's see everybody in July.

Matt Farrell:

Okay gang. It's a little bit like the Academy Awards. We're going to be hearing cutlery and clinking of plates and whatnot. All right. Thank you. Welcome, everybody. This is our 2024 Analyst Day, and we got all of our sell-side analyst friends in the room and lots of major shareholders. So, let's begin. We have a Safe Harbor statement. Encourage everybody to read that after class. And I'm going to start -- virtually the entire management team, one of the best-looking management teams in CPG. I'm sure you'll agree. And we've got kind of a packed agenda. I won't read it to you, but got a number of people coming up, are going to talk to you today about financials, our new products, digital and also our international story. So, here's a quick look back to 2023. So, we had a great year for reported and also organic growth, our reported 9% and organic 5%. And we had gross margin expansion of 220 basis points. You can hold the applause for a minute. We had all-time high shares in a lot of our major brands, share gains. Marketing spending historically has been around 11%. We almost got all the way back to 10.9%. And we generated $1 billion in cash from operations. And finally, as you know, we've been investing in capacity for laundry, litter and vitamins and also adding to the capabilities of the company. And here's our TSR. We show this to you every year, one, three, five and 10 years, especially what matters to our shareholders. 2022 was an abysmal year for us and we've recovered 2023. And we got a lot of confidence going forward, which you're going to walk out of the room here today thinking this is that. We've got a lot of confidence in our ability to grow in the US. You see that we tweaked our evergreen model in our press release, so we're expecting 3% growth in the future in the US. International, we've tweaked that there to say we expect 8% growth internationally going forward. We have a wonderful lineup of new products in 2024, but we've been consistent in our innovation for many, many years. We're becoming more and more digitally-savvy. So, one of the markers for that would be what percentage of your sales is online? And the answer is 20% of our sales is purchased online. That's over $1 billion in sales. The new evergreen model is very healthy. I'm sure you're going to leave here today thinking that. We've got really strong fundamentals going forward. So, who are we? We're a $6 billion company, largely US. You see 78% domestic and 17% international. Specialty Products is our original business from back in the 1840s. Historically, we've talked to you about 14 power brands, and those 14 power brands account for 85% of our revenues and profits. But today, as you saw under our release, in the future, we're going to narrow our communication to investors and shareholders and analysts to seven of those 14. And those seven are ones that are in larger categories, and we also believe they have a lot of potential for our global growth. So, those are the seven, THERABREATH, VITAFUSION, HERO, of course, ARM & HAMMER, our biggest brand, WATERPIK, BATISTE, and OXICLEAN. And they account for 70% of our revenues and profits. So, I'm going to run through what our winning formula is. First off is we have a very balanced and diversified business. We have low private label exposure, great innovation as you're going to see here today, and we are an acquisitive company. For many, many years, we've said the highest and best use of our cash flow is to buy brands. All right. Here's the balance. We're pretty much 50-50 between household and personal care. As far as value versus premium, historically, it's been 40-60 between value and premium, because of the growth of THERABREATH and HERO that shifted a little bit, but it's still pretty solidly around 40-60. Low private label exposure, this is on a weighted average basis, it's around 12%, and it's been like that for many, many years. Category-leading innovation. Barry Bruno is going to take you through a lot of the innovation group, things we're launching in 2024. And we have a long history of acquisitions. So, if you went back to 2004, we had $1.5 billion in sales, and now we almost have $6 billion in sales in 2023. And our acquisition criteria is very specific, so we're very fussy about what we're going to buy. They have to be number one and number two brands. They need to have high-growth, high-margin brands, fast-moving consumables, asset light. We have to be able to bring something to the party and leverage our supply chain, our internal capabilities, and they have to have a long-term sustainable competitive advantage. All right. So, we've got seven of those power brands today and more to come. And here's our -- I'm just going to wrap it up here just to remind you. Balanced portfolio, I think it's really key to the long-term success of this company. Low private label exposure. We don't have new exposure that some of our peers do. Innovation is the reason why our brands are so successful and the reason why our brand equity grows year-over-year. And finally, we're an acquisitive company and we do it well. But I'm going to bring up Rick now to take you through the financials.

Barry Bruno:

Good afternoon, everybody. I think Rick likes when I go right after the dividend slide to remind me I've got an obligation to keep it going, so 123 years strong and some more good quarters ahead. So I'm Barry Bruno. I'm responsible for our US business. I'm going to talk a little bit about our categories, the US consumer and what I think is some really great innovation that we've got in our key categories going forward. I'm going to start with a slide I left you with last year, which was we've got great confidence in our future. If you look at the categories in which we compete, and I'll show you a look at the old power brand and the new power brand categories to break them out for you, we're not only leaders in those categories. We're driving growth in those categories. We thrive in difficult environments. You've seen our value percentage of our portfolio. I'll take you through how, on ARM & HAMMER in particular, we bring consumers in tough times, we keep them, we trade them up. And then acquisitions have a ton of room to run, HERO and THERABREATH have been absolutely home runs, and they're in the early innings of that story still, and I'll show you what that looks like. So this slide was getting a little complicated, right? This is our old 14 power brand prior look, 17 categories. As we got into new categories, the chart got longer and longer. You can see which in 2023 we're growing, mid-single-digit growth, high single-digit growth, pretty strong. But when you look at the new look of our seven power brands and these compete in eight categories, just as a reminder, ARM & HAMMER competes in laundry and litter, of course, seven brands, eight categories, incredibly strong growth, right? 11% in 2021, 18% in 2022 and then 16.9% on top of that. And we're driving a lot of that growth and I'll show you that in just a little bit. But these are exciting healthy categories to be in. Matt talked about these a little bit, too. So our portfolio has changed a little over time. So we're 63% premium, 37% value, still incredibly valuable to us in tough economic times as we bring consumers in and low private label exposure of 12%. And then the third reason for confidence is about these new acquisitions. When we met with you over the last two years talking about THERABREATH and HERO, it's been about our ability to build distribution to bring these to more and more consumers, and you can see the success that we're having. THERABREATH up 57% in terms of distribution last year and lots of room to run to catch up with the big guys, and HERO is another great story as well, up 200% last year and tons of room to keep growing. And that's just in MULO, that's in measured channels. If you look at it from a numerator standpoint, mouthwash is in 63% of US households today. THERABREATH is only in 7%. And you can see the growth we're making from 1% to 2% to 3% to 4% to 7%, great growth, but there's a ton of households where we're not in just yet. And so there's room to run there. And HERO is the same story. HERO almost didn't exist five years ago with a 0.2% household penetration, up to 6.4% today. You can see the rate of growth accelerating. So whether you measure MULO or you measure numerator households, tons of room to run on acquisitions. So let's look at some category and consumer dynamics. Now, we're going to start with our largest brand, Arm & hammer and one of our largest categories, Fabric Care. And the look back is a pretty compelling story of growth from a five share to an all-time share high, 14.4% last year on top of an all-time share high in the prior year. And all of that growth has been driven, as we've talked with you, about being anchored in the value tier of the laundry detergent category. That's about 30% of the category. But I'm happy to be talking today about Arm & Hammer Deep Clean, our most powerful formula and our first entry into the mid-tier segment. And to give you some idea, that's about 27% of the category. The mid-tier, we haven't played there today. And we're thrilled about this new formula that's going to be launching in Q1 in 2024. And just to break it out for you, so you can see our architecture, we've got our core Arm & Hammer products. Those are our better products, Arm & Hammer plus OXICLEAN, sorry, Arm & Hammer Good, Arm & Hammer plus OXICLEAN Better and now with Deep Clean, our best formula and the best anchor in our architecture. And we are telling consumers about this new formula starting very soon, and I'll play one of the spots. We call it dig deep to show you how we're bringing awareness to the category and the brand. [Video Presentation] So that's just one way we're spending some of the incremental marketing that Rick talked about earlier. But fabric care is so important to us, we're not done with Deep Clean. We're also happy to be talking about Arm & Hammer Power Sheets, laundry sheets, not dryer sheets. We're the first mainstream brand to bring this form, new form of unit dose to market. We launched it in Q4 of last year online. We quickly grew to the number two detergent sheet on Amazon, and we're expanding it into bricks-and-mortar this year. It's a great new form of unit dose. And there's a lot of education that needs to take place when you've got a new form, so let us show you how we're using one of our army of influencers to educate consumers about this great new form of unit dose. Let's play the spot. [Video Presentation] Once is enough. You can tell she's excited about it. We are too. I just dropped my son off at college a few weeks ago, and laundry sheets were one of the first things that I made sure I packed for him. Far more convenient than unit dose for sure, and than liquid for sure. So staying with ARM & HAMMER, moving over to Cat Litter, now another important multibillion-dollar category for us. You can see that the category is healthy, right? It was up 11% last year. It's been a consistent grower for a long time. During COVID, there were increased pet adoptions, then there were multiple rounds of price increases, 11.7% growth. ARM & HAMMER contributing to that growth, up 11.8% last year. When you're growing faster than category, you're gaining share, of course. We were up to a 24.8% share, almost a 25% share of the category. And you can see we've been a consistent growth over time from 23.6% up to 24.8%. And one way that we're keeping that growth going is through new products, ARM & HAMMER Hardball is what we're talking about today. We're changing the lightweight litter experience. We think it's lightweight perfected, ultra compact strong clumps, 60% lighter than our base product today, plant-based, and it was one of the strongest-performing litter new product launches at Walmart last year. So we're expanding it nationally this year. And why are we so excited about lightweight? Well, today, we've just got a four share in the lightweight subsegment versus our 25% share overall. So getting our fair share equals $100 million opportunity in retail sales. So we're squarely focused on growing and gaining share in this important subsegment of the category. And we'll share how we're doing that via a piece of advertising right now, which is cats watching humans on the Internet. So, a little bit of a different play. Let's play the spot. [Video Presentation] I swear we test all of our advertising and our cat-obsessed consumers love it, so it's helping to bring awareness to this great new product. All right. Switching gears to something slightly different, dry shampoo. BATISTE dry shampoo has been an absolute tear. The category is healthy, up 15.6% last year. As the leader in the category, we were up 16%, a combination of new products and advertising has absolutely driven continued growth for us. And you can see the share story is the same here, whether we're talking about litter or fabric care or BATISTE, we're hitting all-time share highs. We hit a 46.3% last year. We're up 9 share points in the last few years, so incredibly strong growth continues here. And again, the theme is the same. We're keeping it going with new products that we're supporting by advertising. Now we're talking about BATISTE Sweat and Touch Activated, our newest innovation in dry shampoo. They use bursting bead technology that have been in skin care before but never in dry shampoo, so they do -- they offer a burst of fragrance with every touch or drop of sweat for up to 24 hours of freshness. Those are launching starting now in Q1, both forms. And we think they're pretty futuristic. So we've engaged some help from the future to tell the story about this new product. Let's play the spot. [Video Presentation] So I have a lot of fun with BATISTE, as we approach a 50 share in the category and keep innovating and investing. VITAFUSION. It's a slightly different story when we talk about VITAFUSION vitamins. So once made VITAFUSION unique, our gummy form, our great taste, our wide assortment has now become really prevalent in the VMS category. There are over 60 vitamin players in the gummy form right now, and that's just in bricks and mortar. There are over 100 if you were to look at online players. So ultimately, there's been a share decline, but you've seen it's gone from 23.9% down to 12% in the category. The gummy category has just about doubled during that time, and you see a real inflection back in Q4 of 2019 and Q1 of 2020 during COVID. But obviously, the share decline is going to stop. And we're making the investments required to do just that because our consumers and our customers depend on us to do that. We're the number one gummy player still Amazon, at Walmart, at Walgreens and all the players you see listed here. And we've got the highest household penetration in the gummy form. But we've got to turn it around. And so we're investing in new product upgrades, to our base formulas, to new packaging that pop better at shelf. We're taking that new packaging into new displays to get off-shelf display. We've got new advertising to support it. And we're launching new forms beyond gummies in 2024 with the whole goal of stabilizing the business, stopping that share decline and getting back to growth in 2025. Now I'm going to close out talking about just a few acquisitions. So I'll start with THERABREATH, and I think this THERABREATH story is pretty well known. 85% growth last year, right? Incredible growth, driving category growth of 12.8%. So healthy category, again, driven by THERABREATH where we're now category leaders. And you can see the share growth is absolutely playing out. This is in the total mouthwash category. We've gone from a 2 share to a 13 share in the alcohol-free portion of the category where we play, 26 share category leader. And actually a fun fact in January, alcohol-free for the first time is larger than the alcohol segment of the mouthwash category. So we are continuing to gain share and grow dramatically here. And it's a similar story where we've got a great new product, introducing THERABREATH Deep Clean, our first alcohol-free antiseptics and antiseptics 30% of the category today, we don't play there at all. Deep Clean is our first foray there. Kills 99% of germs with no burn because there's no alcohol and it's dentist-formulated launching in Q1. I don't have any great advertising to share with you here because the team just got back from LA last night, but we'll have it for those of you who are going to be at CAGNY as it supports our launch in Q1. And last but definitely not least is a little brand called HERO. And it's not so little anymore. You can see that it's absolutely driving category growth. We're up 72% last year, drive category growth of 20%. And when I say little, it was at 0.2 share five years ago. Right now it's an 18 share all-time category, high-end category leader in acne care. And we're absolutely keeping it going innovation in both our patch form. We're a leader with over a 50 share today. And in acne-adjacent skin care, where we're launching Dissolve Away, our Daily Cleansing Balm. So patch innovation, combined with skin care innovation equals lots of good growth yet to come. So let's talk about patches for just one more second because the form is still not all that well known in the US. We've got the first national campaign called pimple -- your MIGHTY PATCH bringing awareness to this great new form, let's play that spot. [Video Presentation] Again, the form is new so we're pioneering in the industry, launching the first new advertising nationally to bring awareness to this forum. So the summary is great momentum, right? You heard about all-time share highs in laundry and cat litter, on BATISTE, in mouthwash and in acne care. We've got great new products. We're supporting with more advertising. And ultimately, that brings us back to the algorithm that we were talking about earlier. You see we've raised our target to 3% for the US. And we're absolutely confident we can achieve that. seven out of the last 10 years, our US business has been growing faster than 3%. And we're absolutely committed to continuing to do that going forward. One way we're doing that is via digital and e-commerce. And so Surabhi Pokhriyal is going to come up now to talk about how we're going to keep that great growth going. Thanks.

Mike Read:

Good afternoon. My name is Mike Read, I lead our International and our SPD business. So, let me just start with the international story. As Rick mentioned earlier, we have upgraded our Evergreen model, so what used to be 6% organic growth, we now moved to 8% organic each year. So, an exciting step for the division. If I break that down a bit, we're about $1 billion in size. There's kind of two parts to it. We have six subsidiary markets that go direct to retail. It's about 63% of our total business, Canada, UK, Mexico, Australia, France, and Germany. The remaining 37% is through our Global Markets Group. So, we operate in about 100 different countries. We partner with 400 value distributor partners around the world. So, our Global Markets business has been our fastest growing over the last few years and will continue to do so. And just to make that kind of point, if you go back to 2009, the international division has tripled in size. And during that time, the Global Markets Group has doubled in importance. So, we see that trend continuing well. While we've had strong growth in our subs, we do expect GMG to continue to outpace that. If I just give a summary of 2023, a very strong year. We had a breakout quarter in Q1, almost 12% growth, followed by 6.1% in Q2, 7.3% in Q3, and we finished strongly with 9.0% in Q4. So, a full year organic of 8.5%. We had strong growth across all our subsidiary markets and double-digit growth across our GMG region as well. So, across the board, really strong results. And that just shows the 6% to 8% Evergreen model change. If you look back over a number of years, other than the sort of setback from last year, we've had pretty consistent growth across a number of years and pitching above 8% in 2023 at 8.5%. I think the good news is relative to our peers, we're still very much underdeveloped. So, we have about 17% of our sales as a company comes from international. We are very much in growth mode. Many of our peers are in the 59% to 60% range, so a long runway ahead. But what's most encouraging about that runway is we've got a portfolio that travels extremely well as do our acquisitions. So, we've got a combination of US power brands like ARM & HAMMER, OXICLEAN, VITAFUSION that travel very well, and that's complemented with a strong personal care and OTC portfolio headlined by BATISTE, STERIMAR and FEMFRESH. So, brands that aren't necessarily commercialized in the US that are playing important roles for the International division. I think most notably though is acquisition has been a really big part of the growth story within International. If you go back to a few years back with the acquisition of WATERPIK, that's one of our biggest brands internationally. And we're thrilled with the addition of THERABREATH and HERO. So, just rolling both those brands out globally, both are on track and actually making a big splash already with lots to come. So, we're really excited about adding those two pieces to the portfolio. If I just sort of summarize sort of three key things to think about from an international perspective, Rick talked about some of the investments that we're making, particularly in our GMG group, but we are putting a lot of infrastructure process, IT to just shore up and be able to support the growth that's coming from our Global Markets Group. We've also added a lot of capabilities around portfolio strategy, revenue growth management, and as Surabhi mentioned, just really upskilling our digital e-commerce capability. And certainly, the acquisition additions and just getting on the front foot on both those acquisitions are the focus areas for international. All right. So, over to Specialty Products. So, the Specialty Products division, we are holding our Evergreen model at 5% growth. If you just break that into kind of two main parts, we have an Animal Nutrition business, which is about two-thirds of the business. You see sort of the impact of MEGALAC. The rest is Specialty Chemicals is about a $320 million business. If you kind of unpack that a little bit, a tough year in 2023, we're down minus 8%. Most of that is MEGALAC-driven. So if you take MEGALAC out, we're actually in positive growth, and the Animal Nutrition business was in stronger growth than that. Most importantly is, we're still very focused on building out our portfolio and supporting prebiotics, probiotics, nutritional supplements across a wide range of species, dairy, cattle, swine, poultry. So nothing really changes. MEGALAC's coming out but the rest of the portfolio is strong. We have high growth ambitions for it. And most notably, we're focused on international similar to the consumer side. So if you go back to kind of 2015, we are less than 6%. We're now at 17%, which is in the parallel of our consumer business, last year, grew 25%. So, really strong growth internationally as well. So with that, I'll pass back to Matt Farrell.

