Church & Dwight Q4 2023 & Analyst Day 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 2, 2024

There are 21 speakers on the call.

Operator

So 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.

Operator

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. I encourage everybody to read that after class. And I'm going to start out with who's with us here today.

Operator

We have The entire management team, one of the best looking management teams in CPG, sure you'll agree. And we've got a kind of a packed agenda. I won't read it to you, but got a number of people coming up. We're 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.

Operator

So we had a great year for reported and also organic growth. I 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%.

Operator

We almost got all the way back to 10.9%. And we generated $1,000,000,000 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, 1, 3, 5, 10 years is what matters to our shareholders.

Operator

2022 was an abysmal year for us and we've recovered in 2023. And we've got a lot of confidence going forward, which you're going to should walk out of the room here today thinking this is that, got a lot of confidence in our ability to grow in the U. S. You see that we tweaked our evergreen model In our press release, so we're expecting 3% growth in the future in the U. S.

Operator

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, well, what percentage of your sales is online. The answer is 20% of our sales is purchased online. That's over $1,000,000,000 in sales.

Operator

The new evergreen model is very healthy. I'm sure you're going to leave here today thinking that. And we got really strong fundamentals going forward. So who are we? We're at a $6,000,000,000 company, largely U.

Operator

S, who's 78% domestic and 17% International Specialty Products is our original business back 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 release, in the future, We're going to narrow our communication to investors and shareholders and analysts to 7 of those 14. And those 7 are ones that are in larger categories. We also believe they have a lot of potential for our global growth.

Operator

So those are the 7 Therabreath, Vita Fusion Hero, of course, Armour and Hammer, our biggest brand, Orderpik, 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.

Operator

All right, here's the balance. We're pretty much fifty-fifty between household and personal care. For as value versus premium, historically it's been 40, 60 between value and premium because of the growth of Thoroughbred and Hero that shifted a little bit, but it's still a pretty solidly around forty-sixty. 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 through a lot of the innovation group, things we're launching in 2024 and we have a long history of acquisitions.

Operator

So if you went back to 2,004, We have $1,500,000,000 in sales and now we almost have $6,000,000,000 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 1 or number 2 brands, either it had to be 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 or our internal capabilities and they have to have a long term sustainable competitive advantage. All right, so we have 7 of those power brands today and more to come.

Operator

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 nearly the 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 after year. And finally, we're an acquisitive company and we do it well. All right, I'm going to bring up Rick now to take you through the financials.

Speaker 1

All right. Thanks, Matt. I'm going to talk to you about the quarter, the full year, which we finished really strongly and also our outlook in our evolved debit remodel. So first, the quarter. Our outlook was 5% from a net sales growth perspective.

Speaker 1

It was 4% organically. We came in at 6.45.3%, so just better than the top line all around. Gross margin, we just said expansion, we came in at 260 basis points expanding versus a year ago and then EPS was up. So just green arrows all the way. For the full year, similar story, we had 9% as an outlook for the top line and 5% for Organic, we came in at 9.25.3.

Speaker 1

Gross margin, we had expected to be up 210. We were actually up 220 as Matt mentioned. And then EPS reported and adjusted are both better than we expected. Cash flow, dollars 1,000,000,000 was our outlook and we came in at $1,030,000,000 so All right, so just I'm going to spend some time on the Evergreen model. So for many, many years, we've been going through and I begin and end almost all my presentations with the Evergreen model because that is The backdrop for the company, organic net sales of 3%, gross margin expansion of 25 basis points, Flat percentage for marketing, higher dollars, and then we leverage SG and A by 25, and that's how we got to 50, and that led to 8% EPS growth.

Speaker 1

And that's what we've been saying Year after year after year and we're evolving it today. We're going to say 4%. For the last 10 years, if you look back at our history, we've been growing 4%. But we're saying we have confidence in the future, but we're going to continue to grow at 4%. I'll get into that detail in a second.

Speaker 1

But the divisions would be 3% domestic, 8% international and 5% for SPD. Gross margin, we also think that this is the time that we are accelerating on productivity. Inflation is starting to moderate and we have some fast growing acquisitions that we've done that are helping that are tailwinds to gross margin. Marketing, same story, flat percentage, but higher dollars. And as we grow faster, that just means we're going to invest even more dollars in marketing to help gain share and to help grow our brands.

Speaker 1

SG and A, we're going to leverage, maybe not as much as in the past, but still leverage. And in that number, we're now investing largely behind international and largely behind e com, and we'll get into that detail in a second too. So operating margin still expands 50 basis points and industry leading growth of 8%. That's the new model. So let's just go through the detail a little bit on organic.

Speaker 1

What gives us confidence? Well, we're in fast growing categories and Barry will show you as we talk about those 7, they're extremely fast growing. We want to take share and we do that through marketing, through innovation and we've done that year after year. Their breadth and hero recent acquisitions are fast growing And then international growth is accelerating to 8%. On the gross margin side, again, productivity is outpacing inflation.

Speaker 1

We have higher margin acquisitions on the marketing side and Surbhi is going to talk about it. We're getting good ROIs in our spend. That transition is helping and then we have higher dollars as we grow the top line. And then SG and A we're putting in systems all over the world. We put in a China ERP system, we're putting in an ERP system for our GMG business based out of Europe.

Speaker 1

All these investments are embedded in our numbers. We also are building capabilities around the world, regulatory back office to support this fast growing business called gmg within our international. So I just talked to the new evergreen model. The outlook is actually a step up from that. The outlook is 4% to 5% on the top line.

Speaker 1

It's 4% to 5% organically, excluding Megalac, excluding currency. Gross margins up 50 to 75 basis points, so just step up again from our evergreen model. SG and A is leveraged, operating profit expansion is higher than our evergreen model 60% to 80%, tax rate is a little bit higher And EPS growth is 7% to 9% and our cash from operations is $1,000,000,000 plus. Now we do have some timing within our EPS outlook. So the first half is essentially flat and the second half is where all of our EPS growth is coming from.

Speaker 1

Why is that? Well, we're purposely moving marketing spend from the second half to the first half because we have one of the biggest new product introductions in major categories in our history. And Barry's gonna walk you through what each one of those are. But we're excited about that. We're gonna go ahead and spend the money upfront to drive trial, drive awareness to do that.

Speaker 1

And then the second point is we had a great first half in twenty twenty three. The first half of last year is a strong comp to compare against. We had 11% EPS growth last year in the first half. How do you think about or how do we think about EPS growth? Well, 8% to 10% if we strip out the Megalac.

Speaker 1

Again, we're not It's included. These are the shutdown costs. These are the stranded costs. So adjusted EPS growth, you know, before Megalac is 8% to 10%. Megalak impact is a 1% drag.

Speaker 1

That's how we get to 7% to 9%. If you think about the tax rate, that's also a headwind of about 2% for operating performance. So we're really strong operating performance is what I would want to leave you with for 2024. Let's look at our track record, 10 years of growth. Last year, net sales growth grew 9.2%, one of our strongest years ever.

