Church & Dwight Q4 2023 Earnings Report

Church & Dwight EPS Results

• Actual EPS: $0.65
• Consensus EPS: $0.65
• Beat/Miss: Met Expectations
• One Year Ago EPS: $0.62

Church & Dwight Revenue Results

• Actual Revenue: $1.53 billion
• Expected Revenue: $1.51 billion
• Beat/Miss: Beat by +$15.87 million
• YoY Revenue Growth: +6.40%

Church & Dwight Announcement Details

• Quarter: Q4 2023
• Date: 2/2/2024
• Time: Before Market Opens

Church & Dwight Co., Inc. develops, manufactures, and markets household, personal care, and specialty products. It operates in three segments: Consumer Domestic, Consumer International, and Specialty Products Division. The company offers cat litters, carpet deodorizers, laundry detergents, and baking soda, as well as other baking soda based products under the ARM & HAMMER brand; condoms, lubricants, and vibrators under the TROJAN brand; stain removers, cleaning solutions, laundry detergents, and bleach alternatives under the OXICLEAN brand; toothbrushes under the SPINBRUSH brand; home pregnancy and ovulation test kits under the FIRST RESPONSE brand; depilatories under the NAIR brand; oral analgesics under the ORAJEL brand; laundry detergents under the XTRA brand; gummy dietary supplements under the L'IL CRITTERS and VITAFUSION brands; dry shampoos under the BATISTE brand; water flossers and showerheads under the WATERPIK brand; cold shortening and relief products under the ZICAM brand; oral care products under the THERABREATH brand; and acne treatment products under the HERO brand. Its specialty products include animal and food productivity products, such as ARM & HAMMER baking soda as a feed additive to help dairy cow; BIO-CHLOR and FERMENTEN used to reduce health issues associated with calving, as well as needed protein; CELMANAX refined functional carbohydrate, a yeast-based prebiotic; and CERTILLUS a probiotics products used in the poultry, dairy, beef, and swine industries. It offers sodium bicarbonate; and cleaning and deodorizing products. The company sells its consumer products through supermarkets, mass merchandisers, wholesale clubs, drugstores, convenience stores, home stores, dollar and other discount stores, pet and other specialty stores, and websites and other e-commerce channels; and specialty products to industrial customers and livestock producers through distributors. The company was founded in 1846 and is headquartered in Ewing, New Jersey.

Church & Dwight Q4 2023 Earnings Call Transcript

Presentation

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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 year, three years, five years, and 10 years, especially what matters to our shareholders. 2022 was an abysmal year for us and we've recovered in 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.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

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 and our evolved evergreen model.

So, first, the quarter. Our outlook was 5% from a net sales growth perspective. It was 4% organically. We came in at 6.4% and 5.3%, so just better in the top line all around. Gross margin, we just had 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 9.2% and 5.3%. Gross margin, we had expected to be up 210, were actually up 220, as Matt mentioned. And then EPS reported and adjusted are both better than we expected. Cash flow, $1 billion was our outlook and we came in at $1.30 billion, so just strong cash flow all the way around.

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 leveraged SG&A by 25 basis points and that's how we got to 50 basis points, and that led to 8% EPS growth. And that's what we've been saying year-after-year-after-year and we're evolving it today. And 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 and we're going to continue to grow at 4%. I'll get into that detail in a second. 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.

SG&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. What gives us confidence? Well, we're in fast-growing categories, and Barry will show you, as we talk about those seven, 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 after year. THERABREATH and HERO, recent acquisitions are fast-growing, and international growth is accelerating to 8%.

On the gross margin side, again, productivity is outpacing inflation. We have higher-margin acquisitions on the marketing side, and Surabhi 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&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. 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. And then analytics and e-commerce, those are capabilities we want to build.

Okay, moving to 2024. 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. It's 4% to 5% organically, excluding MEGALAC, excluding currency. Gross margin up 50 basis points to 75 basis points, so to step up again from our evergreen model.

SG&A is leverage, operating profit expansion is higher than our evergreen model, 60 basis points to 80 basis points. Tax rate is a little bit higher and EPS growth of 7% to 9%, and our cash from operations is $1 billion-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. 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 is going to walk you through what each and one of those are. But we're excited about that. We're going to go ahead and spend the money upfront to drive trial, drive awareness to do that.