A - Matt Farrell:

Steve Powers, you're up.

Matt Farrell:

Okay. Your first question is probably with respect to the weakness in the fourth quarter with respect to ARM & HAMMER on laundry. If you recall back when we did our Q3 call, by the way, this sounds a little right now. Does that sound okay? If you think back to our Q3 call, we said, hey, we had -- because of revenue growth management, we identified a lot of promotions that we had in Q4 of 2022 that we're not going to repeat in Q4 of 2023. So that cost us. So we lost some share but it was the right thing to do. And if you look at the most recent four weeks ended, say, mid-January, the same is true, like so we cut back as well. So we had a very low deal in the first couple of weeks of January. So it's not unexpected from inside out. Your second question is with respect to Deep Clean. So Deep Clean is that we're entering into the high tier, something going on with this thing. We're entering into mid-tier where historically we've played in value. And yeah, we are going to be getting incremental share in there. And we do think it's going to be contribute to our share growth in 2024. But Barry, if you'd like to add anything?

Matt Farrell:

Carlen, do you want to pile on it all?

Matt Farrell:

We probably need a mic up here, too, for those in the crowd. Okay, Dara?

Matt Farrell:

Past is prologue. So we had a slide up here that showed if you looked over the last 10 years, so what's been our organic growth rate average? It's been 4%. And almost every year, it's above 4%. And often at these meetings, we get the question, how come it's 3%? So we finally fessed up and said, yeah you know what, going forward it's going to be 4%. I mean, it's as simple as that. Now why would we have confidence there? Because we did change how we're going to get to 4%, right? So we said 3% US, 8% international, 5% Specialty Products. International is going to be a juggernaut for us. It's 8% growth. It's in our one big component is Global Markets Group, and that's been doubling every five years. So we do have such great brands. And what we're doing is what our competitors did 30, 40 years ago, is take your products on the road. So I think a lot of faith in the international number. And just international and US are going to benefit from our two most recent acquisitions, which is THERABREATH and HERO. And we're going to be launching HERO in 40 countries in 2024. And we just got so much runway there. So I got total confidence in our ability to grow the top line 4%. Yeah. I guess you can't rest on your laurels since you did 4% for the last 10 years. But given where I stand today and the innovation that we have, I think it's in the bag.

Matt Farrell:

Sure.

Matt Farrell:

Okay. Well, I'm going to throw it to Mike to talk about international. I'll let Carlen have a crack at how we're thinking about it in the US.

Mike Read:

Yes, I can take that first from an international perspective, the -- from a TheraBreath first perspective, I think any time you've got a great success story and a category grower that you take that story internationally, that holds well. And I think we've got a lot of proof points to that within our portfolio. I think what's also encouraging on TheraBreath specifically is we have a very similar type of penetration success in South Korea, where the brand is equally developed. And so being able to take not only a great US story, but being able to take another market internationally and be able to take that story to the trade has been really positive. And Hero, the same thing. It's been such a clear winner for the business. It's a very simple thing to get. Retailers around the world are really excited about it. So both those brands provide scale and fairly easy entry points in the global markets. There's a real demand for it. So we're pretty excited about it.

Matt Farrell:

Yes. And obviously, we know the resets and what the planograms are going to look like.

Matthew Farrell:

Okay. Rupesh, you're up and then Chris. Bring your own microphone.

Rick Dierker:

Yes, good question, Rupesh. We got ahead of our 2024 expectations for buyback. We did $300 million in Q4 of this year. And if cash continues to build on the balance sheet for an extended period of time, we would do a larger buyback at some point. In terms of debt paydown, I think at year-end, we had maybe $200 million on the revolver. We've already paid down another $100 million, so that's kind of embedded in our outlook.

Matt Farrell:

Yes, we'll take that one first. So I'm going to toss that one to Barry and Surabhi as far as what we're seeing for Amazon.

Surabhi Pokhriyal:

Yes, it's four months in the market, Rupesh. Got around 6,000 reviews and 4.5-star rating. The reviews are super positive. It's a mix of people who want sustainability and care for the planet and do want to do good for people who truly like the clean are coming out of it, because efficacy was really, really important for us, and we didn't want to do just greenwashing. But I think more to come on the analysis of how many are shifting versus new, a lot of them seem to be incremental.

Rupesh Parikh:

Thank you.

Chris Carey:

Hey, Chris Carey, Wells Fargo. Just on the guidance and the phasing. So more of a back half weighted guide, totally makes sense with the front half investment. How much of that back half weighted guidance or, if any, depends on success of the innovation? Basically, what's your visibility on the ability to accelerate? And are you anchoring to anything that you're rolling out this year in order to hit that back half number? And then just connected to this, can you maybe give us a sense of what your expectations are for VMS this year? Obviously, some interesting packaging and advertising behind the product going into 2024. Do you expect that business to flatten out? And maybe you could also comment on your expectations for WATERPIK as well?

Rick Dierker:

Yes, in terms of, I guess, cadence and reliance on new products to kind of hit our outlook on revenue, I would say, we give revenue ranges for a reason. And there's lots of things in play there, whether it's how fast our recent acquisitions grow, how fast our categories grow and competition. We've mixed all that together, and we're very confident in hitting the 4% to 5%.

Matt Farrell :

It's only been 12 months though. We did have -- early on, we had a bit of a drought. I think in 2008 we acquired ORAJEL, and 2011 we acquired BATISTE. So I know we had some small deals in there but businesses we don't talk about are very small brands. So as far as decent-sized transactions, we've had seen a drought in the past. And yes, I get the whole -- it's a burn a hole in your pocket, and this is -- or what do you do with the cash? We did a large buyback. I can't remember what year was. It's quite a while ago pre-COVID where we had a lot of cash building up the balance sheet. We hadn't done a sizable deal in a while, and we wound up increasing our authorization to buy back and we bought back more shares. So that's always available to us. But like I said, we looked at four deals this past year and some had pretty good economics but we just didn't think long term that they were going to be able to be sustainable. So no, we don't ever get deal momentum in the company. So we -- like I said, we're really fussy. But we do recognize the fact that we have an unlevered balance sheet. It's pristine. We could be building up a lot of cash if we don't do that. So this time next year, we haven't done a deal. Obviously, we'd be looking a lot harder at buybacks.

Matt Farrell:

And you might be encouraged by the fact that we've doubled the size of our M&A team. So for -- so I joined in 2006, and Brian joined in 2006. And in 2023, we added another person.

Matt Farrell:

No, that's true. We're in the hunt to hire somebody in Europe and also in Singapore or in Asia Pacific so we get deal flow outside the US because historically, it's more US-centric, our focus, but it is true. And this is -- by the way, this is the team that goes through the diligence meetings. All the gray beards, old people with better experience. And so Brian is very grateful. Okay. I think that Andrea was going to be next, then Peter.

Matt Farrell:

I'll do the M&A one, so is your question of what categories would be focused on?

Matt Farrell:

Yes. Well, I mean, look at the -- you can only buy what's for sale. And we venture into lots of different categories. We will not venture into devices. But we look at household or personal care. Again, it has to be how good is the brand? How good is the brand equity? The economics obviously matter, but what do we bring to the table? Are we a good owner? So we have a pretty wide lens of the types of brands and products that we'll look at. But again, it's got to be a fast-moving consumable. But we don't have -- we don't target. It's one thing we don't want to. So Brian doesn't spend all day long, looking at categories and say, wouldn't it be wonderful to own that brand? Yes, but they're not for sale. So we don't spend any time on those PowerPoints. What we want to make sure is that we're in the deal flow that anything sets for sale, we know about. So we can look at it. That's most important.

Matt Farrell:

Okay. Peter, you're next, so let's keep it at that table we have to…

Rick Dierker:

Yes, okay. So the first one is on gross margin cadence. 50 to 75 for the year, we do expect gross margin in the first half to be a little bit better. Why? Because we have pricing carryover that's happening a bit still in the first half of the year that wasn't there. So gross margin a little bit better than the front half than the back half. And then your second question was on -- yes, on marketing investments and stuff like that, okay. Well, look, the scorecard -- last year was kind of unique, right? We wanted to build back the war chest on marketing because we got too low during COVID because we were outside of we were out of stock. We didn't have to supply, all those reasons. And so we did that a year ahead of time. We really initially said, we're going to go to 10.5% and then 11% this year. And we fast-forwarded, put it back to 11%. We think 11% is the right number. But with that said, share matters, share is a scorecard to tell you if you're the right number. Right now, we're getting share in about 60% of our sales. That is a good metric and good scorecard. So right now, we believe that number is the right number.

Barry Bruno:

I got a lot of new products to support them, so yes.

Anna Lizzul:

Hi, thank you. Anna Lizzul from Bank of America. I was wondering in your evergreen model with the recent revision today, how much is that driven by the success of your more recent acquisitions like HERO and THERABREATH versus the growth of the remainder of the portfolio?

Rick Dierker:

Yes. I would also add that

Barry Bruno:

Yeah.

Matt Farrell:

Yeah. that's a good point. So if you think back that 5% growth and 5.3% growth in 2023, more than half of that came from the business ex-THERABREATH and HERO, tell you that the base business is strong. Okay, let's move over to the far table now.

Matt Farrell:

I've had that question in the past. And we evaluate all of our brands regularly, because everything is going to pull their weight. But I wouldn't say that signals anything. You see that MEGALAC is one that we've looked at that for a while. It had good years and bad years. But considering that's become commoditized, we think we should move it out. But yeah, it's a regular analysis that we do as a company.

Matt Farrell:

Okay. Let's start with supply. So Rick Spann, take a swing. You think you can supply 40 countries?

Matt Farrell:

Hang on, Rick.

Matt Farrell:

It's such a good story I want to make sure everybody can hear it.

Rick Dierker:

Maybe, Mike, do you want to comment on the 40 countries, maybe even tell the UK story a little bit.

Mike Read:

Yeah. What I'd say is just generally across the portfolio, we've had really balanced growth across our five GMG regions and our sub's really healthy. And with doing that, we're able to add more brands to our business with strong appetite from our distributor partners and then on to retail. So HERO is not the only one. We actually have other opportunities to expand multiple brands across multiple countries. But I think just the success story of HERO, not only in the US, but now as we've gone into commercializing into most of our subs already they're already taking number one positions. They have really strong consumption really early. So we've only been in for two, three months and we're already well established as a brand. So the playbook that clearly played out in the US is playing out beautifully already in the markets that we're in. And that just becomes the story that we take to those 40 countries. But we are well poised with our distributor partners around the globe to make a big success globally.

Mike Read:

Yeah. So just in terms of registration getting into markets, so we've launched in Canada, we've launched in the UK, we launched in Germany, France, Australia, all with really strong positions, great retail partnerships doing well online. So everything that we're hoping for, it's that and a little bit more. So it's the success is there. And every time we have that repeatable success in the playbook, it just adds more momentum for those new partners that we're trying to bring on.

Filippo Falorni:

Filippo Falorni, Citi. I wanted to ask you about the promotional environment in your categories. You talked about, Matt, stepping back on boundary a bit. What about the other categories? Like do you see any need to step up more promotional activity and what you're seeing from your competitors? Thank you.

Javier Escalante:

Javier Escalante, Evercore. If you can talk again a little bit the opposite to M&A, the two acquisitions that you made seems to have more extendability into adjacencies. WATERPIK doesn't come across that way, but HERO, THERABREATH, there seem to be adjacencies. Have you -- when you talk about that, whether that inform also the 4% that probably is 5%, if the new target internally, if you can talk about that?

Javier Escalante:

You mentioned that you first hoped that you thought it was 4% and you were promising 3%. Perhaps now you think that is 5% and you're promising 4%.

Matt Farrell:

Yes, I'll start off and then Barry, you pile on. So, we want a business that disrupted a category. So, the category was a $500 million category in the US say, four or five years ago. And then this new form comes along. Now, it's a billion-dollar category and still growing. So, we said, hey, what you really want to do is you don't want to get distracted. You want to really do a great job with household penetration of patches in the United States and also taking it globally. So, that's where our focus is. But there are opportunities to go elsewhere.

Matt Farrell:

I'll be getting e-mails from people in marketing and new products tomorrow, because you're on their team. We should be going into adjacent categories more quickly. But I think the slow roll is going to pay off long-term. Okay. I think that might be it. Anybody else that has…?

Matt Farrell:

Oh Olivia, so sorry, dead center.

Rick Dierker:

Yes. So, the second one first. We've been managing the business with classifying our brands in a certain way for a very long time, and we resource those brands in a certain way, depending on the classification. And that is not changing, right? That's our internal. This is to help simplify when we talk outside what those brands represent and narrow the conversation, because those are what are driving kind of whether the top line moves or margin expands or earnings. So that's kind of the purpose. Your first question on SG&A, I think you're talking about the outlook, really, the evergreen model. Yes. Yes, dollars are higher, in general. We're getting leverage for two reasons. Really primarily because of we're growing faster than the top line is what we're doing. We're also spending money, as we've been talking about for a long time, on investments in analytics, automation. We're trying to take hundreds of thousands of hours out over the next three to five years. And we're not going to reduce people. We're going to not add people when we scale, right? We're making these system investments and ERP systems, not so that we can have a workforce that's reduced, because as we grow from $6 billion to $7 billion to $8 billion, the ERP system can handle that type of growth. So that's a short answer.

A - Rick Dierker:

Thank you.

Operator:

Good morning, ladies and gentlemen, and welcome to Church & Dwight’s Third Quarter 2023 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. Matt Farrell, President and Chief Executive Officer of Church & Dwight. Please go ahead, sir.

Rick Dierker :

All right, thank you Matt. And good morning, everybody. We'll start with EPS. Third quarter adjusted EPS was at $0.74 down 2.6% to the prior year. As Matt mentioned the $0.74 was better than our $0.56 outlook primarily due to higher than expected sales growth and gross margin expansion. Net sales were up 10.5% and organic sales were up 4.8%. Over half of our organic growth in the quarter was driven by volume. The total consumer business was up 5.8% organically. Our third quarter gross margin was 44.4%, a 270 basis point increase from year ago primarily due to improved pricing, volume, productivity and the impact of the HERO acquisition net of the impact of higher manufacturing costs. Let me walk you through the Q3 bridge. Gross margin was made up the following. Positive 140 basis points impact from price volume mix. Positive 120 basis points from acquisitions and a positive 160 basis point impact from productivity, partially offset by a drag of 150 basis points due to inflation. Moving to marketing. Marketing was $27 million up year-over-year. Marketing expense as a percentage of sales was 11.5% or 80 basis points higher than Q3 of last year. For SG&A, Q3 adjusted SG&A increased 310 basis points year-to-year, primarily due to higher incentive comp, improved business performance, SG&A related to the HERO acquisition, and investment spending. Other expense, all-in, was $21.8 million, a $2.4 million increase due to higher average interest rates. For the full year, we now expect other expense of approximately $95 million. For income tax, our effective rate for the quarter was 24.1%, compared to 20.2% in 2022, an increase of 390 basis points as the prior year rate included the benefit of a non-recurring state tax reduction. We continue to expect the full year rate to be approximately 22%. And now to cash. For the first nine months of 2023, cash from operating activities was $795 million, an increase of $261 million due to higher cash earnings, including the positive impact from recent acquisitions, and improvements in working capital. Turning to the full year outlook, We now expect the full year 2023 reported sales growth to be approximately 9%, up from our previous outlook of 8%. We continue to expect organic sales growth to be approximately 5%. We now expect full year reported gross margin to expand 210 basis points up from 200 basis points. This is an encouraging trend as we continue to move closer to restoring gross margins to pre-COVID levels. We continue to expect a double digit percentage increase in gross profit in full year 2023. Looking at inflation, we continue to expect around $120 million of higher manufacturing costs in 2023. This is well below what we have experienced in the last couple of years. While many commodity prices remain below prior year levels, resins and oil based commodities are a bit higher. We continue to expect full year marketing as a percent of sales to be 11%. And we continue to expect full year SG&A to be higher in both dollars and as a percent of sales compared to 2022. SG&A is expected to be higher than our previous outlook driven by incremental R&D investments, higher incentive compensation given our strong performance and a bad debt reserve related to one specific customer situation. As in past years when we have strong business performance, we invest for the future. Our investments will focus on driving future growth with higher marketing dollar investment, R&D investment, including clinical studies and accelerating product registrations in international markets, as well as driving efficiency, including investments in automation and technology. We continue to expect full year adjusted EPS growth to be approximately 6%. And as a reminder, our EPS guidance includes the step up of marketing that we've been talking about and higher SG&A. We continue to expect full year cash flow from operations to be approximately $1 billion. Our full year CapEx plan is now expected to be approximately $230 million as we continue to make capacity investments. And we expect to return to historical levels of CapEx about 2% of sales by 2025. Moving on to Q4, we have a strong outlook and expect reported sales growth of 5% and approximately 4% for organic with volume contributing 1% or better. Organic growth rate in Q4 reflects positives from HERO, Litter and THERABREATH and negatives from not repeating some low margin laundry promotions. We expect gross margin expansion, a significant increase year-to-year in both marketing and SG&A, and marketing is expected to be an excess of 14% in Q4. Adjusted EPS is expected to be $0.53 per share, a 2% increase from last year. So to summarize a strong nine months of the year behind us, we saw the inflection point of volume growth as expected and we are spending on marketing and investments to build momentum for 2024 and beyond. With that Matt and I would be happy to take questions.