Speaker 1

And we're gonna Have 4% to 5% growth on top of that growth in 2024. Organically, long track record again of above 4%. So the median for 2024 is 4.5% or the average. And we're going to, That's better than our 10 year average, better than our new evergreen model. So it'd have 4.5% or so above the 5.3% is again, growth on top of growth.

Speaker 1

And it matters where that's coming from. In years past, you know, before all the COVID noise and all the pricing and the inflation, we are We're a volume driven company. 100 percent of our organic growth was really from volume. Many companies right now are talking about the return to volume. We've already returned to volume.

Speaker 1

The last two quarters consecutively we have volume growth. We expect that in 2024 as well. About 2 thirds of our growth we expect to be volume driven growth in 2024. On gross margin, this is a slide to spend some time on. So we had a fantastic gross margin expansion, 220 basis points in 2023.

Speaker 1

That got us to 44.1%. Our eyes are on our high of 45.5 back before COVID, the 2019 number. If we hit The middle of our 50 to 75 basis point outlook, then that means we have 80 bps remaining to get back to that kind of pre COVID number. Now, we also have tailwinds from acquisitions that we didn't have back then, but our eyes are firmly on recovering back to 45.5 And that's also why we have confidence and raise our gross margin outlook for the next few for the future. Here's the bridge.

Speaker 1

So this is always the detail that folks want to see. 2023 price volume mix as expected, very strong tailwind from price. In 2024, not as much. We have some carryover price, but it's not the driver. Manufacturing costs were a headwind of 240 basis points last We expect that to be closer to down 130, down 140, about $85,000,000 It was about 125,000,000 in 2023.

Speaker 1

Acquisition is a tailwind in 2023. We don't expect to have acquisitions in 2024 from carryover impact on gross margin. Productivity programs up 150, that was one of our best years ever. It was our best year ever for our productivity program. And then in 2024, we also expect to have a really strong productivity program.

Speaker 1

Gross margin change would then be 220 in 2023 and then 50 to 75 in 2024. I'll spend a minute on manufacturing costs. Inflation is still there. I would say it's moderating. So, maybe a few months ago, I would have said, inflation, I would say it's moderate inflation.

Speaker 1

And the nuance in 2024 is a small piece of that is commodity related. And whether it's Resin prices or natural gas or sugar, those costs are up. But the bigger part for Church and Dwight is some of the costs and investments we're making So the new depreciation on the capital that we've put in, we added a new distribution center. We're outsourcing International supply in some cases until we can bring it in house. We have higher third party manufacturing costs and higher labor costs.

Speaker 1

So that's the bigger Makeup of the pie, largely capacity driven as we grow into it. Moving to marketing, so Now, 11% with 4% to 5% net sales growth, this is an investment of $35 or so $1,000,000 So this is real incremental dollars year over year to help drive The top line in share. SG and A, we continue to believe we're going to leverage SG and

Speaker 2

A and I walk through even in

Speaker 1

the future of a model, leverage of 20 5 basis points to 0. So those investments behind international e comm are key. And all that leads to great Consistent strong EPS growth over time, double digit in many cases or high single digit and we have a great outlook in 2024. Turning to cash flow, so cash flow is what we believe drives value and our free cash flow conversion which is Free cash flow divided by net income is industry leading. So for 10 years our average was 119%.

Speaker 1

In our recent history, We're making huge capital investments on CapEx, that number is down, but still, right in line with industry or maybe even a little bit better, But we expect that to continue to inflect positively. Our cash conversion cycle, this has been a track record at Church and Dwight. We've taken our cash conversion cycle from 52 days down into the 20s. We had a spike up this year, largely because of acquisitions, but again, that's going to work its way back down over time. Strong balance sheet, one of the strongest positions we've ever been in.

Speaker 1

So We ended this year at 1.8 times levered. We expect to end next year closer to 1.6 times. And this chart is updated. So even from a few months ago back in September when we presented at Barclays, our financial capacity is about 20% higher And why is that? It's because we're generating even more EBITDA.

Speaker 1

It's because we're generating and paying down cash. It's such a rate we're paying down debt as well. And so those things are just again virtuous cycles when we look at doing acquisitions and deals to grow our business. So number 1, far and away for capital allocation is M and A and we're laser focused on M and A. Number 2 is CapEx for organic growth In our good to great program, number 3 is new products number 4, debt reduction and number 5, return cash to shareholders.

Speaker 1

We're not a capital intensive company. We spiked up in 2022, 3, on the way down in 2024, we believe it will be at 2% of sales back to normal in 2025. And then finally, we have a we announced this morning in the press release, we have a 4% dividend increase right in line with our capital allocation strategy. And I'll turn it over to Barry to talk about the domestic division in Neutronics. Thank you.

Speaker 3

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 U.

Speaker 3

S. Business. I'm going to talk a little bit categories, the US consumer, and what I think is some really great innovation that we've got in each of our key categories going forward. I'm going to start with a slide I left you with last here, 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, not only leaders in those categories, we're driving growth in those categories.

Speaker 3

We thrive in difficult environments. You've seen our value percentage of our portfolio. I'll take you through how a harm and hammer in particular, we bring consumers in 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.

Speaker 3

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 23 were growing mid single digit growth, High single digit growth, pretty strong. But when you look at the new look of our 7 power brands, and these compete in 8 categories, just as a reminder, ARM and HAMMER Competes in laundry and litter, of course, 7 brands, 8 categories, incredibly strong growth.

Speaker 3

Right? 11% in 21, 18% 22, and then 16.9 percent 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 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.

Speaker 3

Right? When we've met with you over the 2 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.

Speaker 3

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. Thoroughbreds 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 We're not in just yet, and so there's room to run there. And here was the same story. Hero almost didn't exist 5 years ago with a 0.2% household penetration Up to 6.4% today, you can see the rate of growth accelerating.

Speaker 3

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 and Hammer, and one of our largest categories, fabric care. And the look back is a pretty compelling story of growth from a 5 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.

Speaker 3

That's about 30% of the category. But I'm happy to be talking today about ARM and HAMMER Deep Clean, our most powerful formula, and our first entry into the mid tier segment. And to give you some idea, that's 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 and HAMMER products.

Speaker 3

Those are our better products, ARM and HAMMER plus OxyClean. Sorry, ARM and HAMMER is good, ARM and HAMMER plus OxyClean 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 Dig deep to show you how we're bringing awareness to the category and the brand.

Speaker 1

Laundry call. Let's dig deep, people.

Speaker 4

Stench drenched. Soaked through. Caked on deep. Everyday dirt and stink lingers deeper than you think. Now clean deep with new Arm and Hammer Deep Clean Laundry Detergent.

Speaker 4

Our most powerful formula yet penetrates deep into fibers and gets to the bottom of odor and mess. ARM and HAMMER Deep Clean, more power to you.

Speaker 3

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 and HAMMER power sheets, laundry sheets, not dryer sheets. We're the 1st mainstream brand to bring this form new form of unit dose to market. We launched it in q 4 of last year online.