And then the second point is we had a great first half in 2023. The first half of last year was 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, again, we're not excluding MEGALAC. It's included. These are the shutdown costs. These are the stranded costs. So adjusted EPS growth before MEGALAC is 8% to 10%. MEGALAC impact is a 1% drag. That's why 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, and we're going to 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 to have 4.5% or so above the 5.3% is, again, growth on top of growth. And it matters where that's coming from. In years past, before all the COVID noise and all the pricing and the inflation, we're a volume-driven company, 100% 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. The last two quarters consecutively, we have volume growth. We expect that in 2024 as well. About two-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. 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 basis point 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 raised our gross margin outlook for the next few -- for the future.

Here's the bridge. 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 for a headwind of 240 basis points last year. We expect that to be closer to down 130 basis points, down 140 basis points, about $85 million. It was about $125 million in 2023.

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 basis points. 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. Gross margin change would then be 220 basis points in 2023 and then 50 basis points to 75 basis points 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 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 & Dwight is some of the costs and investments we're making in capacity. 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. So that's the bigger makeup of the pie, largely capacity-driven as we grow into it.

Moving to marketing. So 11% with 4% to 5% net sales growth, this is an investment of $35-or-so million. So this is real incremental dollars year-over-year to help drive the top line and share. SG&A, we continue to believe we're going to leverage SG&A. And I walk through even in the future evergreen model, leverage of 25 basis points to zero basis points. So those investments behind international and e-com 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%. In our recent history, because we're making huge capital investments on capex, that number is down, but still right in line with the 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 & 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. 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. It's because we're generating and paying down cash at 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 one far and away for capital allocation is M&A and we're laser-focused on M&A; number two is capex for organic growth and our Good to Great program; number three is new products; number four, debt reduction, and number five, return cash to shareholders. We're not a capital-intensive company. We spiked up in 2022, 2023 on the way down in 2024, and we believe we'll be at 2% of sales back to normal in 2025.

Then finally, 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 and new products. Thank you.

[Barry Bruno, Executive Vice President, Chief Marketing Officer and President - Consumer Domestic at Church & Dwight]

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, right? 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.

[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 a $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.

[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 nine 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, 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.

[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. So 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 two-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, driving 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.

[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 years 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.

[Surabhi Pokhriyal, Chief Digital Growth Officer at Church & Dwight]

I'm Surabhi Pokhriyal, I'm the Chief Digital Growth Officer here at Church & Dwight. So quick context setting because I know all of us are consumer goods users but not always fancy. Some geeky things might happen here, so 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. 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 six-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. So the consumer is very fluid between buying in brick-and-mortar store, buying online, or making that 2 a.m. order to get the product delivered to the door, 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.

Let's talk some numbers, and Matt broke the thunder for me. We go from 220 in under seven 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 letter subscribed and showing that up every month on your door versus having to lug it from the store.

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, six power brands out of our new seven power brands have grown in the share in 2023. And these are some all-time high share names, ARM & HAMMER, both laundry and litter, THERABREATH, NAIR, and SPINBRUSH.

It's important to understand. Now these were 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 so we get maximum stretch out of our dollar so that we don't just meet the consumer at that moment of truth to get better returns on that dollar spent.

So broadly, right, I'm going to 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 & 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, 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. It feels like a creative that was meant for that platform and that's why it generates more thumb-stopping connection with the consumer.

Interestingly, I'm sure AI is a buzzword 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 NAIR usually, we might have story-boarded and created that over five days, six days. With the help of technology and with the right human oversight, this kind of creatives can now be created in under five hours or so. And we try to scale those creatives in what you see on the right, in a very large surround sound mode.

So like I was mentioning, we have fit-for-platform, TV creative, social creative, retail media creative as the consumer buys online and search, all of that comes in a surround sound cohesive manner so that your MarTech-enabled creative goes far this right to the point of purchase.

Social. Social is what I call as the consumers engage in doomscroll, the endless scrolling. These are some creatives, which are truly, I believe, authentic, thumb-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 six seconds. We want to. And we do make commercials that are fit from the platform six seconds. And 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 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 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 two years, usually, we would do go-to-market and go brick-and-mortar, first, and go large. We have slightly changed that model, especially for some launches like ARM & 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.