Rupesh Parikh:

Good morning and thanks for taking my question. So just starting with the specialty product segment, how do you think about the business in the coming quarters? So this quarter obviously a larger decline. Just wanted to get a sense of we should see weakness for a few more quarters until you lock the issue that you cited.

Rick Dierker :

Yes, I think the nuance, Rupesh, also is when you look at like a 4% growth rate in Q4. When we talk about investing many times we talk about SG&A or marketing, sometimes we're doing really well. We also look at customer profitability. We take -- we get ahead of it and call unprofitable or low profit promotions in some of our businesses like laundry.

Matt Farrell:

No, that's true. Last year in the fourth quarter we had a looking back now, we had a lot of promotions that we thought were not profitable. So we called them. So they're not going to be in place for this fourth quarter, which obviously results in a lower volume.

Matt Farrell:

The user to do that when the quarter is over than do right now. Now it's more conjecture, but it is a direct.

Bill Chappell:

Thanks. Good morning. Can you talk a little bit about kind of where we are for both HERO and THERABREATH in terms of as we're moving into next year trying to understand the distribution? Is it where you expect to be or we have tougher comps for both of those businesses in terms of growth in year two?

Rick Dierker :

Yes, Bill, that's the big difference for 2024. In 2023, we got TDPs. We got new retailers, new stores. Now it's all about shelf space and expanding that footprint. And that's what's happening.

Rick Dierker :

Yes, Bill, it's mostly SG&A. It's, some of it’s higher incentive comp, but many of it is the investments we've talked about these last few quarters and just more of that. I think HERO is a good example. As we fast forward product registrations, we're going to be in 40, 50 new countries pretty rapidly because we're able to do that. So we think all these investments are great and they're going to help us in 2024 and beyond.

Chris Carey:

Hey guys, one quick follow up on laundry and then broader question. The promotions that you're talking about, have that been occurring over the course of the year or was that something new that you did because you're responding to the environment or you saw an opportunity because you're tracking ahead? I'm trying to understand if we're slopping something or this is a new decision. Apologies, you should understand but --.

Chris Carey:

Okay, that makes sense. I know we'll get guidance on 2024, next quarter, but you have given kind of high level thoughts. As they think about this, volumes positive, you still have gross margin, momentum behind productivity, inflation is easing. I think you've kind of taken a view on that and you've rebased investment spending this year. Is there anything that we should be just thinking about, perhaps less obvious, going into next year, and just maybe any kind of like high level thoughts about how you feel about the business and your momentum going to 2024? Thanks.

Operator:

The next question comes from Steve Powers from Deutsche Bank

Matt Farrell:

Yes, no problem on the first one, Steve, but if you could repeat the second one, it would be helpful, you are breaking up.

Matt Farrell:

Yes, got it. Okay. Well, the first one is on EPS. We've, if you take a big step back, we've looked at we typically repurchase shares on annual basis to offset share creep. We didn't do that this year. We may get ahead of that in 2023 for 2024. So that in rounding will probably get you most of the way to the difference on your EPS for Q4. The second thing on your gross margin bridge questions, I would say, of course, the price component of -- the price volume mix component, the gross margin bridge comes down a little bit more in Q4. The price piece, but the volume and mix piece are going to go up because we used to have acquisition by itself, which was HERO and that gets blended into kind of the mix of the portfolio. So I would probably say in Q4, a big tailwind from price volume mix, a little bit lower productivity just because it's timing and those projects are choppy. And then, of course, we go backwards a little bit on manufacturing costs and inflation year-over-year. So those are kind of the three pieces to the main three pieces for the gross margin bridge.

Matt Farrell:

Well, Steve, I mean, everybody, any public company that is with a question like that is going to say, hey, 2022 was and it was the last year of a three year COVID event. In 2023, there were three things that hit us. It was a WATERPIK and vitamins post COVID and then Flawless. And so the business and gets to re-baseline. WATERPIK, vitamins and Flawless in 2023 and then we kind of grow from there. So I think that's the simplest way to think about it. The three isolated incidents that affected us in 2022. We've got our eyes open about that. Those businesses, vitamin is certainly stabilized. Pardon me, WATERPIK is stabilized, vitamins is still declining, but we have a path back to stabilize that business next year.

Dara Mohsenian:

Hi, guys. So can you give us a little bit more of an update on the vital VITAFUSION business? You obviously mentioned the weak retail sales. We can see in the scanner data with the distribution losses. Do you have visibility that can snap back going forward in 2024 that you can in fact regain shelf space based on your plans and perhaps that business can return to growth at some point. And maybe just in general, help us understand your plans on that business for 2024.

Rick Dierker :

And meanwhile, we're investing in a big way on marketing to drive awareness, new packaging to pop at shelf. And displays, all those tactical things that you can do as the momentum will build back.

Matt Farrell:

Yes, look, the trade down, as I mentioned in my opening remarks in the litter class of trade, or litter category, we have a black box and an orange box and a black box is premium. The orange box is value. And so consumers are staying within the franchise trading down from black box to orange box. And it shows in our shares. So our shares are almost like 25% in litter. Your other question was more broadly with respect. Let me comment on laundry as well. I mean, laundry has, we've been doing trade down since beginning, I guess the middle of 2022, quarter after quarter. And this past quarter, liquid laundry grew with the category, but extra you see has started to grow. And that again is a sign of the times. It's a deep value laundry detergent. So once again, I think our portfolio was well positioned for a difficult economic environment. Of course, as long as unemployment stays low, people have jobs. We think that it's going to, people are going to be discerning when they go shopping, but they have money in their pockets to shop. So I think the best value is going to win. When it comes to the promotional environment, liquid laundry, just to give you some numbers, round numbers, if you look at liquid laundry sold on deal in Q1, it was around 32%. And Q2 is like 33.5% and Q3 was 35%. So liquid laundry has been creeping up during 2023. So it's around where you expect it to be pre-COVID. So it's kind of all the way back. Same is true for unit dose. You look at unit dose sequentially Q2, Q3, 31% sold on a deal on Q2, 36% in Q3. Now litter is a different story. I think it's largely because of the difficulties that one of the competitors has had and has consequently pulled back on promotion. So the trend for litter Q1, Q2, Q3 is like a 15% in Q1, 14 .5% in Q2 and like 14.2% in Q3. So that kind of gives you a sense for the trend. I'd say in vitamins, it sequentially is up 200 basis points from Q2 to Q3. There are some competitors that are spending 55% sold on deal. It can't make a lot of money that way, but it definitely does grab volume. But I think those four categories, liquid laundry. unit dose, litter, vitamins give you a sense for what's going on in the promotional environment, Steve.

Lauren Lieberman:

Great. Thanks. Good morning. I have a question about HERO. Hey, so in the past, I think you've talked about being focused on sort of acne related categories with HERO. But we've seen some press talks about you expanding into retinol and eye cream and balms and stuff. So just curious kind of where you stand on beauty overall. And just perspective there and start there.

Lauren Lieberman:

Okay. Great. And then just sticking with HERO and maybe my math is wrong, but just with it moving into organic, I guess in mid-October, it looks like it should add two to three points to organic sales growth in the fourth quarter. So I just wanted to make sure that was sort of roughly the right order of magnitude for thinking about this, and then just ask about sort of what that implies for everything else kind of decelerating sequentially. Frankly, is it conservatism or is there something you're seeing that would support that modeling that deceleration? Thanks.

Matt Farrell:

Yes, and Lauren, it all depends on your perspective. Look, people, it depends on the narrative. Do you want to look at sequential Q3 to Q4? Do you want to look at just year-over-year and look at comps and say, what was in last year versus this year? But we have total confidence in where we sit right now with respect to the demand for the products as evidenced by such a strong October. So yes, we think we've got a good number for Q4. And yes, sometimes people accuse us of being conservative. But one thing is for sure about Church & Dwight is we take the long view. We don't have short-term thinking. And I think that anybody listening to the call and certainly our long-term shareholders understand that we're always palms up and try to make sure people, create understanding for not just you the analysts, but for our shareholders. And we're really confident not only Q4, but in our future.

Anna Lizzul:

Hi, good morning and thanks so much for the question. I wanted to ask on the higher marketing and investment spend; I think some of us were expecting you could potentially see a benefit in market share in certain categories like litter from a competitor's disruption. And maybe that would provide some leverage on the investment side. So I was wondering if you could talk more about where you are investing in terms of marketing spend. and where you think you need the most support among your categories. Thanks.

Operator:

The next question comes from Andrea Teixeira from JPMorgan

Rick Dierker :

Okay. Hey, Andrea. So I guess first of all, in my prepared comments I said we thought Q4 would be 1% or better on volume. So not half. And in Q3 it was better than half. But in Q4 we think it's 1% or better. And part of that is because of some of the promotional pullback and discontinuing of promotions like I talked about. We don't think that's continues at all into 2024. Those are some discrete promotions we chose to not repeat in Q4. That's the simple story.

Rick Dierker :

Okay, so I would take that in two parts and I'll start with the second one. On vitamins, we kind of just talked about that recently over the last quarter or two. It's going to take a full 12 months to get back into the shelf position that we want to and all those tactics we talked through is what's going to enable us to do it. So I know it feels like it's been a long time but we've only been talking about that relatively for a short period of time. Your second question on trade down, I think Matt and I have been really clear over a long period of time the company does really well, our brand portfolio does really well in good times and in bad times and the value brands of course do better but even what you would call our mid-tier premium, it depends what category you're in. Most of our premium brands like THERABREATH or HERO are doing astonishingly, just fantastic. Yes, we do have some rise of private label in a couple categories but in general consumption is strong for the quarter end for October.

Rick Dierker :

And just one comment for everybody as we move forward because we're starting to get a little tight on time. Let's just try to keep it to one question and maybe one follow-up question.

Olivia Tong :

Great. Thank you. First on marketing, can you just talk about what is incremental in Q4 versus your prior expectations, what's driving the 14% particularly if there's a big change in certain categories and then your flexibility around that? Because if I remember correctly, Q3 and Q4.

Olivia Tong :

Got it. And then just laundry. Can you talk about the shape of your laundry portfolio because your first market with the sheets, which is obviously a premium price product. But then we're cutting back on some promo, but also sounds like you're benefiting from trade down. So how are you thinking about the positioning of your laundry portfolio premium versus mid-year versus sort of the opening price point with XTRA? How do you think about that longer term and then also just in the midterm as you embark on this next new category?

Operator:

The next question comes from Peter Grom at UBS.

Matt Farrell:

Yes, I know this is a lot to do with our forward looking guidance for 2024. So I would just tell you, we'll get into all those details in January, February. We do think we have now gross margin expansion. We think there's tailwinds on gross margin because for the first time in a long time, productivity can outpace inflation. Inflation, we think still higher than normal next year, but not anywhere near what it's been like these past few years. So that's kind of what I would tell you in a heartbeat. The other nuances really, when we look ahead, our pre-COVID margin should be higher because we have some better, faster growing personal care products like HERO and THERABREATH. So we fully recognize that as well, but it's going to be, like I said, the Deutsche Bank Conference and Barclays Conference as well. It's going to be two to three years to get to get there. And so we're going to take a good step each and every year.

Nik Modi:

Thanks. Good morning, everyone. Guys, can you just talk about what you're seeing in the M&A environment as kind of the situation continues to evolve? Are you seeing any potential assets out there, brands that might look interesting? And then I have just the follow up question on the promotional situation.

Nik Modi:

Yes, I mean, usually when you see these kinds of unprofitable promos get called, it's usually part of a revenue growth management initiative a more focused revenue growth management initiative. Over the years, I haven't heard you guys talk too much about revenue growth management. So I'm just curious, is there just a more concerted effort to really focus in that area? And that's what's really what's driving some of these choices at the fourth quarter. And any perspective around that would be helpful.

Operator:

The next question comes from Jason English from Goldman Sachs.

Rick Dierker :

Yes, thanks, Jason. It’s Rick, I would say, So Lauren got me to comment on 2024 a little bit more than we normally would. But what's normal for us in COGS inflation is around 2% of COGS inflation. That's been true for many years, 2013 through 2019. And then it went to 8% during those COVID years, ‘20 to 2022. And then in 2023, it was 4%. My belief is it will be lower than what it is this year, for sure. But a little bit higher than what we've had in the past. And what's driving that is some of the oil-based and resin-based commodities. And that's probably the extent I'll go into right now. The good news is that our productivity, it's not going to be as apparent because productivity for the first time in a long time can actually offset some of these headwinds. And that wasn't the case during the last few years with COVID. In that type of environment, I don't think that pricing will play a major role when manufacturers can cover a lot of their cost headwinds. And in other categories, in other companies, there's other commodities that are going the other way. And so that's why there's deflation in some commodity categories. So that's kind of the short answer from our perspective. We have one price increase that we just rolled out. You heard us talk last quarter about soda ash and baking soda and those cost inputs being up 40% to 50%. We did roll out a price increase on baking soda in October, and that's going to be out in retail. And we don't have further plans to tick price really.

Matt Farrell:

Yes, so MEGALAC has faced low-priced imports for years, even pre-COVID. We were a little protected from that because of how difficult it was to get shipping containers. And so the US market was a little bit more protected, and so MEGALAC did really well during those few years. So once shipping constraints were lifted, competitors came back in, low-priced competitors were there, and we've lost share. This is a very low-profit business, this one product line. And so we are looking hard at how to restructure that business. And so not a lot to talk about today, but I would just tell you, yes, revenue is down, it was volatile, but the impact on profits is minimal.

Jon Anderson:

Hey, good morning, everyone, thanks for the question. Just one, if it's a shot, it may be too early for you to comment in detail, but you mentioned a couple of times that you have one of the better or best [inaudible]

Jon Anderson:

Given kind of the current macro, is the innovation for ‘24 likely to be tilted more towards value than premium? And if you can just kind of characterize it a little bit, given Matt's comments that it's one of the best or better new product lineups that you've had. Thanks.

Jon Anderson:

Great. Thanks. Can I squeeze one more in?

Jon Anderson:

Yes, we'll try again. Just WATERPIK. Could you give us a little bit more detail around where that business is versus your plan year-to-date and really more importantly, what your expectations are going forward as you look to 2024? Thanks.

Operator:

The next question comes from Javier Escalante from Evercore ISI.

Rick Dierker :

Yes, the first one is similar to what I said with Lauren, there's two things that are kind of impacting the comp in Q4. One is even for HERO is we did have some big. So that was a higher comp. The second thing was the laundry promotions. We had some discreet laundry promotions and revenue growth management activities that kind of Matt alluded to is what got pared down in Q4 this year. So those are the two things.

Javier Escalante:

But you don't have a sense of whether given the amount of pricing there has been a pullback in actual usage or purchase frequency.

Operator:

The last question comes from Filippo Falorni from Citi.

Matt Farrell:

We've said that 11% is where we wanted to get back to and we thought it was going to be a stair step that would go from 10% in ‘22 to 10.5% in ‘23 and then 11% in ‘24 and we're already now at 11% and we think that's a good level of spend to sustain and grow our brands.

Matt Farrell:

Okay, hurray. Hey, thanks for joining us today. We had a great Q3, a lot of momentum going into Q4 and in 2024. And really looking forward to talking to you guys at the end of January or early February with our outlook for ‘24. So thanks for joining us today.