Speaker 3

We click Quickly grew to the number 2 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.

Speaker 5

As a family of 5, the amount of laundry we create is intense. I've partnered with ARM and HAMMER to share their brand new power sheets that have been a total game changer in our laundry room.

Speaker 6

And when

Speaker 5

I say power sheets, I'm not talking about dryer sheets, people. These are laundry detergent sheets. That's right. It's a brand new form of laundry detergent from ARM and HAMMER, and it's made with the same type of powerful cleaning ingredients as ARM and HAMMER liquid laundry detergent. The sheets fully and rapidly dissolve and leave your clothes smelling incredible with a fresh linen scent.

Speaker 5

Arm and Hammer Power Sheets are super convenient to use. Just with the link in my bio. As a family of 5, the amount of

Speaker 3

laundry Think once is enough. You can tell she's excited about it. We are too. I just dropped myself College a few weeks ago and laundry sheets were one of the first things that I made sure to pack for them. Far more convenient the unit dose for sure than liquid for sure.

Speaker 3

So staying with Arm and Hammer moving over to cat litter now another important multi $1,000,000,000 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.

Speaker 3

During COVID, there were increased pet adoptions, then there were multiple rounds of price increases, 11.7% growth, ARM and HAMMER contributing to that growth, Up 11.8% last year. When you're growing faster than category you're gaining share of course. We're up to a 24.8 share almost a 25 share of the category. You can see we've been a consistent grow over time from 20 3.6 up to 20 4.8. And one way that we're keeping that growth going is through new products.

Speaker 3

ARM and 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?

Speaker 3

Well, today, we've just got a 4 share in the lightweight sub segment versus our 25 share overall. So getting our fair share equals $100,000,000 opportunity in retail sales. So we're squarely focused on growing and gaining share in this important sub segment of the category. And we'll share how we're doing that via piece of advertising right now which is cats watching humans on the Internet, so a little bit of a different play. Let's play this spot.

Speaker 7

Arm and Hammer, hardball litter. How hard is it? Crazy hard. No mess scoops.

Speaker 8

Shame, you got to check this out.

Speaker 3

Amazing. I'm obsessed with humans on the Internet.

Speaker 7

It's the virtually indestructible club, Hardball lightweight litter.

Speaker 3

I swear we test all of our advertising, and our cat obsessed consumers love it. It's helping to bring awareness to this, this great new product. All right. Switching gears to something slightly different, dry shampoo. Batiste Dry Shampoo has been an absolute tear.

Speaker 3

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 We're hitting all time share highs. We had a 46.3% last year.

Speaker 3

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 skincare before, but never in dry shampoo.

Speaker 3

So they drop 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. 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.

Speaker 9

Gee whiz.

Speaker 4

What's the future like? Well, people live on Mars. I'm dating an alien. And your hair? It's Batiste Touch and Sweat Activated Dry Shampoo.

Speaker 4

It keeps hair fresh all day long. It's the best invention ever. Better than sliced bread?

Speaker 9

Hop in, Betty. Wow. This is better than

Speaker 3

So having a lot of fun with Batiste as we approach a 50 share in the category and keep innovating and investing. VitaFusion. So a slightly different story when we talk about VitaFusion and VitaFids. So what 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.

Speaker 3

There are over a 100 if you were to look at online players. So, ultimately, there's been a share decline that you've seen. It's gone from 23.9 down to 12%. 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.

Speaker 3

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 at Amazon, at Walmart, at Walgreens, and all the players you see listed here. 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.

Speaker 3

We've got new advertising to support it, And we're launching a new forms beyond gummies in 2024 with a whole goal of stabilizing the business, stopping that share decline and getting back to growth in 2025. And 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%.

Speaker 3

So healthy category, again, driven by thorough breath, 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.

Speaker 3

Introducing TheraBreath Deep Clean, our first alcohol free antiseptic rinse, and antiseptic 30% of the category today. We don't play there at all. Deep Clean's 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.

Speaker 3

Can see that it's absolutely driving category growth. We're up 72% last year, driving category growth of 20%. And when I say little, it was a point to share 5 years ago. Right now, it's an 18 share all time category high and category leader in acne care. And we're absolutely keeping it going with innovation in both our patch form.

Speaker 3

We're a leader with over a 50 share today. And in acne adjacent skincare, 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 our the first national campaign called pimple meet your mighty patch bringing awareness to this great new form.

Speaker 3

Let's play that spot.

Speaker 9

I see you looking at me. You're zit.

Speaker 10

No. Don't do it.

Speaker 9

You can't ignore me, but you know what you can do? Pop me. Come on. Pop Me! It's a perfect solution, and you would definitely not regret it.

Speaker 9

Pop me! Pop me! Pop me! Just do it! Pop me!

Speaker 9

Oh, no!

Speaker 4

Don't pop it, patch it. Mighty Patch pimple patches reveal clear looking skin overnight. Pimple, meet your mighty patch.

Speaker 3

Again, the form is new, so we're pioneering in the camp in the, in the industry launching the first new advertising nationally to bring awareness to this form. 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.

Speaker 3

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. We're absolutely confident we can achieve that. 7 out of the last 10 years, our U. S.

Speaker 3

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 Pokharel is going to come up now to talk about how we're going to keep that great growth going. Thanks.

Speaker 10

I'm the Chief Digital Growth Officer here at Joseph and Dwight. So quick context setting because I know all of us are consumer goods users, but not always fancy. You know, some geeky things might happen here. So, you know, keep me honest as I present to you. I want to say that we are not in the business of getting consumers to shop online.

Speaker 10

We are simply in the business of being where the consumer shops, And that happens to be online more often than not. With that said, 70% of purchases in the US specifically are digitally influenced. What that means is every time you pick up that 6 inch device out of your pocket, look up your iPad, you are making purchase decisions not just to buy online but walk to the store, look up a review online and make that purchase. That's what digitally influenced means. Also, we are in the era of Channel less commerce.

Speaker 10

So the consumer is very fluid between buying in brick and mortar store, buying online, or making that 2 am order to get the product delivered to the dorm, Maybe a laundry sheet. So it's important to segregate how the physical shelf is very different from the digital shelf. The physical shelf is set once a year, maybe twice a year, and it is set it, forget it. The digital shelf like this time lapse video shows you changes by the second. So our tactics really have to cater to the online world in a very different manner.

Speaker 10

Let's talk some numbers and Matt broke the thunder for me. We go from 2 to 20 in under 7 years, right? That's the kind of e commerce penetration we are seeing for our categories. It's important to say here that we have seen a sustained post COVID momentum in almost all of our categories where the consumer, once Who has decided and chosen convenience doesn't want to give it back. Think about getting your litter subscribed and showing that up every month on your door versus having to lug it from the store.