Operator:

Good morning, ladies and gentlemen, and welcome to Church & Dwight’s Second Quarter 2023 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. Matt Farrell, President and Chief Executive Officer of Church & Dwight. Please go ahead, sir.

Rick Dierker:

Thank you, Matt, and good morning, everybody. We’ll start with EPS. Second quarter adjusted EPS was $0.92, up 21% to the prior year. As Matt mentioned, the $0.92 was better than our $0.78 outlook, primarily due to continued strong consumer demand for many of our products and higher-than-expected gross margins as well as a lower tax rate. Net sales was up 9.7% and organic sales were up 5.4%. Almost half of the reported revenue growth year-over-year was HERO. Organic sales were once again driven by pricing in Q2 with volumes slightly down. That slight decline was better than expected and turning to the second half, we continue to expect a return to volume growth. Our second quarter gross margin was 43.9%, a 270 basis point increase from a year ago, primarily due to productivity pricing and strong contributions from higher margin acquisitions that are offsetting inflation. This result exceeded our expectations for the quarter as we saw a greater impact from productivity programs, a better product mix driven by our recent acquisitions. Let me walk you through the Q2 bridge. Gross margin was made up of the following

Chris Carey:

Hey, good morning.

Chris Carey:

So on my math, this is the first return to organic sales growth, in personal care since the beginning of 2021, unless I’m calculating that wrong. And clearly there was some commentary around WATERPIK and vitamins being on plan. Nevertheless does feel like a bit of a step change on this kind of important area of the P&L. And I wonder if you could just frame, what’s going on, on an underlying basis in that business to drive this reacceleration. I know comps are getting easier, but we hear so much about WATERPIK and FLAWLESS and sometimes, not the rest of the underlying drivers of organic sales here. And really, I’m just trying to get a sense of the full delivery of this personal care portfolio into the back half of the year, specifically as HERO comes into the base.

Rick Dierker:

Yes. And I would probably just add Chris, it’s Rick. And Matt’s exactly right, BATISTE, THERABREATH, all those things are happening. You’re right. Your math is correct. Q1 organically for personal care was negative. Q2 is positive. We expect Q3, Q4 to be positive. So we do see the inflection point as well.

Chris Carey:

Okay. Yes. And that’s just one thing I wanted to confirm that mix should become a bit more of a tailwind for gross margins in the back half as well. So I think you just – you took care of that. The one other then I’ll get back in. We saw some incremental pricing in the Nielsen data around laundry. Just wanted to confirm that if that’s true or not, sent in the way, if there was pricing taken in the business, and then maybe just contextualize if that was the case, why it happened and how you’re thinking about kind of maintaining value and volume share in the laundry business in the U.S. go forward. Thanks so much.

Matt Farrell:

Yes. And Chris, the only area where we have announced an increase in price to retailers is in baking soda for the obvious reasons with the 50% increase in soda ash that, that Rick made reference to.

Matt Farrell:

Yes.

Rupesh Parikh:

Good morning. Thanks for taking that question. Also, congrats on a really nice quarter.

Rupesh Parikh:

So just going back to your comment here in the U.S. consumer business where I think you gained six – share on six – gain to maintain share on six out of your 14 power brands category. How are you thinking about this for the balance of year? Do you expect that metric to improve as we get to Q3 and Q4, especially as maybe some of your advertising picks up?

Matt Farrell:

Yes. And Rupesh, some of the categories in personal care that, that are down or like battery pregnancy test kits, cold shortening, these are small categories, so but they count as one of the 14. So we’re trying to get the focus more on the big brands and how they’re performing.

Matt Farrell:

Yes. Well, look, as far as promotions go, generally the conversation goes around household. So if you look at the laundry category in total, it’s sequentially, it’s up about 80, 90 bps from Q1 to Q2. And if you look at liquid laundry detergent, that’s up a couple of hundred basis points in sold on deal from Q1 to Q2. On the other hand, if you look at unit dose sequentially, it’s down 340 basis points from Q1 to Q2. So all in, I’d say if you look at the laundry category in total, it’s not any – not significantly more promotional in Q2 than Q1. And then if you look at laundry, or pardon me, a litter sold on deal, just the last few quarters, it’s been pretty steady. It’s been around 15% sold on deal. So I would – and then the last one would be a vitamin business VMS. That actually is, it’s less promotional in Q2 than Q1. So I would say that from where we sit and we look at our most promotional categories, we think it’s that things are pretty steady.

Matt Farrell:

Okay.

Bryan Adams:

Good morning, guys. This is Bryan Adams on for Peter. Thanks for taking a question. So just looking at the implied I think you said up to or the back half that implies around up to 2.2% or a little over 2% growth in volumes in the second half. Should we be thinking about that as a sequential build or is it more just looking at the year ago comparisons with how challenging 3Q was? Is it reasonable to expect that 3Q volumes might be on par or even above that of 4Q?

Bryan Adams:

Okay. Great. And then just one more quick one on specialty products. I think entering the quarter, the expectation was for that business to be slightly negative this year, and you’ve had another choppy quarter here. I know you called out the reasons why with the lower price import. I think on par from an expert on the puts and take of the business here. But just looking ahead, should we expect kind of a similarly challenged backdrop as we head into the second half? Are you expecting any improvement here? Thanks.

Bryan Adams:

Awesome. Thanks, Rick. Thanks, Matt.

Lauren Lieberman:

Great, thanks. Good morning. I just want to maybe try to ask a bit of a longer term question, which is that now, it feels you’ve got really good visibility into gross margin recovery to pre-COVID levels, through the worst in terms of kind of the discretionary driven volatility on top line, and with all of that reinvestment set up to get back to not quite 12%, but a huge step change this year. Now the things are kind of more settled, if you will. You also talked about some incremental investments in efficiency. And so I was wondering if we could just hear a little bit about kind of longer range planning as you think about investments in capabilities, in supply chain, which I know we’ve talked about in pieces, but if you kind of think over a multi-year view, perhaps how you think about investments that you may want to be making more in kind of infrastructure to support the business with the hindsight being 2020 of some of the operational headwinds that you ultimately faced during the global pandemic that nobody could have planned for. Thanks.

Rick Dierker:

Yes. So it’s all in the backdrop of making sure that our evergreen model of 25 basis points of SG&A leverage each and every year is solid for the next five, 10 years. And so two examples, like one Matt mentioned is like RPA. So one of the investments we’re making right now with automation and technology is, we have 20 or 30 projects that represents thousands and thousands of hours that we’re automating. And that way that our people have more capacity to do other work, which is really impactful as we build the company. And we have more and more brands every day. The second one we’re doing is we’re making significant technology investments. I think you’ve heard us talk about before, but we put an ERP system into China, as an example, we’re investing into an ERP system for our GMG business, which is our fastest growing international business. So we’re putting technology, we’re putting – enabling technology to – so that we can scale and grow. We have SG&A investments for people and regulatory and R&D, so that business can continue to grow at the rate it’s been growing at.

Matt Farrell:

Thanks, Lauren.

Dara Mohsenian:

Hey, good morning guys.

Dara Mohsenian:

So just along the vein of the last question, clearly, a lot of reinvestment in the back half of the year relative to original plan. Can you just talk about the level of payback you expect from those investment areas, as well as the timing of payback? Obviously, marketing is a line item that’s highly visible to us, but it seems like there are a bunch of other areas in terms of higher R&D, greater registrations technology, you just mentioned ERP in China, Rick. So those are more nebulous and harder to judge. So just how do you think about the payback and are you basically pulling forward some incremental investment that would’ve occurred in 2024 as we think about this reinvestment in the back half of the year? Thanks.

Matt Farrell:

Yes. I’d just say, Dara, we’re very consistent. We had a long standing practice that when the business is performing well, we look at that as an opportunity to reinvest. So things we – initiatives we might’ve had next year, the year after, we say, hey, we could fund it now, let’s do it. And as with respect to marketing, that’s really a no brainer. Because marketing correlates with this – with the health of brands and the strength of your brand equity, and you can’t live at 10% of sales. And there’s another example of something we were going to ramp up in 2024, that’s – we got ahead of it now. So that is not going to be a drag year-over-year in 2024 versus 2023. That ramp up to 11%. So I think these are all good things.

Operator:

Your next question comes from Andrea Teixeira from JPMorgan. Please go ahead.

Matt Farrell:

Yes. Well, let’s start with FLAWLESS. We haven’t said a word about FLAWLESS, nor will we, it’s a small brand for us now. First, WATERPIK, just remember, we enter the year, if you go back six months, we said, hey, the first six months, we’re going to be choppy here. We had inventory in the channel that we had to work through. We had an imbalance out there that’s behind us now. So that obviously has a direct impact on our sales in the second half. And same with vitamins. That was our biggest problem child when it came to supply in 2022. We got punished for that by suppliers where we lost displays, some cases lost distribution. So consequently, we took that on the chin in the first half, but that started to improve in the second half as far as the number of displays we’re able to get in. And some of the variants that we weren’t able to make last year that we’re going to start introducing backend example, a magnesium gummy for example. So for those two businesses, we would say, hey, there’s reasons to believe that there’s going to start inflecting in the second half.

Andrea Teixeira:

Okay. Thank you.

Steve Powers:

Thanks. On VITAFUSION, just maybe a little bit more detail on your visibility into stabilization and kind of winning back those retailers and consumers? Just kind of where you are in the process and how long you think it will take?

Rick Dierker:

Yes. I mean, for vitamins, I think it’s – when we have our TDPs get impacted a little bit because we’re in the penalty box for supply and we got to do what Matt alluded to. We’re going to get – we’ve gotten more displays, we’re adding advertising, we’re looking at our messaging, and then it takes nine months or so to make that case for the retailer so you can get the distribution back into a leading position.

Matt Farrell:

Yes. Well, look, I’ve been here for a long time, since 2006, and we’ve lived with our evergreen model for many, many years and it’s served us well. And last year was an anomaly for us. And we said, okay, we got to get back to our algorithm. And we said we had a big step up in 2023, and by virtue of what we’ve shown in the first half we’re going to get to 6% EPS growth in 2023. We’re going to get marketing back up to 11% of sales, which is how we want to run the railroad. And we sold 200 basis points light versus what our gross margins were pre-COVID. So when we get to the end of 2023, that’s ahead of us. So it’s going to take us a few years to get back there, but as we improve our gross margin in 2024 and 2025, that’s obviously going to throw off a fair amount of profit. So if you look at the – just the first half of this year we had double digit gross profit growth. That’s a great trend. So I’d say that the short story is, is that the success we’ve had in the first six months, the strength we see in the second half certainly on sales and gross profit growth gives us greater confidence, so we can return to our normal evergreen model algorithm in 2024. But we’re not – it’s too early to be calling numbers at this point, but I think going to 11% of marketing as a percentage of sales this year is a big deal. It won’t be a headwind in next year, that 2024 versus 2023, and we still have the ambition to grow gross margin significantly in the next couple of years. So that’s a short story about how we think about the P&L, Steve.

Matt Farrell:

All right.

Anna Lizzul:

Hi, good morning. Thank you for the question. I was wondering on the distribution gains with Hero and THERABREATH. Could you comment on where you’re seeing the largest gains in distribution with your various retail partners? And are there any challenges to gaining distribution? Also, to what extent do you think you have more runway on distribution? And do you have any concerns from some of the larger brands that have been innovating in this space with similar offerings that might have distribution already well established? Thanks.

Rick Dierker:

Yes. And I would just add, Anna that both of those brands have a lot of runway left on TDPs. Even if you look at THERABREATH for example, it’s maybe third or fourth in the segment on TDPs. And the next step change maybe is another competitor that has 1,100. So there’s still room to run.

Anna Lizzul:

Thank you. And just any concern, I guess, from some of the larger brands that have been innovating in this space with some similar offerings that already have some distribution well established? Just any concern from that?

Anna Lizzul:

Yes, both in the acne category and in the mouthwash category?

Anna Lizzul:

Great. Thanks very much.

Bill Chappell:

Thanks. Good morning,

Bill Chappell:

Hey just a little bit more on sodium bicarbonate. Just I don’t remember, maybe you said what the percentage that is in terms of cost goods sold, but also – because I always enjoy the discussion on animal husbandry. I thought the key part of the Specialty Ingredients business was feeding sodium bicarbonate to cows to produce more milk. So why would that business not be passing out pretty meaningful price increases as well and driving sales?

Bill Chappell:

Got it. So it’s not enough to drive sales.

Bill Chappell:

Okay. And then second, and I might have missed a but, I mean, in terms of the strength of your results in the past couple quarters, you would leaned on or not leaned on, indicated that consumer trade down was driving it. I mean, is that still a big driver? I mean, it seems like it is more just the strength of the brands and the categories and or is it really you’re continuing to see a nervous consumer?

Bill Chappell:

Got it. Thanks so much.

Operator:

Thank you. Your next question comes from Olivia Tong from Raymond James. Please go ahead.

Matt Farrell:

Yeah. Well, you heard Rick mention that HERO and THERABREATH are virtue being part of Church & Dwight. We certainly have the wherewithal to invest quite a bit on two brands that are growing significantly and have a lot of runway ahead of them. The other place of destination would be which I mentioned briefly in my opening remarks, and that’s our master brand campaign, which is Give it the Hammer and to Give it the Hammer campaign is really resonating with consumers. And I’m just talking about your average consumer out there. It’s really resonated with them because it really halos all of our different categories and it’s – it’s consistent and we came up with this as we entered the year and we said, hey, we got all this trade down going on. ARM & HAMMER is the working man’s brand. So let’s get behind that and let’s come up with a campaign that’s going to support that, that thesis. And it’s working. That brand is really scoring super high and we’re continuing to get behind it. We’re going to get behind it in the second half continually.

Rick Dierker:

Yes. Hey Olivia, so there’s – there’s, most of our pricing has lapped. Lot of our laundry, litter, OxiClean pricing happened in July a year ago. So most of the pricing has been lapsed, there’s a little bit still to come. That’s why we’re saying maybe 50/50 in the back half of the year. And then the only price in action that we’ve talked about is baking. So that’s the only one left from a list price perspective. We always want to go optimize trade and revenue growth management, but with the 50% increase in...

Olivia Tong:

Great. Thank you.

Operator:

Your next question comes from Filippo Falorni from Citi. Please go ahead.

Matt Farrell:

Yes. Well look there’s a – there’s a half a dozen categories where we have the private label competition and I would say Litter is usually the one we’ve – we’ve talked most about. But that’s been stable. For the last three quarters, it’s around 13% Q4 – Q1 and Q2. As far as trade down goes in household, it’s a consumer is more likely to trade down. Now we’ve talked about trade down within laundry to ARM & HAMMER, we’ve had four quarters of that, as I just mentioned the previous question. We do – based on how July is setting up it looks like that’s continuing to happen. Well, I do expect it’s going to abate a little bit, but one thing that’s notable about trade down is – is which I said in my opening remarks is that Extra, which is a extreme value detergent. It grew 7.5% consumption in Q2 and it actually gained share. And that was the first time, and that was like 14 quarters that Extra gain share. So that would suggest that there’s a trade down that’s – and Q2, remember this is our most recent quarter, first time that’s happened in 14 quarter. So you’d say, yes, there’s still a tendency to trade down particularly on the household side. When it comes to personal care, particularly health related categories far less likely to see trade down. So I think it’s more of a household story.

Matt Farrell:

Okay.

Javier Escalante:

Hi. Good morning everyone. Another permutation on the spending and reinvestment and what to expect from it in the second half; it feels as if do you guys have built a financial benefit from that spending the higher advertising spending in the second half or not? It’s just basically; you are assuming that you are just rebuilding a baseline of investment?

Rick Dierker:

Yes. And Javier, I would say it also positions us well as we enter 2024. So that should be taken into account as well.

Matt Farrell:

Yes. Well, I mean, our outlook is what our outlook is. That’s our best forecast of results. So right now, we’re saying we’re extremely happy that we got the 6% EPS growth while bringing marketing back up to 11%, which we thought was going to take two years. We’re doing it all in one year and also making some investments for the future. So not really ready to talk about what we’re going to do if we have upside to that.

Javier Escalante:

Absolutely. Thank you very much.

Matt Farrell:

Yes. Hey, thanks everybody for joining us today, and look forward to talking to you again at the end of the third quarter. Have a good one.

Matthew Farrell:

Good morning, everybody. Thanks for joining us today.