Speaker 10

Of course, we are incessant about all time share highs, like Barry was speaking. In the online world also, we have new metrics where we say we aspire to be in online share, at least equal or higher versus brick and mortar. And we have had some fantastic success. As you see here, 6 out of our new 7 power brands have grown in the share in 2023. And these are some all time high share names, arm and hammer, both laundry and litter, theta breath, nair and spin brush.

Speaker 10

It's important to understand. Now these are the results like the what. Now I will speak a little bit to the how. As Rick was mentioning, A lot of our media spend in the last couple of years has pivoted to digital, right, simply as the consumer has gotten on to more digital consumption, which is 80% today. But more beautiful than that is, as we have more tactics to measure the efficacy of our media, we are having more and more ROI on every dollar that we put.

Speaker 10

So we get maximum stretch out of our dollar so that we don't just meet the consumer at that moment of truth, we get better returns on that dollar spent. So broadly, right, I'm gonna speak about the consumer connection in that zero moment of truth, whether the consumer meets us In an out of home advertising, on a YouTube video, or an Instagram influencer, but we add to it the incessant and the Hallmark of Church and Dwight that is beautiful executional excellence. So I'll share with you some examples of how we execute. These are some digital plus out of home advertising. What you will note here is each of them you might have seen in your own feeds.

Speaker 10

Sorry. Back. Each of these you might have seen in your own feeds. What we try to do is we want to make content that is authentic to the platform. So when you see a YouTube advertisement or a Pinterest or a TikTok advertisement, it doesn't feel like an ad creative.

Speaker 10

It feels like a creative that was meant for that platform. And that's why it generates more thumb stopping And that's why it generates more thumb stopping connection with the consumer. Interestingly, I'm sure, you know, AI is a buzzword all of All over the place, one thing that we are noting is there are some use cases of AI, especially in martech, where the creative that you see on the left from our brand Nier, Usually, we might have storyboarded and created that creative over 5, 6 days. With the help of technology and with the right human oversight, These kind of creatives can now be created in under 5 hours or so. And we try to scale those creatives and what you see on the right in a very large Surround sound mode.

Speaker 10

So like I was mentioning, we have fit for platform, TV creative, social creative, retail media creative, As a consumer buys online and search, all of that comes in a surround sound cohesive manner so that your MarTech enabled creative goes farthest right to the point of purchase. You know, social social is, you know, what I call as the consumers engage in doom scroll, the endless scrolling. These are some creators which are truly, I believe, authentic, thon stopping. They are snacky content. We are no longer in the era where we would make a 60 second TV commercial, Cut it down to 6 seconds.

Speaker 10

We want to and we do make commercials that are fit from platforms, 6 seconds. And, you know, like we say, on TikTok, we don't make ads. We make TikToks. So that's the kind of creative we have. All of this creative is amazing.

Speaker 10

But as we get the consumer from inspiration to purchase, we have to make sure we have one click to cut. Because we know every time the consumer has to click more times, we use we lose 90% of that traffic. So from inspiration to purchase, it has to be a single click. And that's what drives a lot of our online revenue. Another interesting pivot we have seen, especially in the last 2 years, Usually, we would do go to market and go brick and mortar first and go large.

Speaker 10

We have slightly changed that model, especially for some launches like ARM and HAMMER Power Sheets and Hardball, where we would launch online first, get initial category and consumer insight, all that rich data, All the ratings and reviews Barry was mentioning do audience testing on the different social platforms, AB test the product detail page, the content that you see. And once we are satisfied by making it good online, we make it big in brick and mortar. That's exactly what we did with hardball. That's what we are doing with ARM and HAMMER Sheets. We noticed that on sheets, the consumer is looking for not just a sustainability message of good for you and good for the planet, they are looking for the clean that they trust in Arm and Hammer.

Speaker 10

And that's what we learned online, and then we take it to brick and mortar in a large way. So in summary, in terms of metrics and aspirations, Like I said, we are not in the business of getting consumers to shop online, but we are where the consumer is and online is a lot of growth for us. So we will be very Passionate about growing online sales and share growth. To clarify on share, we don't just look at pure play, that is Amazon and Chewy. Online share is measured across Amazon, Chewy, walmart.com, target.com, kroger.com, because that's the universe of where e commerce happens in the country and globally.

Speaker 10

We are also more tech powered and human guided relative to the MarTech and AdTech investments that we are making. And the next step, the 2.0 and Online for us is we are gonna be more focused on efficiency and profitability on guy ongoing to make fit for channel kind of products that make sense for us in the online world. So I just want to say, you know, in ending, we have come a long way from digital being a capability builder for Church and Dwight To digital now being a true business and growth driver for the company. So with on the topic of growth driver, I'll give it to Mike Reed

Speaker 11

Good afternoon. My name is Mike Garrido, 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 move to 8% organic each year.

Speaker 11

So exciting step for the division. If I break that down a bit, we're about $1,000,000,000 in size. There's kind of 2 parts to it. We have 6 subsidiary markets that go direct to retail It's about 63% of our total business, Canada, U. K, Mexico, Australia, France and Germany.

Speaker 11

The remaining 37% is through our Global Markets Group. So we operate in about 100 different countries. We partner with 400 Distributor Partners around the world. So our Global Markets business has been our fastest growing over the last few years and we'll continue to do so. And just to make that I kind of point if you go back to 2,009, the international division has tripled in size.

Speaker 11

And during that time, the Global Markets Group has doubled in importance. And we that trend continuing well. 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.

Speaker 11

We had a breakout quarter in Q1, almost 12% growth, followed by 6.1% in Q2, 7.3% in Q3, and we finished strong 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 bottle change. If you look back in 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 we're Preaching above 8% in 2023 at 8.5%.

Speaker 11

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.

Speaker 11

So we've got a combination of U. S. Power brands like ARM and HAM or OxiClean, VitaFusion that travel very well and that's complemented with a strong personal care and OTC portfolio headline by Batiste, Sterimar and Fem Fresh, so brands that aren't necessarily commercialized in the U. S. That are playing important roles for the international division.

Speaker 11

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 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 really excited about adding those two pieces to the portfolio. If I just sort of summarize sort of 3 key things to 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 upscaling our digital e commerce capability and certainly the acquisition additions and Getting on the front foot on both those acquisitions are the focus areas for international.

Speaker 11

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 2 main parts, we have an animal nutrition business, which is about 2 thirds of the business, you see sort of the impact of Megaloc there, the rest is specialty chemicals, it's about a $320,000,000 business. If you kind of unpack that a little bit, tough year in 2023, we're down minus 8%.

Speaker 11

Most of that is Megaloc driven. So if you take Megaloc out, we're actually in positive growth 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 and nutritional supplements across a wide range of species, dairy, cattle, Swine, poultry, so nothing really changes. MEGALEX coming out, but the rest of the portfolio is strong. We have high growth ambitions for it.

Speaker 11

And most notably, we're focused on international Similar to the consumer side, so if you go back to kind of 2015, we're less than 6%. We're now at 17%, which is in parallel with our consumer business. Last year, we grew 25%, So really strong growth internationally as well. So with that, I'll pass back to Matt Farrell.

Speaker 9

You

Operator

know, people who are long term shareholders have a pretty good handle on this. You understand the brands and the growth rates and the margins and all that kind of good stuff. But the long term shareholders have, I think, a better understanding of the importance of the culture in the company. And The culture of church in Dwight is described in our annual report. And it's you can read it.

Operator

It says we're we're a blue collar organization. That doesn't mean, that's not a dress code thing, this is we're just gritty of people. A lot of high aptitude people, there's a lot of people that join our company that From big CPG and get kind of tired of the big company thing and want to go small and we consider ourselves small As we say, we're blue collar, we're high aptitude, we're underdogs. There's a lot of people we compete with that are much bigger than we are. But beyond that, for the last 5 years, we've been getting into predictive analytics.

Operator

So, we go sit in meetings with Church and Dwight, everybody wants to know What are the facts? Get the facts. The next thing is Sarebi described as we're becoming digitally savvy. We've embraced that And it's throughout the company. And one of the things we said in our release and today is that, hey, we're going to be putting more money into this.

Operator

We're going to spend more money in e commerce both with people, but also technology. Just to kind of round out what our culture is like, We do embrace diversity. That's super important and teamwork is super important. And finally, we're risk takers. As companies get bigger, they often want to pull back and you make decisions in groups and consensus and that slows things down and often you don't make the decisions.

Operator

I mean, that's the element you're never gonna read about in the sell side analyst report. You might get it privately, but you're not gonna read it in a note. But that's one of the things that you're investing in and that's one of the things that makes the company go. And if you think about 2022, we pancaked in 2022, right, minus EPS hadn't happened in 20 years. But the company is just so creative, clever resilient that we said, hey, that's we're going to turn that around in 2023, and we have.

Operator

There are a few more things about how we run the place. First, I'll just I won't read them all to you, but I'll kind of bomb through them. Leverage Brands, we've talked about the brands already. Now, Friend of the Environment, That's important to us as people and just as human beings, but it's also important to the consumers. If you talk to younger consumers, they're really interested in brands that want to be sustainable.

Operator

So, we've embraced that. If you look at the laundry sheets, that is the most sustainable form of unit dose, comes in a cardboard box, there's no plastic. And this is a little bit corny, but if you go back to the 19th century, all the way on the left part of this slide, We're putting pictures of birds in baking soda boxes, not baseball players, but birds and the card said, save the birds, save the planet. This company was into the environment before anybody could spell sustainability. And then more recently in 2021, we've made a commitment to science based targets.

Operator

And in 2023, we started investing in those. So we're putting our money where our mouth is in capital programs. And those capital programs, They're focused on removing, putting less CO2 into the atmosphere, because up until recently what we've been investing in is trees to take the CO2 out of the atmosphere, but now we're going to reduce the amount that we actually pump out of our plants. And we're getting recognized for that. There's lots of rating agencies around the league that rate companies, but as you can see we've been recognized BBB and I worked with AA for the last couple of years.

Operator

Number 3 is the people. So I gave you a little bit thumbnail with respect to the culture of the company, but we're like super productive and I think this is a really underappreciated metric. So we generate over the $1,000,000 per employee in the company. And generally, you're going to see that with startups. But and we were very proud of this.

Operator

And I guess that we're we if you talk to anybody that's coming up on this stage today, they will all say we don't have enough people. And we do that deliberately because when you have fewer people, fewer really good people, you prioritize. So you only work on the stuff that matters. And again, that's part of the culture. We've got a really simple compensation structure, familiar net revenue, gross margin, EPS, cash flow, but also strategic initiatives.

Operator

We want to make sure that on an annual basis, we're also looking to the future and the types of strategic initiatives we have are With respect to the environment, DE and I, how well we're at. We're integrating acquisitions. Also, are we investing in international and also our e commerce area. So there's 5 components to the strategic initiatives. And gross margin expansion, you saw we changed our Evergreen model, now we're saying we're going to expand faster in the future and that rains money.

Operator

And you can spend that money back on marketing and back on SG and A and again international and e commerce. And when that's part of your incentive comp, if you're an employee, you're asking yourself, okay, how can I get it? How can I participate? And here are some of the ways that we run after. 1 is Good TO Great, which is the name of our continuous improvement program.

Operator

Always like to joke that that's the book that everybody's heard about, but Nobody's read. The next one is supply chain optimization. And this is just investing in our plants, automation, etcetera. New products, you want to launch new products that have a higher gross margin than the gross margin of the products that they're replacing. And then finally acquisition synergies.

Operator

When we buy businesses, that's one of the levers we have to improve, the businesses that we buy. So our procurement, supply chain, etcetera, but also it's helping our gross margin going forward because of the mix. All right. Number 4 is leverage assets. This is something else we pay a lot of very close attention to.

Operator

So this is kind of a pretty slide and we say 2% of sales is generally what we think is our sweet spot for investing in CapEx, but we pay close attention So the relationship of our cash earnings to our property plant equipment and working capital is we believe that every company is a machine. You need to invest in assets, both property and net working capital and a relationship with the cash earnings, so that matters. Okay. And finally, if you do those first four really well, you're going to have a good company and you're going to have good returns. But if you put on top of that good acquisitions and that is the skill of this company.

Operator

If you look at all these acquisitions we've done over so many years, almost 1 per year, We left in 2023, we did look at 4 deals this past year, but we're very fussy about what we're going to buy. So, we've gone from 1.5 After $5,900,000 and a lot of that was through acquisitions. And I went through these before, we're very fussy, we stick to these. And you know with 7 big ones today with opportunity to be even bigger, but more to come in the future. And just to kind of wrap up here, strong organic growth in 'twenty three, strong organic growth in 'twenty four, we're seeing 4% to 5%.

Operator

Gross margin expansion again, back to back. This new product pipeline is the best in my 17 years with the company. And then international is the future for us. You saw we're only 17% of our sales. Most of our competitors are 40% or higher.

Operator

That's the future. And then e commerce, if 20% of our sales are ordered online today, we believe by the end of the decade, it'll be 30%. So, we got to get ready for that. And then finally, we generate lots and lots of cash. So we're always on the hunt for new brands.

Operator

Steve Powers, you're up.

Speaker 3

Right and center. He's behind you. He's hiding in the center.

Speaker 12

Yes. Steve Powers from Deutsche Bank. Thank you. Two questions on Laundry. The first one is just when we look at track data, Market shares have been under some pressure across all formats for Church and Dwight of late.

Speaker 12

Looks like both Sort of at the high end to P&G and as well as the private label, just it was just a perspective on what you see going on there, if that's emblematic of all channels or just sort of what we see in the track data? And then looking into 2024 specifically with Deep Clean, a little bit more details on the rollout there. Do you expect it to be incremental in terms of facings for the ARM and HAMMER brand on the shelf, etcetera? Thank you.