Matthew Farrell:

Good morning, everyone. Thanks for joining us today. I'll begin with a review of the Q1 results. And then I'll turn the call over to Rick Dierker, our CFO. And when Rick is wrapped up, we'll open the call for questions. So Q1 was a solid quarter. Reported revenue was 10.2%. Organic sales grew 5.7% and exceeded our 1% Q1 outlook. Of the 10.2% reported sales growth beat our outlook of 4%, thanks to stronger results from several brands, including Hero, THERABREATH, ARM & HAMMER laundry and ARM & HAMMER litter and exceptionally strong sales growth in our international business. The other good news is that the vitamin business and the WATERPIK business hit their Q1 sales plan, and were right on expectations. And finally, it's also fair to say that we had a degree of conservatism in our original Q1 outlook, both top line and bottom line. Our Q1 top line growth reflects the strength of our brands, both premium and value and also our focus on execution. The combination of consumer demand and improved case fill, which is now over 93% in the U.S. is resulting in strong revenue growth. Something else that is noteworthy, we had flat volume growth in Q1, which is an encouraging sign after declining volumes in the last six quarters, and we now expect volume growth in our full year net sales outlook. Adjusted EPS was $0.85, which was $0.10 higher than our $0.75 EPS outlook. And that was driven by higher-than-expected sales in the U.S. and especially in our international business, which posted 11.6% organic growth. In Q1, global online sales as a percentage of total sales was over 16%, and we continue to expect online sales for the full year to be above 16%. Now private label shares remained consistent with historical weighted averages. Both domestic and internationally, private label is stable in our categories. And now I'm going to comment on each business. First up is the U.S. The U.S. consumer business had 5.5% organic sales growth, and 8 of our 14 power brands held or gained market share in the quarter. Now I want to look at a few of the important categories in the U.S., and I want to start with laundry. If we look at the big picture, value laundry detergent grew 9%, while premium detergent declined 3%. So the trade down to value detergent continues into 2023. During Q1, the liquid laundry category grew 3.6%, while ARM & HAMMER grew 9.3%. ARM & HAMMER liquid laundry detergent grew share by 80 basis points in the quarter to 14.3%. So with more consumers migrating to ARM & HAMMER laundry detergent, we have the potential for a long-term benefit to the ARM & HAMMER brand similar to the last recession. Now over in litter, the category grew 12.7%, while ARM & HAMMER litter grew 13.5%. So we gained market share in the quarter. We did see a trade down from our premium ARM & HAMMER Cat Litter to our ARM & HAMMER value litter, which is in the orange box. So consumers are staying in the ARM & HAMMER franchise. And our Give it the Hammer advertising campaign, which halos met the many categories that ARM & HAMMER competes in is resonating with consumers. Now in dry shampoo, the dry shampoo category was up 11.8% in Q1, driven by BATISTE consumption, which was up 20%. We now enjoy a 46.2% market share in dry shampoo. In the condom category, the condom category was up 4.1% in Q1, while TROJAN consumption was up 5.3%. There again, we gained 80 basis points of market share, thanks to our new TROJAN bare skin raw condom and the success of more targeted marketing. Our most recent acquisitions, THERABREATH mouthwash and HERO are performing extremely well. THERABREATH, which we acquired in December of 2021, had just a great quarter with 70% consumption growth. THERABREATH grew share 6.8 points to 22.5% of the alcohol-free mouthwash. And as promised when we bought the brand, distribution of THERABREATH has doubled since we acquired it in December of 2021. THERABREATH is now the number two nonalcohol mouthwash brand and the clear number four in total mouthwash. We expect this brand to be a long-term grower for Church & Dwight. Now ZICAM, this is a December 2020 acquisition, also delivered strong results this quarter. ZICAM is the number one brand in the cold shortening segment with a 78% share. Now to our latest acquisition, HERO, which grew year-over-year consumption by 43.5% and gained 1.6 share points to achieve a 9.1% market share in the total acne treatment category. And distribution has expanded by 50% since the October acquisition date. And as we said in the release, there continues to be a great deal of excitement around HERO -- about the HERO brand and especially the HERO team. From our oldest brand to our recent acquisitions, our brands are driving category growth. I'm going to give you a few examples. ARM & HAMMER liquid laundry detergent, which has a 14% share of the liquid laundry category drove 35% of the category growth. In dry shampoo category, BATISTE has a category-leading 46% share, but contributed 75% of the category growth. And in the mouthwash category, THERABREATH makes up 11% of the total category but delivered over 50% of the growth in mouthwash. Next up is international. Our international business delivered organic growth of 11.6% in Q1, driven by strong growth in the subsidiaries and double-digit sales growth from our Global Markets Group, and that was quite balanced across all of our global regions. And the growth was headlined by BATISTE, vitamins, femfresh, WATERPIK and gravel. And as far as the consumer goes, similar to the United States, unemployment remains low in our international countries where we have subsidiaries. However, in many of these markets, particularly in Europe, the consumer is facing inflation in energy and food, but so far, consumption has remained strong. In China, while it is a relatively small market for us, we are experiencing stronger growth in Q1 and remain optimistic about the full year apart. And finally, Specialty Products. Specialty Products organic sales decreased 5.9% primarily due to lower volume in the dairy business as low price imports returned to the U.S. market. I want to wrap up my remarks right now by saying consumption is strong. Our value offerings are performing well as are our premium offerings. Acquisitions are on track. We're ramping up our marketing this year in support of our brands and new product launches. And we expect to have the opportunity to invest even more behind our brands in future quarters. And now, I'm going to turn it over to Rick to give you some more color on Q1.

Operator:

[Operator Instructions] For your first question comes from the line of Chris Carey from Wells Fargo. Chris, please go ahead.

Richard Dierker:

Hi Chris.

Richard Dierker:

Chris, you're breaking out.

Operator:

Right. Sure. No worries. One moment please for your next question. Right. So for your next question, it comes from the line of Kevin Grundy from Jefferies. Kevin, your line is open. Please go ahead.

Matthew Farrell:

Yes.

Richard Dierker:

Yes. Thanks, Kevin. I'll go first. I think gross margin, we said in the release and in my script that really, we expect gross margin to expand -- the expansion continues to improve throughout the year. We did do better than we expected in Q1. That's why we raised the full year. From a pricing perspective, as we go through the year, there will likely be less pricing overall. There will be less inflation overall, and productivity kind of ramps up as we go through the year as well. So all those things we think are -- will be tailwind. And to the extent that we overdeliver on gross margin, that's why we put the investment commentary in the release as well. Matt?

Kevin Grundy:

Yes. I appreciate the comment. If I can just get one more, Matt. Just on -- and for Rick as well. HERO seems to be performing much better, I think maybe than folks had modeled, how is it coming in relative to your own expectations? Presumably better, I would think. And why is that? Is the distribution ramp more quickly? Is the velocity been better? Is it both and sort of why? And then maybe just updated thoughts on your outlook for the brand. And I'll pass it on. Thank you.

Operator:

[Operator Instructions] For the next question, it comes from the line of Chris Carey from Wells Fargo. Chris, your line is open. Please go ahead with your question.

Operator:

Yes, I can hear you. By the way, we lost Chris' line at this time. Should we move on to the next caller? No, we're still live and your line is still open. All right. I'll just go ahead and check here. Yes. By the way, I'm -- we'll talk over the audio. Yes, sure. I'll just try to stop the stream for now then, let's see if that would refresh the connection. Okay. All right. So good day, ladies and gentlemen. Apologies for the technical difficulties. So we're going to be resuming with a Q&A. [Operator Instructions] So for your next question, it comes from the line of Lauren Lieberman.

Operator:

Hi Lauren, just wanted to take if you can hear me. This is the operator.

Operator:

Okay.

Operator:

Okay. So for -- okay, so for Mr. Farrell, Mr. Dierker, please try to redial. Just please try to dial back in. Okay. Sounds good. So Lauren, please standby. I'm really sorry about the technical difficulty at this time.

Operator:

Yes, this is Kyle. I can hear you.

Lauren Lieberman:

Rick, it's Lauren. I can hear you.

Richard Dierker:

All right. Well, hey, take 3.

Richard Dierker:

Yes. No, I got it. I think everybody -- the question was really, how does consumption match up with organic for domestic?

Richard Dierker:

Yes, yes. We don't think there's a huge disconnect actually. We -- IRI consumption is 7%. That included some of the HERO consumption. And so that got -- if you back that out, that's around 6%. So 6% is what IRI would say is our organic consumption. And we were at 5.5%. And the drag is, as you would say, it's from untracked channels like WATERPIK, for example, online or other businesses. So with the disconnect, it's a little bit closer.

Richard Dierker:

Yes. And I partially thought I was answering that when I answered Chris' question. I probably got cut off. So in 2022, those three businesses, we said in the release, at the end of 2022, they were about a 4% drag for the three businesses. In Q1, they were closer to 3% drag. And I said we expect personal care organic to inflect positively in the back half. And a big reason is because those businesses are not a drag. And furthermore, Matt said it in his script, but it was very encouraging that WATERPIK and vitamins hit their internal plan numbers.

Richard Dierker:

I wouldn't call that yet. I would just say we don't expect it to be a drag in the back half.

Operator:

[Operator Instructions] For your next question, it comes from the line of Rupesh Parikh from Oppenheimer. Your line is open. Please go ahead.

Matthew Farrell:

We can hear you.

Matthew Farrell:

Yes. The vitamin fill rate is improving sequentially month by month take November, December, January, February, March, which is a really good thing. As far as the category goes, if you look at the last few categories for gummies, you may remember in the third quarter last year, a big decline to gummies were at 8%. But then Q4 was down 10% and Q1 down, 2.3%. So I would say it's really stabilized, which is a good thing for us. Now we did lose share in the first quarter, again due to our fill rate difficulties. But we anticipated some of that. And we probably benefited a bit because the category was stronger than we expected. So consequently, the vitamin business wasn't a drag on our outlook. They hit their plan for the first quarter. And we think things should improve from here for the rest of the year.

Richard Dierker:

Yes, sure, Rupesh, it's Rick. Domestically, we're now calling 3% to 4%. International between 5% and 7%. SPD is actually slightly negative and that gets us to the total company organically of 3% to 4%.

Richard Dierker:

Okay.

Olivia Tong:

Great. Thanks. Good morning. I just wanted to get a little bit of an update on your view on the U.S. consumer, particularly any early reads on the incremental pricing you took, impact of compaction and the extent that you've seen any change in promotional levels? Thank you.

Olivia Tong:

Sorry, it was around compaction, the pricing, any early reads on those and...

Richard Dierker:

Yes. And it's kind of early to call any impact from concentration that just rolled out late Q1, but we expect that will be positive.

Operator:

All right. Thank you. And for your next question, it comes from the line of Dara Mohsenian from Morgan Stanley. Dara, your line is open. Please ask your question.

Matthew Farrell:

I think you answered the question for me, Dara. We're three months into the - and we follow a lot of companies. And so we're not alone and having a good first quarter but not necessarily falling along through just because there's always a certainty with respect to the economy. So that has [technical difficulty]. So we do have the freedom now to take a long view and increase our marketing from 10.5% higher. And we have all of the place where we can put money, which I went through with Kevin, growth, efficiency or sustainability projects. They're all available to us. So yes, we feel like we got a lot of flexibility going forward for the rest of the year.

Dara Mohsenian:

Okay. That's very helpful. And then can you just give us a little more detail on some of the problem areas recently, WATERPIK, FLAWLESS, vitamins, just sequential performance in Q1 relative to recent trend. I know you mentioned a couple of them, you were on plan. But I just wanted to get a little more detail on sort of the year-over-year performance, both in terms of consumer demand as well as retailer inventory levels. If you can just give us a little more insight there. Thanks.

Richard Dierker:

Yes. So those two are stabilized and -- expectations. The third one is FLAWLESS. Retail inventories are moving slower than we expected. That's partly have an impact on our inventory reserves for -- limiting inventory on our end, but we think we've appropriately captured that from here, and we're moving forward.

Operator:

And for your next question, it comes from the line of Anna Lizzul from Bank of America. Anna, your line is open. Please ask your question.

Richard Dierker:

Yes, I'll start and then Matt probably has a point or two to add to. What we said on volumes, and just to be super clear, was they were flat in Q1, and we expect to inflect positively in the second half and for the full year. So you can infer that, that means we think they're going to be negative in Q2. Originally, our outlook was down in Q1, down in Q2 and inflect positively in the back half. So we're encouraged by what happened in Q1. That was largely because that was our largest year-over-year delta in case fill. A year ago, Q1 case fill was 72%. Q2 is 89%. So we just have less volume to make up there. Yes. So I would probably say volumes continue to impact -- inflect positively in the back half. We're now calling going to be positive for the year. And that's kind of the short story.

Anna Lizzul:

Great. And then just in terms of pricing and margins, just curious how would you attribute the benefit to outright pricing versus the package size changes?

Anna Lizzul:

Okay. Thanks very much.

Bill Chappell:

Thanks. Good morning. Matt, just a little bit more on kind of your commentary about consumer trade down. And I'm just trying to understand how you feel like why you think it's consumer trade down as you're benefiting versus just the power of the ARM & HAMMER brand because -- especially in laundry detergent, I mean, for years, you've been taking share from kind of the smaller old Unilever fund, whatever their -- whoever owns them now brands. You're looking at a lot of the stores and a lot of those brands have lost some or all of their shelf space and you gained shelf space. So I'm trying to understand like what you're seeing that -- where you think it's trade-down benefit versus just power of the brand benefit that isn't sustainable regardless of what the economy does?

Bill Chappell:

Well, and I guess just to follow up on that. Are you seeing outsized or accelerating growth for the extra brand or for that deep value or more shelf space for the -- being given by retailers for the deep value?

Operator:

And for your next question, it comes from the line of Peter Grom from UBS. Peter, your line is open. Please ask your question.

Richard Dierker:

Yes. Okay. Thanks, Peter, for the question. In the release, we said that largely for us and our inflation expectations were unchanged. And there's puts and takes on the commodity side. Transportation costs are down. Our resin, the outlook is slightly higher. Soda-ash is higher. Sugar is higher. Some resins are down. Ethylene is down. So it's a mixed bag, but it kind of nets to kind of neutral from our original outlook. You're right, we did say at the beginning of the year that we were less hedged this year than we have in many years, just thinking that commodities would come down over time as the recession was potentially looming. And it just takes a few months for costs to actually be down and stay down before you start seeing those commodities trickling to material pricing, and tickle into -- and then you have to buy and they go on the balance sheet. They get expensed to the P&L when you sell it. So I don't know. If you see something down now, it has to be down for a few months and then probably within six months, it would flow to the P&L.

Operator:

All right. Thank you. And your next question, it comes from the line of Andrea Teixeira from JPMorgan. Andrea, your line is open. Please ask your question.

Richard Dierker:

Yes, I'll take the -- just the first half, second half dynamics of pricing. But Matt's comment is true, a lot of pricing does roll over. But the first half average, we think, is in the 160s. And the second half we think is 180, 190. So the full year is 180. So we do think there's a little bit, and that's really because of our litter price increase in February, and the concentration impact that kind of flows through there as well. So those are the two things that help in the back half a little bit.

Andrea Teixeira:

But do you expect promo to continue to accelerate as we go? I mean I appreciate it's backward-looking, but forward-looking, you're embedding that, obviously, cat litter will be one and perhaps vitamins or you think that this is going to be a similar dynamic?

Richard Dierker:

Yes. And I would just say, laundry for Q1, a little lot like Q4 from a promotional perspective like that was going through.

Richard Dierker:

Well, that's for the full year. So there's also partial pricing finishing from last year when we took it midyear, that would be a benefit and a tailwind as well. And that's price/volume mix is that line on break out the three. So that's also volume growth of higher-margin brands, as an example, year-over-year. So there's a lot in that number, but I guess the answer for you, Andrea, is it's a tailwind and the tailwind gets a little bit better in the second half.

Richard Dierker:

Yes, I'm not saying that. I'm just saying that, that 180 basis points is also following the mix that is not just priced by itself.

Operator:

Thank you. And for the next question, it comes from the line of Javier Escalante from Evercore. Javier, your line is open. Please ask your question.

Richard Dierker:

Yes. I'll take the first two and maybe Matt has the third one. But -- and I'll even take your second one first. Through RSUs for HERO, our adjusted EPS excludes any impact of amortization related to RSUs. So that's kind of not a factor in our outlook or in our adjusted EPS. So that's apples-to-apples. Number one, we don't expect to see much of a gap between shipments and consumption at all. And when you see tracked versus our -- or Nielsen or consumption versus our organic growth in the back half, it should be really close, is the short answer. And in Q2, you may see a little bit of a disconnect again because some of those brands like WATERPIK, as they continue to stabilize and go backwards a little bit, that's largely in untracked channels. Some of HERO growth from a reported perspective is also in untracked channels, whether it's online or a few specialty retailers. So I would say, overall, we've kind of talked about -- we had a great quarter. We're raising the full year on reported organic EPS across the board. We've made the comment that we're going to make investments if we continue to outperform on revenue and profits. And Matt?

Javier Escalante:

And if I can follow up on the detergent side because perhaps I didn't explain myself is that when you compact, don't you have a negative impact on volume? Or does your reporting basically adjust for wash loads, something that we cannot see in IRI track channels?