Operator

Okay. Your first question is probably with respect to the weakness in Q4 with respect to ARMOUR HAMMER Laundry. If you recall back when we did our Q3 call, by the way, this sounds a little weird right now. Does it sound okay? 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 'twenty two that we're not going to repeat in Q4 of 'twenty three.

Operator

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 4 weeks and it's in mid January, the same is true. So we cut back as well. So we had very low sold on deal 1st couple of weeks of January. So it's not unexpected from inside out.

Operator

Your second question is with respect to deep clean. So deep clean is here we're entering into the high tier. There's 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 shelving there.

Operator

And we do think it's going to be contributory share growth in 2024. But Barry, if you'd like to add anything? Yes, sure.

Speaker 3

No, Matt, I think you covered it largely, right. We're going to support the launch of deep clean, as you'd expect, as well as fabric sheets. Part of that's going to be part of the share growth story that you're going to see in the months ahead. If you look at the last week of tracked data, shares up in just the last week, if you're bored.

Operator

Carla, do you want to pile on it all?

Speaker 6

Yes. I think it's more to Steve. In terms of Reception from the retailers has been incredibly positive and you asked about incremental facings and incremental space and that is very encouraged by

Operator

We probably need a mic up here too for a person to cry. Okay, Dara.

Speaker 13

Dara Mohsenian, Morgan Stanley. So, Matt, if you go back over time, there's A number of examples in the CPG industry of companies raising long term top line guidance and then sort of disappointing kind of analogous to that SI cover jinx, You get confident and unexpected things happen. So maybe in that vein, just obviously numerically you've answered the divisions, International higher growth, domestic a bit higher growth numerically, but what gives you the confidence behind raising The Evergreen long term top line growth target at this point, maybe give us a little bit of detail within those divisions, what's giving you the confidence? And then also, Rick, margins didn't change in the evergreen target, top line went up, earnings didn't go up. Is that just rounding?

Speaker 13

Do you have sort of more confidence in the earnings growth in Evergreen, but just that specific question would be helpful?

Operator

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%.

Operator

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% U.

Operator

S, 8% international, 5% specialty products. Look, international is going to be a juggernaut for us. It's an 8% growth. It's One big component of that is Global Markets Group and that's been doubling every 5 years. So we do have such great brands and what we're doing is what our competitors did Now, 30, 40 years ago, just take your products on the road.

Operator

So I think we got a lot of faith in the international And just international and U. S. Are going to benefit from our 2 most recent acquisitions, which is Thoroughbred and Hero. And we're going to be launching Hero in 20 24. And we just got so much runway there.

Operator

So I have total confidence in our ability to grow the top line 4%. Yes, 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 kind of innovation that we have, I think it's in the bag.

Speaker 1

Yes. And then in terms of gross margin, really you're talking about operating margin, right, 50 basis points didn't change from the prior evergreen model to current evergreen model. Gross margin, we're raising a lot of confidence. We talked about productivity is offsetting moderate inflation, best productivity program That we've ever had. When Rick came in, our sites were too low on productivity.

Speaker 1

And so we've made a turn and the ship has turned. And so that's a great place to be in. Inflation is moderating, so good confidence there. But we're going to go spend some of that money back on SG and A for those growth investments to cement this higher degree model into the future. And so that's why operating margin doesn't change.

Speaker 1

But It helps give us more degrees of flexibility, which is great.

Operator

Sure. We'll get Tom.

Speaker 13

Give one follow-up there. Sorry. So Hero and Therabreath, obviously, huge growth. Last year, you mentioned in your answer the acquisition contribution. Can you just give us a sense of your thought process in terms of growth for those 2 brands in 2024, Maybe the distribution opportunity in the U.

Speaker 13

S. And how big international is as you think about the growth opportunity for those 2 brands?

Operator

Okay. Well, I'm going to throw it to Mike to talk about international and let Carlin have a crack at How we're thinking about it in the U. S?

Speaker 1

Yes. Why don't we give some good details on what the growth drivers are, but we don't get into what percentage growth that we're expecting.

Speaker 14

Yeah, I

Speaker 11

can take that first from an international perspective. The Hang on, boys. I've got a mic.

Speaker 3

Double up. Double

Operator

It's going to be loud

Speaker 11

and might hear you and out of shape. No, from a Therabeth First perspective, I think anytime you've got a great success story and a category grower, then you can take story internationally, that 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, To be able to take another market internationally and be able to take that story to the trade has been really positive. And here are the same thing.

Speaker 11

It's been such a clear winner for the business. 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 a global market. There's a real demand for it, so we're pretty excited about it.

Speaker 6

And then I'll talk to the U. S. I would say similar story. I mean, retailers are Excited about both Hero and Therabraft. We've seen tremendous growth in distribution gains this past year.

Speaker 6

Obviously, based on the results, you saw that There's a lot of runway to go on both of those brands in terms of, I mean, it's nice to have a brand where retails are actually calling you, asking. So, we really see a tremendous potential for both HERO and Therabreath across all channels, I would say

Operator

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

Speaker 6

Yes. We do have information on what we're seeing in terms of the resets And what you'll see are substantial improvements in placement as well as additional facings. So a lot of space coming from both those brands.

Operator

Okay. Rupesh, you're up and then Chris.

Speaker 3

Bring your own microphone.

Speaker 15

Rupesh Parikh, Oppenheimer. So just Rick, the question on guidance, does your guidance incorporate any benefits from share buybacks for debt pay down? And then I have a follow-up question.

Speaker 1

Yes. And a good question, Rupesh. We got ahead of our 2024 expectations for buyback. We did $300,000,000 in Q4 of this year. And if cash continues to build in the balance sheet for an extended period of time, we would do a larger buyback at some point.

Speaker 1

In terms of debt pay down, I think at year end, we had maybe $200,000,000 on the revolver. We've already paid down another $100,000,000 So that's kind of embedded in our outlook.

Speaker 15

Okay. And then maybe two questions just on innovation. So, Matt, you said it's the best line of, I think, in your 17 years. How

Speaker 2

do we think about the contribution? Because I think

Speaker 15

you previously said it's 1 to 1 app point contribution from new products. And then the power sheets, any sense whether you're bringing new customers into their franchise or whether you're sourcing from Existing ARM and HAMR users.

Operator

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

Speaker 3

PowerSheet's still in early days. We're 3 or 4 months into launch, but absolutely new users coming in and incremental usage going on. You might use it when you're traveling. You might use it at a vacation etcetera. So still 3 or 4 months in, we don't have the full analysis of exactly where, but, yeah, absolutely new.

Speaker 3

Would you add anything?

Speaker 10

Yeah. It's 4 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 care for the planet and do good, but people who truly like the clean are coming out of it because efficacy was really, really important for us 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.

Operator

Yes. Rupesh, you are accurate that historically we've said that if you look at our organic growth at 1% to 1.5 percent is going to come from a new product. So our expectation is we're going to exceed 1.5% in 2024.

Speaker 16

Thank you.

Operator

Yeah. Randy, Andrea, you're next after Chris.

Speaker 16

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?

Speaker 16

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 to 2024, do you expect that business to flatten out? And maybe you could also comment on your expectations for WATERPIK as well?

Operator

Yes, I'll take a swing at the VMS and you guys can prepare for the other pieces. So if you look at the category, categories really struggled this past year. If you look at the 1st three quarters, it was down in Q1, up like a point in the 2nd quarter, down in Q3 and down 4% in Q4. So the category is still recovering from the COVID success where the category just rocketed. We are down even more in 2023.

Operator

So as you heard today, we're making a lot of changes there. We'd be happy with a flat year for our Vitamin business in 2024. So that's not we're not banking on a big recovery in the VMS business in order to hit our numbers for 2024. And okay.

Speaker 1

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, competition, we've mixed all that together and we're very confident in hitting the 4% to 5%.

Speaker 16

And just one quick one as well. Just with the balance sheet going to where it is, your capacity to do deals has accelerated. Cash burning a hole in your pocket, what do you do about it? Would you just rest on that cash and make money because it's It's a high interest rate environment. So I don't know where but 6 months from now, we don't have a deal.

Speaker 16

Are you starting to get anxious about that? Just how are you thinking about that in the context of shareholder returns or number 5 on your TSR accretive M and A priorities? So any context there?

Operator

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, and then we had some small deals in there, but businesses we don't talk about. They're very small brands. So For us, you know, decent sized transactions, we've had seen a drought in the past.

Operator

And, yeah, I get the whole it's a burn a hole in your pocket and this is what do you do with the We did a large buyback, I can't remember what year it was. It's quite a while ago pre COVID 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 we looked at 4 deals this past year and Some of them had pretty good economics, but we just didn't think long term that they were going to be able to be sustainable.

Operator

So now we don't ever get deal momentum in a company. So I guess I were really fussy, but we do recognize the fact that we have an unlevered balance sheet and it's pristine. We could be building up a lot of cash if we don't do that. So if this time next year we haven't done a deal, obviously we'd be looking a lot harder at buybacks.

Speaker 1

Yes, the only thing I would add is, we're in a great position like we are never chasing after a deal just to do a deal And we say no a lot. We have a lot of rigor around that. This team and the stage spends a lot of their time doing due diligence and Brian leads that in a big way. So when you have a great performing business, you're never forced to reach for a deal. And so we again, just the rigor around that.

Speaker 1

So We'll let the cash build. As he said, if it builds for a period of time, then we'll look at doing buyback. But meanwhile, at 5% or 6% interest, it's fine to be in the balance sheet.

Operator

And you know you might be encouraged by the fact that we've doubled the size of our M and A team. So for so I joined in 2,006 And Brian joined in 2006 and in 2023 we added another person. So we're very lean.

Speaker 1

Yes. Matt, you might want to one up that. We're tripling it in 2024 With our European footprint.

Operator

No, that's true. We're in the hunt to hire somebody in Europe and also in Singapore In Asia Pacific, so we can deal flow outside the U. S. Because historically it's more U. S.

Operator

Centric, our focus, but it is true. And this is by the way, this is the team that goes to the diligence meetings, all the gray beards, all the people with veteran experience. So Brian is very grateful. Okay. I think I said Andrew was going to be next, then Peter.

Speaker 17

Thank you. Andrea Teixeira from JPMorgan. So my question Mike, I have a question on the organic growth into 2024 and then one on a follow-up on M and A. First on the organic growth for 2024, I understood you mentioned, Rick, 2 thirds coming for volume. So if my math is correct, it's about 3% Volume growth for 2024.

Speaker 17

And with your and so kind of like with your cadence of EPS being 0 The first half and the first half is the easiest comp for volume. Can you walk us through number 1, Point A of that question, getting HERO and TerraBreath and all of those with more ACV and then having these accounts For VMS and then the launches of laundry, how we should be thinking of that cadence for organic volume? And then the follow-up on M and A is that like what are the categories that you believe you should better buy growth over greenfield? Thank you.

Operator

I'll do the M and A one. So is your question about what categories would be focused on? Yeah. Well, I mean, look at the you can only buy what's for sale. And we venture into lots of different We will not venture into devices.

Operator

But we look at household or personal care. Again, it has to be how good is the brand, How good is the brand equity? Economics obviously matter, but what do we bring to the table? Are we a good owner? So we have a pretty wide lens The types of brands and products that we'll look at.

Operator

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 do. So brand 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.

Operator

So we'll spend any time on those PowerPoints. What we want to make sure is that we're in the deal flow, that anything that's for sale we know about, so we can look at it. That's most important.

Speaker 1

Lucie? Yes. In terms of cadence for organic, it's pretty our expectation is pretty consistent throughout the year, Right, our outlook is 4% to 5%. Our Q1 number is 4%, but in general, it's pretty consistent throughout the year. There's lots of things underneath that, whether it's comping Round 2 of concentration in laundry and when that happened, whether it's vitamin category and assumptions and So there's a lot of puts and takes, but I'd say in general, it's a pretty consistent growth throughout the year.

Operator

Okay. Peter, you're next.

Speaker 14

So Rick, I got

Operator

Let's keep it at that table. So we'll have to

Speaker 14

Sorry. Maybe just following up on the phasing, But more on the gross margin side. So 50 to 75, still above your new evergreen target. But just in the context of exiting the year with 200 basis points plus, can maybe just give us a sense for how we should be thinking about gross margin expansion kind of through the year? Is it more front half weighted versus back half?

Speaker 14

Just any color there. And then last year, you delivered upside, like sales came in better, gross margin came in better, But you chose to reinvest some of that back into marketing. If that were to play out again this year, how should we think about the balance of reinvestment versus dropping more of that to the bottom line?

Speaker 1

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?

Speaker 1

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 in the front half than the back half. And then your second question was on Yes, marketing investment and stuff like that. Okay. Well, look, the scorecard year was a kind of a unique, right.

Speaker 1

We wanted to build back the war chest on marketing because it got too low during the COVID because we're outside of We were out of stock. We didn't have the 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 We fast forward it, put it back to 11%. We think 11% is the right number.

Speaker 1

But with that said, share matters. Share is the 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

Speaker 3

right number.

Operator

Yes. And the other thing, Peter, I'm sure Barry Bruno put his hand up for

Speaker 3

I've got a lot of new products to support me. So yes.

Operator

But look, when you got all these new products launching, It's a target rich environment. There's lots of places we could spend money. Look at the sheets thing we just came out with. There is an awareness about that. You got to spend some dough To implode that out, but yes, there's lots of opportunity.

Speaker 9

Hi, thank you. Anna Lizzo 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?

Operator

Look, everybody's aware of the fact that we got 2 fast growing brands, but this is not just a 1 year look, It's because we've grown 4% for 10 years in a row and you know the stable of your portfolio can change over time And obviously, we got 2 fast moving ones. We'll have other ones in the future. So we used to see it's sustainable and clearly sustainable for the next couple of years because of those 2. Yes. But it's not a cause effect.