Javier Escalante:

Thank you very much.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Matthew Farrell:

I'll call everybody to attention. Hey, we haven't been together for a few years. The last number were down here was January of 2020. So it's been three years. It's really great to see so many familiar faces in the room. We've got a great show for you today. I'm going to start off with the safe harbor statement. I encourage everybody to read that when you have some time. And here's who is here from management today, which have virtually the entire management team. So when we're done with the presentation, everybody will come on up, fill the stage, and then we can do Q&A. All right. We've got a pretty packed agenda. Some of it will be familiar to you, but these are all the things we think we want you to walk out of the room knowing more than when you walked in the room. All right. So, I want to start with a look back at 2022. So, as you all know, we had significant inflation this past year. We had $250 million of increases in COGS year-over-year '22 versus '21. And how we reacted to that, we increased prices both in '21 and in '22. And in some cases, we raised prices more than once. You saw that in laundry and also on litter. We have really great success this year with several of our brands. As you can see on the page here, ARM & HAMMER litter laundry detergent and BATISTE at all-time highs, racked shares. And then if you look at some of our more recent acquisitions, and that would be ZICAM THERABREATH and HERO acquired in 2020, '21 and '22, all had double-digit growth and all-time high market shares. And then finally, we know we've experienced a black swan event over the past few years. We know there'll be others in the future. So, we've done a lot of work in '21 and '22, spent a lot of money, a lot of effort getting ready for the next one. And then finally, we ended the year strong. So, what you see on the slide here that the categories that we're in grew consumption, 13 out of 17. And just as kind of a leave behind, these are the 17 categories that we compete in. So, you can take a look at this after class is which categories went up and which categories did not. All right. Now here's a slide that we show every year, and this is a very different slide than we've seen in the 16 years that I've been with Church & Dwight. So, the first 15 years with Church & Dwight -- every year, we've had significant TSR. And in many, many years, it's been double digit. And this year, we went backwards. And that's a disappointment to me, it's a disappointment to the management team, to the Board and our shareholders. And so, granted, we have that disappointment. But now we're just going to broom ourselves off, take our sows up. We got a great company. We've got great brands, and we're looking ahead with optimism to ‘23 and we plan on starting another 15-year streak starting in 2023. All right. So why do we have so much confidence in our future. First off, we'll go left to right U.S. So, Barry is going to come up in a little while and talk about our plans for the U.S. business and why we expect growth in the future. Mike Reid is going to come up and talk to us about international for a long time. International has been growing at 6% annually. That, by the way, is our model. And he's going to tell you why we believe that to continue in the future. Innovation as well, Barry is going to talk about innovation. We're a very innovative company. It's been a big contributor to our top line growth for many, many years. And Barry is going to take you through one innovation, in particular, which is hard ball new leader that we're launching this year, we think could transform the litter category. Surabhi going to come up. She's our Chief Digital Officer. He's going to talk about how Digitally savvy we've become on our plans for the future. And finally, the Evergreen model. everybody in the room, particularly long-term holders. We're very familiar with our evergreen model, 3% top line, 8% bottom line growth. That model is healthy long term. We have strong fundamentals in 2023, we think we'll return to that model in 2024. All right. So now who we are. So, we're a $5.4 billion company. You can see how we split. We're largely a U.S. business, 77% domestic, 70% International and our Specialty Products business, which is our legacy business is a business that the company was founded on, it's about 6% today. So, we have 14 power brands. Those 14 power brands make up 85% of our revenues and profits. One brand you won't see up there today is flawless. That's a business that we bought four years ago. It obviously didn't turn out the way we had expected as disclosed in the release. But as I said, these 14 power brands drive 85% of our revenues and profits. So, here's our formula. We have a balanced and diversified portfolio. I'll take you through some stats in a minute. We have low private label exposure. The weighted average exposure is 12%. And innovation, Barre, is going to take you through a little while, and we are an acquisitive company. We generate lots and lots of cash and the first destination for our cash is a TSR accretive acquisition. So, here's some of the diversity stats I want to share with you. So, we're 40% value, 60% premium. For as household and personal care split, it's about even 46% household, 48% personal care. And here's our weighted average private label exposure. And this is over a long period of time. It's generally around 12%. That really hasn't changed that much recently. There are the five categories that we're most exposed to. You can see on the chart there, see how the private level has moved up and down over time. But it's generally stable even in this environment. And as far as consistent innovation, this is the lineup a lot of the new products we're going to be launching in 2022. The upper left, you see hard ball. I think you're really going to be excited about that when you hear about it later today. All right. We have a long history of growth through acquisitions. If you look at -- go back 2004, $1.5 billion. We've added almost $4 billion to our top line, and a lot of that is through acquisitions. You can see they're all laid out through the bottom. Almost every year, we add a new brand. And in the year 2000, the only brand we had was ARM & HAMMER. So, with 13 of our 14 power brands have acquired -- been acquired since the beginning of the century. And most of those brands are number one and number two in their category. And we have very clear acquisition criteria. Got to be number one or number two in their categories. Notably, they need to be high-growth and high-margin brands that are fast- moving consumables. We've added fast-moving consumables because of our experience with FLAWLESS. Asset-light -- so we're a company that doesn't invest a whole lot in plants. We like to buy businesses that are already made by third parties, by co-packers. And we like to be able to leverage our considerable supply chain. And then finally, it needs to have a long-term competitive advantage. All right. So, the short story is, we have 14 brands today. We hope to have 20 tomorrow. All right. And I think that's it for me. I'm going to pass it over to Rick.

Barry Bruno:

Thanks, Rick. Everybody, good afternoon. Nice to be back live with you here. I'm Barry Bruno. I lead our U.S. business, and I'm going to talk to you a little bit about our categories, our brands, a little bit about innovation and then a new marketing campaign. We call it give it the HAMMER. You might have noticed that when you walked in as we've wrapped the building in Orange today. So pretty good work there that I hope you like as much as we do. I may be biased as I lead the U.S. business, but I think our future is pretty bright. We're leaders in growing categories. I'll show you deeper what's going on in those categories in just a little bit, but we're number one or number two player in categories which are growing and healthy. We thrive in difficult environments. We've been through a lot over our 150-plus-year history and we thrive in those environments. We bring more consumers in. They stick with us as we emerge from them. And our acquisitions have a lot of room to run. I'm going to talk with you a little bit about ZICAM, a little bit about THERABREATH and about HERO. When I say that we're leaders in healthy growing categories, you can see what's going on here. Green means the category grew in that year, read, it contracted. You can see we've added a few new categories over the years as we bought brands in the cold shortening, mouthwash and acne patch categories, but healthy growth across each of those 6.4% weighted average last year. We also know how to hold and grow share, right? seven of 14 last year is not ideally where we want to be. We had supply challenges and a number of them that we -- that held us back from where we'd like to be. Ultimately, we plan to do far better as we go forward as we aspire to be better than seven out of 14. That's going to happen as our supply chain improves, right? You can see here where we were last year, Q1 below 80% and improving throughout the year. Some of those supply challenges has made share growth difficult. But as we get into the new year ahead, you can see we're at 93%, growing to 97% through the course of the year. That's good not only for us. it's good for our retailers as we bring growth back to these categories where, again, we're the number one or number two player. And you saw this before, we like difficult environments. We do pretty well in challenging environments. Our portfolio split 40% value, 60% premium, allows us to bring new consumers in, in tough economic times and keep them. And as Matt said about private label, relatively low exposure, only five of 17 categories have material private label. This is a look at consumption in Q4. So, in 13 of 17 categories in Q4, growth took place. You can see some categories that are new to us. If you look at the top cold shortening, if any of you navigated November, December without a cold, the cough, COVID, RSV, I commend you, many of your fellow compatriots here in the U.S. did not do as well, and you can see what drove category growth there. But what I like about this, categories that we've been in for a long time are growing, new categories are growing as well. So, let's take a look at some of those categories that matter to Church & Dwight. Fabric Care. Left-hand side, category growth, right? You can see category growth was 6%, 7%, moderating a little bit in Q3 when the consumer took a step back. And then you can see what church and with growth was on the right-hand side. So, while we lagged the point in Q1, we grew faster in Q2, 3 times faster than category in Q3 and Q4. And as you all know, when you're growing faster than category, you're gaining share and that led us to an all-time share high, 14.9% as we ended the year. And I want you to take away, that's part of a long-term trend, right? We were at 11.5% share in 2017. We're at 14.9% now consumers who try ARM & HAMMER, love the brand and stay with us over time. And we think that's only going to happen more in this environment, right? You can see where the consumer is trading down from premium into value, which is where ARM & HAMMER squarely sits and we're keeping those consumers, as you saw in our all-time share hide. Litter is another really important category. I'm going to talk to you about innovation in litter. But right now, let me show you where our existing business is double-digit growth each quarter last year, 14%, 12%, you can see what's going on there. And again, the story of share growth here in tough economic times, we're continuing to gain share. You can see where we've gained a point and change over the year. But really, what's going on our value orange box, cat litter is gaining material share again, if you look at Q3, Q4, when the consumer was most stressed and they were trying ARM & HAMMER litter they've moved to us and they're sticking with us. So, another story about tough economic times in Church & Dwight persevering. And it's not just economic times that are tough, cough, cold, flu, again, RSV. We really like the addition of ZICAM to our portfolio. You can see over years on the left-hand side how the category has been moving, took a step back in 2021. But in 2022, as consumers were socializing and going out again masks were going away. The category bounced back and ZICAM share of cold shortening has built strength upon strengthens at a 77 share. And actually, if you look at the far right here, we exited in December a 78 share of the category. And again, this is an interesting chart on the left, right? That is influenza reports to the CDC just in November and December of 2022 versus the last five years, that gives you a little bit of flavor for how severe the cough, cold season was and flu this year. So that's good, and those are some important categories. We haven't even really talked about acquisitions yet. So, I'm going to talk a little bit about mouthwash and acne care. As a reminder, we bought THERABREATH in December of 2021. We bought it HERO in October of 2022. So, HERO has only been with us for 90 days. But it's a story of strength to strength and growth. New distribution for THERABREATH plus our WATERPIK hygienist detailing it and have led to outstanding growth and HERO is on the same path. Let me tell you a little bit more about each of those. So THERABREATH sales on the left here. So, percentage growth year-over-year, you can see where that business was up 59%, 45%, 50%. Ultimately, though, that growth far faster than the category has led us to an 8 share of the overall mouthwash market. We're at almost a 20 share of the alcohol-free mouthwash market category, subcategory, right? We're the number two player there. We're growing as we're investing more in marketing and advertising and distribution. And speaking of distribution, when we last met with you guys, we talked about the huge runway that THERABREATH had. And you can see we're realizing some of that now up 60%, but we still trail all of our main competitors, Actin CREST and LISTERINE were way under skewed. And as a brand that retails for double the category average, we're at about a $10 price point versus a $5 average, retailers are happy to engage us with us in those conversations as we bring a lot of penny profit to the category. So, a great track record for THERABREATH breath already, and that's going to continue into the future. HERO, our newest edition. The Acne pass category almost didn't exist five years ago. You can see $20 million in retail sales in 2018. It has grown dramatically to $340 plus million fueled by HERO. And you can see the percentage growth for HERO on the right-hand side in each month driving that category growth. And what's remarkable about that, I think HERO was only in distribution in bricks and mortar and Target and Ultra last year, right, on Amazon as well, but only target in Ultra. That's why you can see the TDPs are difficult to calculate even in terms of how small they were. All of that growth is ahead of us as we look to get our fair share and drive more growth, and we're going to be launching in all of the major bricks-and-mortar retailers that you'd expect starting with CVS now and more to come over the course of the year. So, the summary for that section, right? They're great categories we compete in. They're growing. They're healthy. We're the number one or number two player in most of them. We thrive in difficult environments with the portfolio that's 40% value we bring consumers in and we keep them. And our most recent acquisitions have tons of room to run. And we haven't talked about innovation yet. So, I'm going to spend a little bit of time on that. It might surprise you, I'm going to focus on cat litter. Because I think we've got something really noteworthy that our R&D group has created for us. The category, just to give you a look back, we started with our orange box products going back to 1998. We added Black Box, which is our premium back in 2016. We've had a 12% CAGR over decades in the business. That value cat litter, $280 million in retail sales, that's Orange box that's one pillar for us. Second pillar, clump and seal, our premium price litter has been 80% incremental to us, and we think we're on the cusp of lasting our third pillar. We call it hard ball or lightweight litter perfected. Why do we care so much about lightweight later? Well, we've got a 25% share in the total clumping category. We've only got a 5% share in the lightweight category. And lightweight is about a 16% subcategory of the total category. So absolutely going after our fair share there, and we think hard ball is going to help us do it. What is hard ball. It's a new and different kind of litter. It's sorghum, which is a sustainable non-clay lightweight grain. We turn that into virtually indestructible clumps, which makes for easy no mess scoping. And I could tell you more about it, but I'm going to show you a video of some of our scientists having a little bit of fun that I think will bring it to life. Let's play the video, please. [Audio/Video Presentation] I like the roof drop as the demo, right? That's a compelling one. Hopefully, that gave you a flavor to what hardball is all about. Again, category benefits, it's surprisingly lightweight yet incredibly strong, it's virtually indestructible clumps, makes cleaning the litter box of breeze. If you've had to clean the litter box at home, you know it's probably one of the least favorite household chores and hard ball makes it far, far easier. And it's sustainable, right? renewable, lightweight, easy to transport as well. So that's only one of our innovations. You can see in the top left corner. We've got innovation across laundry and condoms and acne patches and water flossers and vitamins Nair prep and smooth, by the way, a great new innovation that's going to make facial hair removal, far, far easier. BATISTE, SPINBRUSH and we're going to bring THERABREATH to a whole new generation of mouthwash users as we launch our kids line. So, lots of innovation across it. Carlos Linares can't be with us here today. He runs R&D and Leslie Dreibelbis here. That team has done a great job giving us as marketers incredible innovation to launch. Trying to tell you just about one more thing. We call it Give it to HAMMER. It's our new master brand campaign for ARM & HAMMER. You see it all around the building. And I don't know if technically, we're in a recession or not as judged by economist, but I can tell you our consumer, sure feels that we're in a recession. If you look at the top right-hand corner, that consumer is paying $396 a month more for goods this year than they were a year ago. And that's forcing them to make difficult decisions. 53% are making different choices. 90%, as you might imagine, are anxious and stressed about that. And I grabbed a spot from a consumer that was posted to here before we ever started this campaign, but this is the inspiration. When you worked hard to get a good job, but it doesn't even feel like it mattered. Gas is $5, rent increased by hundreds. Frozen chicken is $25. It's impossible to buy a home and inflation is so high that the Dollar Tree is now the $1.25 tree, right? That's what our consumer is dealing with, and they feel powerless about it. And it's leading to a wide open window for brand reconsideration. Brands that were on autopilot are now being reconsidered. If you look at the bar chart at the bottom right there, 46% of consumers according to a McKinsey study are shop in different brands and 42% plan to add them to their portfolio going forward. And we say, ARM & HAMMER is made for this moment, where the hard-working brand is packed with power, price to be accessible to all and eager to help. And we're launching a new campaign, a new video to consumers next week. We're going to share it with you now. Let's play the video. [Audio/Video Presentation] So, we think right message, right brand, right time. We're going to be launching it to consumers on Monday. So, you guys have got a sneak peek here. National TV, digital all the influence and social media you'd expect on e-retail and through PR. We're excited about the campaign. We think it's going to bring a whole new generation of consumers back into ARM & HAMMER and they're going to stick with us after. So, thank you for your time. I'm going to turn it over to my partner in crime and the leader of all things digital, Surabhi Pokhriyal

Michael Read:

Thanks, Surabhi. Great to be here. My name is Mike Great. I run the international and the SPD business for Church & Dwight. So, I just want to take the next few minutes to talk about how we're doing in international. And then close with some just updates on our SPD business. So, the international story. So, from the Evergreen model, we're planning to grow 6% organically each year. And just to give you a little bit of a makeup of the business, we're about $900 million in sales, it's basically two different parts. We have our subsidiary markets, which are six. This is a fully staffed, direct models that we have entities we sell directly to retail in Canada, U.K., France, Germany, Australia and Mexico. That's about 65% of our business. The other 35% runs through our Global Markets Group, which we call GMG. That's essentially -- we work with more than 400 partners and distributor partners around the world in over 100 countries. And then we've actually supported that with five regional offices China, Singapore, Panama, the U.K., and most recently, in Mumbai, India, which we opened in March of 2022. If you look back, we've got a very strong track record of growth against that 6% evergreen model going back to 2015. We did take a little bit of a step back in 2022. We've got really strong demand and orders in the system. We did have some supply challenges we referenced earlier in the presentation. And we did have some drag within our China market largely with some lockdowns and some waterflow contraction. But overall demand is really, really strong, and we've got a really strong track record. If I unpack that a little bit, clearly, China has been a drag. But if you actually look at the -- our six subsidiary markets as well as four out of GMG regions. We have really strong positive growth across the board. Demand is really strong. Our portfolio is performing extremely well. I think as supply chain recoveries and as China starts to recover, we'll be poised to take advantage of that and get back on our evergreen model. The reason we have confidence in that, I'd say it's threefold. One is just the strength of our brand portfolio. Our brands travel extremely well across the world. can frame it up in three different ways. Traditionally, and certainly a big part of what we do today is we leverage our U.S. power brand. So, ARM & HAMMER, OxiClean, BMS, TROJAN, et cetera. Those brands travel extremely well across the globe. ARM & HAMMER across all segments is our single largest brand and some of those performed extremely well for us. But those are also complemented with a strong international portfolio in the personal care and OTC space, brands like Sterimar, FemFresh, Gravel are unique brands to the International division, high margin and our high-growth categories, we performed quite strongly there. And of course, we've taken great benefit from our acquisitions that, in many cases, our U.S. based, we're adding their THERABREATH and HERO to the family in 2023. So really excited about those. So, across the portfolio, those are kind of the three ways we look at it, but together, gives us a lot to play with internationally. The second part is geographic expansion. So, while we've got a great international story, we're still very early in our journey. If you look at most of our peer set, most of the revenues are in the 60% range outside of the U.S. We're in that 17% to 18% range. So, we have a long runway to go, lots of geography, lots of brands to go into those geographies. So really excited about the runway ahead. And thirdly and equally important is we are making some key investments in the International division. So, we continue to invest in e-commerce and digital maturity and growth Similarly, in pricing and revenue management we're adding some supply chain within our Asia community as well as putting infrastructure in people around quality, regulatory, R&D in some of our key emerging markets lay in the APAC region. So overall, a very long runway of growth for international, very strong portfolio of brands. So, it's really a matter of continuing to extend our portfolio into new geographies. We'll continue to leverage our acquisitions. THERABREATH and HERO will become really important brands for the portfolio. Most of our growth will continue to come from our global markets group and within our emerging markets, and we're going to continue to invest in key capabilities and resources as we continue to grow. All right. Let's switch gears to Specialty Products. So, Specialty Products is aimed to grow 5% organically each year. Just to kind of break that down, it's about a $350 million business. It grew almost 4% this year. 2021, we grew at 12%. It's broken up two-third, one-third between Animal Nutrition, which is 69% and Specialty Chemicals at 31%. The animal productivity is largely prebiotics, probiotics, and food processing safety. It's all under the ARM & HAMMER master brand. So, we have a whole host of product lines in order to service the animal productivity space. And just if you go back to 2015, international was not a big part of the business. We have made a conservative effort to move into our global markets, not too similar to our consumer business. 2022, it's 12%, and we'll continue to grow our international footprint. But as we grow our international footprint, we're also going into new species as well. So, what used to be largely a dairy business is now cattle, swine and poultry as well. So, diversifying also the specie range. So, with that, this is probably the last time we'll show this slide. If you go back in history, we often had sort of our dairy business and our own productivity is largely linked to the fluctuations in milk prices. Since we've diversified in terms of our species to include dairy cattle and swine and also are moving internationally, we've been able to smooth out our revenue. So, we won't have the ups and down cyclical effect that we've had in past years. So, this will be the last time we showed this chart, but I think it's an important context to have much stable revenues moving forward on SPD. So overall, trusted brand from a Church & Dwight, but also ARM & HAMMER umbrella brand, both in the animal nutrition and the specialty chemicals. We're very aligned with kind of key trends around prebiotics, probiotics and available and affordable proteins. We've got a diversified around multiple species, and we're growing internationally. So, for all those reasons, we're pretty excited about where SPD is headed as well as international. So, with that, I will hand back over to Matt Farrell.

A - Matthew Farrell:

All right, Kevin, I'm going to call on you first.

Matthew Farrell:

No, we want to get you a mic.

Matthew Farrell:

Yes. Okay. It's quite a big question. I think every companies have flexibility and so it creates options. And I think going into the COVID, the pandemic and certainly the recession this past year, on our supply chain side, we didn't have the options. I think less than 15% of our raw materials had redundancy. And our target right now is to have 50% redundancy. So we've come a long way over the last couple of years. And that's why I said earlier that we're focused on -- be ready for the next black swan event. As far as the portfolio goes, 80% of our portfolio did exceedingly well. And we had 20% of the portfolio went backwards. And some of it is self-inflicted, and that is with respect to vitamins and our ability to supply. That has certainly hurt us both on sales as well as in the market share, but we're starting to turn underrun. And then from a device standpoint, certainly learned our lesson with respect to FLAWLESS. FLAWLESS struggled in '20 and '21 through COVID, '22 because of the pullback as it's a discretionary purchase. But WATERPIK is different. WATERPIK is also a device, but do you have a secular trend towards interest in gum health. And that's the business we bought in 2017. It grew high single digits in '17, '18, '19, '20, '21. And went backwards this year. Why we had the recession, $5 gas, et cetera. But that's going to turn around, and that's going to be growing, not only in the U.S. but also internationally for us, but I could go on. But there are many areas of the company that I would say we'd look back and say, "Yes, okay, we've been a little bit differently now but now we're -- we got our eyes open going forward. Thanks, Kevin. Rupesh?

Matthew Farrell:

Second question, price gaps.

Matthew Farrell:

Yes. We'll do it the elasticities first. And elasticities have been surprisingly good over the past year. So -- and I think you probably heard that from all of our CPG competitors. The first part of your question was…

Matthew Farrell:

Yes. Well, I'll just start off, and he's going to have a little bit of chance to think of a better answer, but my answer would be the following

Matthew Farrell:

Okay. Yes. Lauren.

Matthew Farrell:

Yes. That's a good question. I'll let Barry and Paul comment as well. But the vitamin business in January, it's a vitamin category in January was down 10% year-over-year. And the reason for that is because if you went back to last year, you had Omicron and Delta, and you had a huge spike. In fact, the first quarter last year, you may remember from the slides, we had only 70% fill rate because we just couldn't staff our plants. So that's an issue for the category right now. As far as our issues go, yes, we've had some self-inflicted wounds over the year. Our supply has started to come back as well. Now we have to win back the consumer. But I'll dish it over to Barry first and then Paul, if you want to add that.

Lauren Lieberman:

And just a quick follow-up because the outlook range, I mean it's the beginning of the year, it's not just early in the year and giving ourselves a lot of room as you navigate through infinite sense. But I'm curious how much of the year's outlook is actually contingent on what happens with VMS because it's got attractive margins, a wide range of outcomes, right, in terms of where the category settles out. Just curious how important that is the full year outlook.

Richard Dierker:

In 2022, remember, those three businesses were about a 4% headwind to organic growth. In the quarter, they were as well, right? We had 0.4% organic, but we would have been at 4.5%, if not for those businesses. And we said for the full year, that's going to true as well, 4% headwind. Just the absence of that headwind, they're flattish to slightly positive next year.

Olivia Cheang:

Thank you. My question is around the cadence of margins because, obviously, you're starting the year at a lower point. But you said that gross margin would be up in Q1. So could you talk a little bit about what's embedded in the outlook as you progress through the year? Because expect that SG&A is up pretty considerably in Q1. Is that advertising? Or is there other expenses that we should be mindful of? And what happens as year progresses? Thank you.

Richard Dierker:

Do you want me to handle that? To give you something. Gross margin is like we said, stairs up through the year. Part of that is the mix headwind in the front part of the year that we just experienced in the back half of this year because of the discretionary businesses like WATERPIK, Vitamins typically have good gross margins. Other part of it is as our fill rates recover, right? I think you saw a slide that Barry had up there showing 93% fill rates in the first half, 97% fill rates in the back half. So as you have fewer truckloads as you have fewer fines from retailers, all those things up gross margin as your supply improves. SG&A, we haven't really got into the quarterly SG&A. SG&A is higher in Q1, and part of that we put in the release was just timing of equity grants as well.

Matthew Farrell:

Yes. Well, we had a really strong quarter -- new acquisition HERO. It actually exceeded expectations. I think this consumer is driving that. And we also had the opportunity to spend more in marketing in the fourth quarter for Hero after we bought the business that came in, in October. But yes, as far as 2023, I would say, yes, it's a little stronger than we expected when we first bought it. So that's going to help us. And you can see our range -- the gap between reported, which is on average 6% and 3%, which is organic. Most of that is the payroll business.

Mark Astrachan :

And on the EBIT line, I mean, I know what you said about interest expense. So what about from contribution there given the higher revenue, same sort of flow through?

Barry Bruno:

That we've never had a national campaign before because they weren't in national distribution, right? And like seem obvious. But we're getting excited about launching the first campaign to tell people all about acne patches because they still don't even realize what they are in many cases, household penetration versus total acne care lags by 10 times, 20 times, so that form we're going to educate about as the category leader, we benefit from that. So that's all new as we're building distribution at the same time. So I think it's a pretty exciting hero story. We've kept the whole Hero team with us, by the way. They're a great strong team, and they're leading that business today. So excited about here going forward.

Jonathan Feeney:

I'll start. Jon Feeney at Consumer Edge. You mentioned, Matt, a lot of CPG companies talking about elasticities are better, let's say, but yet everybody's get gross margin headwinds. And I wonder the data seems to say that consumers are quite receptive and you get retailers in November, December to how hard things are event one that was talking to food companies about why they need to lower prices. So could you give us a little more -- shed a bit more light, maybe unlike that pricing process where -- I mean, if -- why wouldn't you just price in some of these categories until you got the elasticity you were looking for and optimize the profit pool that way?

Paul Wood:

Yes. I'd simplify it as transparency, the retailers expect you to be transparent with them to that cost story that he said. I think we've been extremely successful in being transparent. That develops a trust. So when we do come in and share a transparent story and timing is important, too. Retailers have financial demands and controls and different things. And I think we've been very good at being showing them where the world is moving, where we expect -- so we have these conversations. They're not surprises. So trust transparency and timing, I would say, has been our secret sauce. And while it may seem a cliche and everyone should do it. I think that's what's allowed us to experience the elasticities we have and make the choices we have as well.

Matthew Farrell:

Yes. I'll let Barry comment on the marketing. With respect to acquisitions, we only hire one person in our entire acquisition, M&A department, which is very church and Dwight like. So we're not have a dozen people that are studying categories saying, wouldn't it be wonderful to be in this category. Yes, it might be, but you can only buy what's for sale. So anything that's for sale, particularly in the U.S., that's consumer products, we are aware of and you know what our acquisition criteria is as well. And we've -- even in the last six months, there's three acquisitions that we diligence that we passed on, had good economics, but they just didn't -- we didn't think they had good long-term potential for the company. But because we're able to make so many different products, we're in so many different categories, we can liquid in a bottle. We can put powder in a box. We put anything in a tube. We know how to make lots of things. So consequently, we can throw a pretty wide net as far as things that we might be able to take on as a company. But I'll dish it over to, Barry.

Matthew Farrell:

Okay. Okay. Let's move to another table. Thank you, guys.

Matthew Farrell:

Yes. Okay. Well, Barry and Paul will deal with this every day. But I can tell you, in the fourth quarter, we had a major e-retailer significantly reduced their inventories and their days of supply. So that was a hit with respect to the fourth quarter. We did see a lot of that pullback happen midyear in 2022, but more recently, it was more retailers, but I'll let Paul and Barry comment on that. Take it away.

Barry Bruno:

It was really in Q3 and Q4, though, for sure. We felt it.

Richard Dierker:

Chris, you're -- the major difference between what you guys can see in Nielsen or IRI versus what's actually happening and on the personal care side is really what's happened in the discretionary business. Like the WATERPIK coverage that you don't see, I remember the universe is this small or your view through Nielsen or IRI on the WATERPIK business. Your view is largely a bit smaller for the FLAWLESS business as well. I think those two things are a big part of the disconnect. But take a step back, a lot of the portfolio is growing consumption really well. I think as you see Hero add to distribution and other retailers, you're going to see that, that gets picked up correctly. It just has to get scaled up to a greater degree. Anything you guys would add?

Christopher Carey:

And just related, if I could, but the supply chain improvement is the inventory improvement and the shift of consumption. We've seen promotions come back up, specifically on your laundry business. Was that an impact on price mix in the quarter? And can you just describe that promotional activity, whether -- it certainly looks like it was more offensive as supply came back, you promoted behind laundry. But am I reading that situation wrong? And just again, any impact on the quarter, would be helpful.

Richard Dierker:

I would also say year-over-year, yes, it's a drag because we're lapping a period where we didn't really have as much promotion. Fill levels were low. And so now as we get back to normal levels of promotion, is it a year-over- year drag, yes. Is it offset is off base from what our historical levels have been now.

Matthew Farrell:

Okay. All right. Finally, this side of the room. Coming to life.

Matthew Farrell:

Yes. Well, let's go back to ZICAM for a minute. And we bought ZICAM has a brand, a very strong brand equity. And we renew we were buying it in the middle of COVID. We thought long term, this is a business that has opportunity to grow. And the opportunity with respect to ZICAM is similar to a brand like Emergency which is not episodic now and its sort of an everyday brand that many consumers use. That's the opportunity for ZICAM long term is converted -- also is having ZICAM in a gummy form. You got to keep in mind, we were in supplements with Vitafusion. So it made a lot of sense for us to add on to that as I can. So just to give a little bit of context. Now as far as discretionary versus nondiscretionary, yes, a recent experience does influence our attitude going forward. And certainly, if you're going to buy a discretionary brand, -- the question is going to be how resilient is going to be the downturns in the marketplace because, obviously, with -- certainly with respect to vitamins, FLAWLESS and WATERPIK. The economy did affect the performance of those brands over the past year. So it does influence that. It doesn't mean that we're -- it's hard and fast. We're going to extrude them. But I will tell you the devices you can put it next through going forward. Steve?

Matthew Farrell:

Yes, I'll start, and I'll dish it to Rick. So as far as the fourth quarter goes, certainly, mix had an impact as we talked about earlier with respect to WATERPIK and vitamins and flows year-over-year -- promotions, which we went through also since that's kind of been heating up Q2, 3, 4. It's gradual, but it still had an impact in the fourth quarter. But I would say the two factors would be mix, number one and number two was heat up and sold on deal as far as the trend with respect to price mix.

Matthew Farrell:

And so we're not timid about raising prices, as you know Steve, as you just heard the what the history was with respect to when we've raised price. But we also have to be cognizant of what's going on in the category, the category dynamics and our price gaps with our competition. So I think -- I mean you and John are beaten on the same topic, but we've taken it as we think as far as we can at the moment with that because we do need cost justification to go few further. Okay. Andre.

Richard Dierker:

Yes. I would say it's more of the same what we just experienced in Q4. All right? The 80% of the business is doing well. Volumes are up, and it's really the drag from those other businesses that we said were going to be choppy for the first six months of 2023.

Peter Grom:

Peter Grom, UBS. So Rick, you showed the slide talking about gross margin performance over time? And then recognizing you're expecting to have a nice bounce back year here in '23. You're still kind of 200 basis points or so below kind of the 2019, 2020 gross margins. And I don't want to sit here and asking question for 2024 guidance in February of 2023. But you spoke to multiyear of opportunity on gross margin expansion. So I guess how big of a priority is that in terms of getting back to that level over time? And as you think about the cadence of the year and kind of look forward here, like how quickly can you get back to 45% gross margin.

Matthew Farrell:

Yes. Just some math. I think the -- our gross margin just a few years back, pre-COVID, 45%. It's 41.9% in 2022 recalling 100, 120 basis points improvement. So pick the midpoint, so you go 41.9%, 43% in 2023. And then I used to dish it over to Rick Spann for a minute. By the way, Matt Duffy is here today. He's one of the on people that drives are good to great program, and we target 2% of sales for cost savings annual. It's $100 million. That's a big number. It's a huge effort to make that happen, but that's what it works referring to week we're able to sustain that going forward. And any kind of help from commodities and input costs, we'll be able to return to expand gross margin in the future. But Rick, anything to add about the target-rich environment. You've all seen Top Gun.

Matthew Farrell:

Yes. As far as call-outs, I neglected to point out that our entire M&A department is actually here on the stage. So if you want to talk to him after Class, please do. All right. Any other questions, no, I guess that concludes it today. I was so happy we were able to do this in person this year and look forward to seeing everybody next year. Thank you.

Operator:

Good morning, ladies and gentlemen, and welcome to the Church & Dwight Third Quarter 2022 Earnings Conference Call. Before we begin, I have been asked to remind you that on today's 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. Matt Farrell, Chief Executive Officer of Church & Dwight. Please go ahead, sir.