Operator

Yes.

Speaker 1

I would also add that in 2023, the rest of portfolio, ex third, breadth, ex 0, did hit or exceed our evergreen model. So we feel great about the strength of the portfolio.

Operator

Yes, that's a good point. So if we Back to the 5.3% growth in 2023, more than half of that came from the business X, They're red in Hero. I'll tell you that the base business is strong. Okay. Let's move over to the floor table now.

Speaker 18

Hey, Komal Gutrawalla, Jefferies. It makes a lot of logical sense why you've narrowed it down to 7 focused brands with the most growth. Does that open up the door for divestitures in some of your other categories?

Operator

I had that question in the past and we evaluate all of our brands regularly, because everything's got a polar weight, But I wouldn't say that that signals anything. You see that Megalag is one that we've looked at that for a while, you know, it had good years and bad years, but consider that's become commoditized. We think we should move it out. But yes, it's a regular analysis that we do as a company.

Speaker 18

Got it. And then second question on Hero, I think, 40 countries, that sounds like a lot. Can you maybe just walk through the process why you feel comfortable there's That much demand in that many different places, do you have the supply? How will you balance the marketing? Maybe just going over that a little more.

Operator

Okay. Let's start with supply. So Rick Hang on, Rick. Hold on.

Speaker 3

Yep. Okay.

Operator

It's such a good story. I want

Speaker 3

Make sure everybody can hear it.

Speaker 19

We have a third party manufacturer in South Korea who has a lot of room to grow right now and they have a lot of property and they have committed to us that they will, They will put up more buildings and put more lines in place and keep up with our demand. So we have no issues on supply at all. And in fact, If you look at the growth that we've supported last year, we didn't see all of that coming and they were able to respond and meet that very high demand that we had.

Speaker 1

Maybe Mike, you want to comment on the 40 countries? Maybe even tell the U. K. Story a little bit. Yes.

Operator

Could we spring for another one of these up here?

Speaker 3

He's got a mic. He's got a mic.

Operator

Oh, you're right. Okay. Yeah.

Speaker 11

What I'd say is just generally across the portfolio, we've had really balanced growth across our 5 gMG regions and our subs are really healthy. And with doing that, we're able to add more brands to our business with strong strong appetite from our distributor partners and then on to retail. So here is not the only one. We actually have other other opportunities to expand multiple brands across multiple countries. But I think just the success story of of HERO, not only in the US, but now as we've gone into commercializing into most of our subs already, Already taking number one positions, they have really strong consumption really early.

Speaker 11

So we've only been in for 2, 3 months and we're already well established as a brand. So the playbook that clearly played out in the U. S. It's 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 it a big success globally.

Operator

Then you can tick off like 4 or 5 countries we've already launched.

Speaker 11

Yes. So just in terms of registration getting into market, so we've launched in Canada, we've launched in the U. K, we launched in Germany, France, Australia, all with really strong positions, great retail partnerships, doing well online. So everything that we are hoping for, it's then 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.

Speaker 2

Thank you. Filippo Follorn, 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 you see any need to step up More promotional activity and what you're seeing from your competitors?

Speaker 13

Thank you.

Operator

Yes. Well, look, when you're talking about the promotional environment, you're generally talking about household. Household is where you have by far the most promotions, couponing, etcetera, etcetera. So if you look at, say, Actually, the sold on deal was declined. Now it went the other way with cat litter.

Operator

So cat litter was up 70 basis points sequentially from Q3 to Q4. But if you look at the numbers historically, The litter is around 15% sold on deal today. If you went back, it was 2019 or 2018, it was 20%. So it's nowhere near where you have historical levels. The same is true for say liquid laundry detergent.

Operator

It's 33% in Q4. But you'd have to go back again, quite a few years and I think the high watermark was 40%. Quite a while ago. But then you asked, this is quite a while ago. So you got to see yourself, hey, all the suppliers have absorbed these huge cost increases, Had a raised price, is it sensible to think that this is going to be dealt back?

Operator

So I think if you look at the trend, you'd say probably not. Just to look at the trend line. Yes. Okay. Okay, microphone over here.

Speaker 20

Javier Escalante, Evercore. If we can talk again a little bit the opposite to M and A, the 2 acquisitions That you made seems to have more extendability into adjacencies. Waterpeak doesn't come across that way, But hero, threat of breath, 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?

Operator

Yes. What was the last part of that, the 4 is actually

Speaker 20

Well, you mentioned that you first saw that You thought it was 4 and you were promising 3 perhaps now you think that it's 5 and

Speaker 11

you're promising 4.

Speaker 1

That's one way to think about it, but we wouldn't really comment on what our internal Why don't we answer how extendable is Hero and Therabra and other?

Operator

Yes. I'll start off and then Barry, you pile on. So we bought a business That disrupted a category. So the category was a $500,000,000 category in the US, say 4 or 5 years ago. And then this new form comes along, now it's a $1,000,000,000 category, and it's still growing.

Operator

So we've 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 that's where our focus is. But there are opportunities to go elsewhere.

Speaker 3

Yeah. For sure. Both of them are extendable. There's no question right. Oral care and skin care are 2 giant categories depending on how you define them.

Speaker 3

Both brands are so strong that they're absolutely expendable. It's a balancing act of doing the right job at the right time and not getting over your skis too fast. So I would say it's not a question of, of if it's when. And we've got an absolute plan about adjacencies to move into for each brand. They're super strong brands.

Speaker 3

Consumers are asking for more and more from It's tempting to go faster. We just want to support them in the right way, especially their foundation products.

Operator

I'll be getting emails 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.

Speaker 3

Great.

Operator

Okay. I think that might be it. Anybody else that I'm listening?

Speaker 3

Olivia has been waiting.

Operator

Olivia has been Olivia is so sorry, dead center.

Speaker 8

Thank you. I just wanted to ask you, Rick, about the SG and A target coming in a little bit. And if you could give a little bit more color behind that, Does it reflect incremental investment in certain areas in terms of operations? Or is it more a function of lower leverage even though the organic sales target is going up? And then just on the sort of narrowing and consolidation of power brands, what does that suggest anything in terms of the ones that aren't part of the 7, I imagine that there's no change in terms of resourcing, it's just a function of how you're calling it, but just wanted to make sure that I clarify that.

Speaker 8

Thank you.

Speaker 1

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 that 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.

Speaker 1

So that's kind of the purpose. Your first question on SG and 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 on 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.

Speaker 1

We're trying to take 100 of 1000 of hours out Over the next 3 to 5 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 in ERP systems, not so that we can have a workforce that's reduced because as we grow from $6,000,000,000 to $7,000,000,000 to $8,000,000,000 the ERP system can handle that type of growth. So that's a short answer.

Operator

Okay, I think we're good. Hey, thanks everybody for joining us.

Speaker 3

Thank you.

Remove Ads
Powered by Quartr
Earnings Conference Call
Church & Dwight Q4 2023 & Analyst Day 2024
00:00 / 00:00
Remove Ads