Richard Dierker:

Thank you, Matt, and good morning, everybody. We'll start with EPS. Third quarter EPS was $0.76, down 5% to prior year. The $0.76 was better than our $0.65 outlook primarily due to higher sales, lower SG&A expense and timing of marketing spend. Reported revenue was up 0.4%, including a 1% drag from currency. Revenue was higher than our outlook of minus 1%. Organic sales declined 0.7% as volume was down 8.5%, partially offset by positive pricing of 7.8%. Matt reviewed the top line for the segments, so I will go right to gross margin for the company. Our third quarter gross margin was 41.7%, a 250 basis point decrease from a year ago. Let me walk you through the Q3 bridge. Gross margin was impacted by 580 basis points of higher manufacturing costs, primarily related to commodity inflation, distribution and labor. These costs were offset by a positive 190 basis point impact, largely from pricing; positive 20 basis points from acquisitions and a positive 120 basis points from productivity. Moving to marketing. Marketing was down $20 million year-over-year, although this was a significant increase of $40 million sequentially from our first half 2022 levels of 8% of sales, as our fill rates have improved. Fill rates in Q3 were 91%, and we expect further improvement in Q4. Marketing expense as a percentage of net sales was 10.7% in the quarter. We expect continued increase in marketing spend in Q4 to approximately 13% of net sales. For SG&A, Q3 adjusted SG&A decreased 30 basis points year-over-year. Other expense all-in was $19.4 million, a $7.3 million increase resulting from higher average outstanding debt levels and higher interest rates. And for income tax, our effective rate for the quarter was 20.2% compared to 20.4% a year ago. And now to cash. For the first 9 months of 2022, cash from operating activities decreased $119.5 million to $534 million due primarily to higher inventory levels from WATERPIK, FLAWLESS and vitamin. We expect inventory levels to come down over the next 12 months. And as of September 30, cash on hand was $438 million. Looking ahead to Q4, we expect reported sales growth of approximately 2%, organic sales decline of approximately 1% and gross margin contraction. Adjusted EPS is expected to be $0.58 to $0.62 per share, a 3% to 9% decrease from last year's adjusted Q4 EPS. This decline is primarily due to significantly higher quarterly tax rate of 25% versus an unusually low tax rate in the prior year of 3.7%, which was largely due to a high number of stock option exercises a year ago. Turning to the full year, we expect the full year outlook for reported sales growth to be approximately 3%, the midpoint of our previously 2% to 4% range. We expect organic sales growth to be approximately 1%. The strong consumption across most of our businesses in 2022 has offset the slowdown in discretionary brands, as Matt talked about. We now expect full year adjusted EPS to be $2.93 to $2.97, a decline of 2% to 3% compared to 2021. The range is influenced by the extent of margin mix within the portfolio. We continue to expect the full year tax rate to be 23%. And we now expect cash from operations for the full year to be approximately $800 million. And our full year CapEx plan is now approximately $170 million as we continue to expand manufacturing capacity in anticipation of future growth in laundry and litter. In closing, we continue to perform in a volatile environment. We expect further market share gains in Q4 as we invest in our brands and our supply chain fill levels continue to improve. And with that, Matt and I would be happy to take any questions.

Dara Mohsenian:

First, just a detailed question. Can you just be a bit more explicit on what changed in the earnings guidance for this year post the early September update? I know there's year-over-year tax rate pressure in Q4, but I think that was known. So just curious on what's changed. And then second, just on the vitamin side. You guys have articulated that the business is suffering from tough comps versus COVID variance last year, that makes sense. As you think about the business longer term, some of the people that were brought in during COVID, who maybe aren't as loyal to the category, is there sort of risk that this weakness lingers and perhaps they're more susceptible to pullback in consumer spending and won't be as loyal to the category from these sort of on-the-fence users who were brought in during COVID? So just any thoughts on vitamins as you look out more to next year.

Matthew Farrell:

Yes. With respect to vitamins, as you heard in my opening remarks, we've lost some share due to fill rates. So we had lost some consumers to brands earlier in the year. So we got to win them back. And there's definitely fewer households purchasing. Your question is, , is can we call the bottom? And do we know that all the consumers who are leaving the category have left? Obviously, not knowable. I will say that the coming flu season actually should bolster the VMS category, just beyond COVID because we haven't had a weaker flu season for a few years. But we -- given it's been many quarters now, several quarters since the end of COVID, we do think things are starting to bottom out. As I mentioned, since we saw that in the fourth quarter that, at least early in the fourth quarter, the decline year-over-year is reduced to 4% where it was 8% in the previous quarter. So it's possible that we could be hitting an inflection point where the category may flatten out and then start to grow.

Christopher Carey:

I'm trying to determine how much of WATERPIK, FLAWLESS, Vitamin pressure impacted your consumer domestic versus your international segment. You've previously given some perspective on geographic mix of these businesses. I wonder if you can update us on the U.S. versus non-U.S. exposure today or how things look today for those businesses. And then just connected to that, do you have a sense of what your organic sales growth would have been in your consumer domestic and international businesses, assuming that these frequencies were neutral growth. Obviously, you gave the 6% headwind, which is quite helpful. I'm wondering how that looks out between your reporting regions.

Richard Dierker:

Yes. And I would only add to that, that we tried to give you a little bit more visibility and granularity into it. But if we were flat for the quarter on net sales, we said those 3 businesses were about a 6% headwind. And as Matt said, our divisions are usually 80-20 split, but WATERPIK is probably more 50-50. But I don't think we'll get any more granularity, but we had a 6% headwind in the quarter.

Christopher Carey:

That's really helpful. If I could just follow up quickly and then get back in the queue. Just as it pertains to when the headwinds came together for these businesses, and as such, when you could potentially start lapping those headwinds, is it reasonable to just look at your personal care business and what the growth started to come off? And then can you just confirm whether you're seeing any sequential worsening or you expect stabilization and this is really just about getting beyond tough comps.

Richard Dierker:

Yes. And then on the Vitamin side, we think that, as Matt said in his prepared remarks, that we're starting to see the minus 8% to minus 4% just because of the Delta variant year-over-year. And we're seeing that start to inflect in a good pattern, so that's about the color we'd give you.

Kaumil Gajrawala:

Can you maybe talk a little bit about -- and you alluded to some of this, but how are you balancing between how much to advertise versus how much CapEx to put it on the vitamin side versus this uncertainty of demand? Because it sounds like there's a fill rate problem, but there's a demand problem and there's incremental CapEx and advertising going into it. So how are you managing these pieces?

Matthew Farrell:

Yes. And you had a question about marketing. If you look back over the last few quarters, just kind of round numbers, Q1 and Q2, we had 8% marketing as a percentage of sales. And why? Because we had lower fill rates. So that was prudent not to be spending at a higher rate. And that amped up in Q3 where it's 10.7%. And you can -- you see we're calling 13% in Q4. And then I'd say next year -- so on a full year basis, this year, we're probably around 10%. But we do expect next year to build on that. So that will move to a higher number. As fill rates become more normal, the marketing spend will also return to a normal rate.

Matthew Farrell:

Yes. In fact, if you look at the stack rate for Q2, it'd be similar to Q3.

Matthew Farrell:

No, I don't think supply would be a very big factor here. I think this is entirely driven by the economy and the consumer. And we've seen this before many, many years ago during the great recession. So we're seeing it in liquid laundry detergent. We're seeing it in the pods. And one we didn't talk about is Scent Boosters, where Scent Boosters the category was flat, but we were up 3% or 4%. So everywhere where we have the value, and I'm sure your comment about supply does not extend to all liquid laundry, pods, Scent Boosters every aspect of laundry, so we're seeing it in so many subcategories within laundry. It's weak concluded. It's real and it will continue.

Stephen Powers:

I guess there's -- as I listened to you, in the third quarter, you had both like demand degradation for sure in FLAWLESS and WATERPIK and Vitamins as well as continued supply constraints across the business and then retailer destocking kind of impacting the total portfolio. As we think about going forward, when are you able to -- when do you see yourself shipping to consumption, whether in the core consumables business or in the businesses that have been the biggest drag?

Matthew Farrell:

Yes. As far as inventory in the channel, Steve, it's -- that's more -- the focus here is more on WATERPIK and FLAWLESS. And that's why we think for the next, say, 6 to 8 months, I think it's going to be choppier for those 2 brands. But we don't have worries about ship to consumption with respect to the rest of the business.

Matthew Farrell:

We have a range for Q4. You're asking us for a commentary on 2023. So there are pluses and minuses when you think about the 2023. So the majority of our business is doing well. Certainly, there's inflation next year. But early days with respect to RFPs, for procurement and input and things like that. We're seeing some things come back, but we won't know really for the next 90 days where all those RFPs turn out. I said we're going to have a few choppy quarters from WATERPIK and FLAWLESS. Laundry is super strong right now. Value is winning. So obviously, we expect that to continue for the next 12 months. Going the other way, we all -- everybody is dealing with higher interest rates and FX, so that's a drag. And then obviously, if we're going to reinflate our marketing spend in 2023, so -- there may be a couple of other pluses or minuses. Rick, anything else you want to throw in there?

Matthew Farrell:

Yes, it's just way too early to call it, Steve.

Richard Dierker:

That's a good question. So usually, just for context, right, we are usually about 60% to 70% hedged by now. I said last call, we were approximately 0% hedged. I would tell you today, we're about 25%. We did do some diesel before the run-up as an example. But mostly, we're still not back to historical levels on hedging because we believe those costs will continue to come down.

Operator:

Our next question comes from Nik Modi of RBC.

Matthew Farrell:

Yes. Well, as far as households, losing households, that's -- that's not something that's been a topic for discussion here as far as people -- less people doing wash loads. So I can't go any further on that. As far as XTRA goes, yes, we've been prioritizing ARM & HAMMER over XTRA for the past 18 to 24 months just because of the fill rate issues. That's behind us now. But we are expecting that in 2023, XTRA could clearly be a winner as that's our deep value detergent. And we did see the same phenomenon back in -- during the great recession. So I think that's ahead of us. And you said you had another one too, Nik, on FLAWLESS.

Matthew Farrell:

No. I would say that the size of the prize is so great with the younger consumers that we don't think that, that shift is going to be so dramatic and so noticeable that it's going to alienate the older consumer. So I would say no, that's not a worry.

Richard Dierker:

Nik, it's Rick. I'll take it. Early in the quarter, we talked about that. We gave a bit of guidance in September. And we said part of the reason was actually because of inventory destocking at retail and it wasn't just one category, it was multiple categories. And so that was implicitly already in our minus 1 outlook. And so we saw that early in the quarter. But after we got through that, we didn't really see it any further.

Operator:

Our next question comes from the line of Kevin Grundy of Jefferies.

Matthew Farrell:

Yes. I can't comment on competitors, so you can appreciate that. But if I look at, take laundry detergent and cat litter, so on the household side of the house, and those are the most promotional areas. So the category sold-on deal for liquid laundry was 32% in Q3. And we were at 26%. And obviously, we have competitors that are higher than that. But that 32% was actually down year-over-year. So I still think that the category spend, the promotional environment, is still lower than it has been historically. And then it's probably worthwhile talking about litter as well. The sold-on deal in litter was 10% in Q3. And that's also historically low as well. Now we were at 13% in Q3, but the 10% and the 13% are still lower than historical levels, which are typically in the high teens level. So it's all ahead of us right now, but I wouldn't say that the environment has been super promotional in Q3, and that could change in Q4 and Q1.

Matthew Farrell:

Yes. Well, it's important to remember, when we acquire businesses, go back to THERABREATH, for example. We didn't take a whole lot of employees from THERABREATH. And we already have an oral care business, right? So oral care business handles toothbrushes, toothpaste. It's ORAJEL. So we're already in the category dealing with the same buyers. So that was really a tuck-in. And then when you think about Hero, keep in mind, for Hero, we're hanging on to the 3 founders that are sticking with us for the next few years, and we want to retain all the employees. So we got an intact, high-performing team to run that business. So we don't feel like we're in a position where we can't look at another business. And as you said, the balance sheet is pretty strong. And as far as the pipeline goes, we are always looking at new deals and have even looked at one since the Hero deal closed. So it's not to say we're going to transact, but we're always looking for strong brands and good categories.

Operator:

Our next question comes from the line of Rupesh Parikh of Oppenheimer & Co.

Richard Dierker:

Yes. Rupesh, it's Rick. Yes, it's a fair question. I'd say 2 things. One, we expect inventories to get back in line over the next 12 months is what I said in my prepared remarks, right? We've adjusted production levels for some of those long-lead devices we source out of China as an example, like WATERPIK and FLAWLESS. It just takes months to run through that inventory as consumption slowed a bit. But we have taken some inventory reserves, both in Q2 and Q3, whenever we have long-dated products like that. So we feel like we've already recognized some of that.

Richard Dierker:

Yes. I mean I kind of went through the bridge a little bit in my prepared remarks. I would just probably keep it high level. And I would say our -- previously, in Q4, we had said that was the quarter that we expected to inflect positively finally for gross margin. We've been saying it all year long. And so now we're seeing contraction. I would just say that we think it's going to contract slightly. I think it's going to be much improved sequentially. I think we were down 250 in Q3. We're not going to be down, in our opinion, not near that much in Q4. So tailwinds from that perspective. And that's partly because of comps on commodities, it's partly because Q4 itself in the prior year is a little bit lower baseline. But I mean, there are a couple of puts and takes.

Jason English:

So I guess I want to come back to that question earlier about trying to unpack the impact of the 3 challenged businesses on the U.S. side of things. It looks like it's around $80 million drag. And if we assume 80% of that hit the U.S., which just sounds like that actually may be high given the water back -- WATERPIK [Technical Difficulty]. But either way, if we assume 80% of it, then it equates to about a 14% drag in your U.S. personal care business. Organic sales over there look like they're down around 16%. So even stripping it out, it looks like your organic sales would still be declining in personal care despite the robust growth you're talking about with BATISTE and despite the recovering growth you're talking about with TROJAN. So can you unpack that a little bit more for us and help us understand, underneath the hood of that personal care business, what else is weighing on performance right now?

Richard Dierker:

Yes. I would just add to that. Remember, our order fill is 91% for the quarter, right? It's a tale of 2 cities, it's probably like 94% for household, it's in the mid-80s for personal care. So you're right, the bulk of the decline in personal care are those 3 businesses. It's FLAWLESS, WATERPIK and Vitamins. We still have 4 or 5 key issues on personal care that we're trying to solve. And we're not going to go through all that detail, but I'll give you an example, right? BATISTE is growing like -- it's doing fantastic, we can't meet all the demand. Consumption is up dramatically. And there's can shortages out there, right? You hear that in the beer industry as an example. And so aluminum cans. But we're trying to add that as quickly as possible to meet that unbelievable demand. Another example would be VMS, not just because the category is down, but our fill level down is lower than we would like because of one key ingredient on one specific SKU. So there is some personal care pressure because of fill rates that we expect to largely be behind us as we exit Q4.

Richard Dierker:

Yes. I would say incentive comp is going to be a headwind next year. We're tracking anywhere between a 30% payout, as an example. It's probably the best ballpark I'd give you. And so that will be a headwind next year as we get back up to 1.0 payout would be our expectations. Your first question was on -- remind me, Jason.

Richard Dierker:

Yes, yes. And I think we'll go through that in February. We'll be very clear on what it is and what it means. I think you should expect that it's a stairstep over time back to what we think has been our sweet spot in marketing from a historical perspective.

Andrea Teixeira:

So my question is on VMS. Again, I understand this segment, and correct me if I'm wrong, about -- represents about 10% of sales. And on top of the WATERPIK and FLAWLESS issues that you discussed, it seems that the issue has been consumption, and I obviously understand you're comping a very high comparison from last year. But how much of the VMS business is down in the quarter and year-to-date? So -- and with that, are you worried about if retailers, if there is excess inventory? I know it's a fast-moving item, but I was just wondering if that can be -- or if that's embedded in your guidance in the fourth quarter, that there could be some issues with destocking there as well, except, of course, that SKU that is not being served.

Andrea Teixeira:

No, that's fair. And then the 80% of the remaining business is probably growing like a mid-single.

Operator:

Our next question comes from the line of Anna Lizzul of Bank of America.

Matthew Farrell:

Yes. I mean, where we are right now, we're winning. So some of the numbers I quoted, the category in liquid laundry is 32%, we're at 26%. And we're gaining share. So you're right, it would appear that there's no need for a heat-up, but I can't predict what competitors will do in the next 6 months.

Olivia Cheang:

My question is on pricing and promotion. You obviously saw a 1 point sequential acceleration in price/mix in Q3, but obviously, some pressures on the higher price portion of your portfolio while pricing on the everyday consumables. So can you give a little bit of color on what impact mix had versus price? And then perhaps a little bit on domestic household versus personal care.

Olivia Cheang:

Got it. And then on Vitamins. I'm curious your view on what you think vitamin consumption trends will be longer term. Obviously recognize that flu could be a factor near term. Still variant of COVID here and there. But where do you think consumption ultimately ends? I mean does it get back to where it was? Does it stay above pre-COVID levels or does it end up getting back to where it was pre-COVID in your view? What are you planning for?

Operator:

Our next question comes from the line of Lauren Lieberman of Barclays.

Richard Dierker:

Yes. I'm not ready to give quarterly or first half, second half guidance on 2023 yet. I would just say that we're kind of getting ahead of ourselves talking about 2023 at all, and so we were just trying to give broad brush strokes. And I would tell you the answer as of right now, our visibility is gross margin expands next year. And we'll get into all the details, all the bridges that you guys want to in February.