A, we 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 & 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 & HAMMER. 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 eCommerce happens in the country and globally. We are also more, tech-powered and human-guided, related to the MarTech and AdTech investments that we are making. And the next step, the 2.0 and online for us is we are going to be more focused on efficiency and profitability ongoing to make fit-for-channel kind of products that make sense for us in the online world.

So I just want to say, in ending, we have come a long way from digital being a capability builder for Church & 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 Read, because International is also a huge growth driver for us. Thank you.

[Michael Read, Executive Vice President, International at Church & Dwight]

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 of 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.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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 & Dwight is described in our Annual Report, and it's -- you can read it. It says we're a blue-collar organization. That doesn't mean -- that's not a dress code thing. This is -- we're just gritty people. A lot of high-aptitude people. There's a lot of people that join our company that come from big CPG, and get kind of tired of the big company thing and want to go small and we consider us so small.

As we say, we're blue-collar, we're high aptitude and we're underdogs. There's a lot of the people we compete with that are much bigger than we are. But beyond that, for the last five years, we've been getting into predictive analytics. So, we go -- you're sitting in meetings at Church & Dwight, everybody wants to know, what are the facts, get the facts.

The next thing as Surabhi described is we 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, that we're going to spend more money in e-commerce, both people but also technology.

And 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, because 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 best decisions. But that's the element you're never going to read about in the sell-side analyst report. You might get it privately, but you're not going to 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, and resilient that we said, hey, that's -- we're going to turn that around in 2023 and we have. 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. Leverage brands. We've talked about the brands already. Now, a friend of the environment, that's important to us as people and just as human beings, but it's also important to the consumers. So if you talk to younger consumers, they're really interested in the brands that want to be sustainable. So we've embraced that.

And 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 it's just a little bit corny, but if you go back to the 19th century, hovering on the left part of this slide, we were putting pictures of birds in baking soda boxes, not baseball players but birds. And the card said, save the birds, save the planet. So this company wasn't environment before anybody could spell sustainability. Then more recently in 2021, we've made a commitment to science-based targets, 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 get recognized for that. This is lots of rating agencies around the league that rate companies. But you can see we've been recognized BBB and now we're AA for the last couple of years.

Number three is the people. So I gave you a little bit of 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 $1 million per employee in the company. And generally, you're going to see that with start-ups but -- and we were very proud of this. And like I said, we're -- if you talk to anybody that's coming up on this stage today, they'll 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 to only work on the stuff that matters. And again, that's part of the culture.

We have a really simple compensation structure, familiar net revenue, gross margin, and EPS, cash flow, but also strategic initiatives. 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&I, how well we're integrating acquisitions. Also, are we investing in international and also our e-commerce area, so there's five 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. And then you can spend that money back on marketing and back on SG&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 it.

One is Good to Great, which is the name of our continuous improvement program. I always like to joke that, that's the book that everybody has heard about but nobody's read. The next one is supply chain optimization and this is just investing in our plants, automation, etc, 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. When we buy businesses, that's one of the levers we have to improve the businesses that we buy, so our procurement supply chain, etc. But also, it's helping our gross margin going forward because of the mix.

All right. Number four is leverage assets. This is something else we pay a lot of very close attention to. So it is kind of a pretty slide, and we say 2% of our -- 2% of sales is generally what we think is our sweet spot for investing in capex, but we play close attention to the relationship of our cash earnings to our property, plant, equipment and working capital because we believe that every company is a machine. In the machine, you need to invest in assets, both property -- net working capital and the 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, you're going to get good returns. But if you put on top of that good acquisitions, and that is the skill of this company, if you look at all these acquisitions we've done over so many years, almost one per year, we left in 2023. We did look at four deals this past year, but we're very fussy about what we're going to buy. So we've gone from $1.5 million to $5.9 million and a lot of that was through acquisitions. And I went through these before. We're very fussy. We stick to these. And with seven big ones today with the opportunity to be even bigger, but more to come in the future.

And just to kind of wrap up here, strong organic growth in '23, strong organic growth in '24. We're seeing 4% to 5% 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. That's the future. And then e-commerce of 20% of our sales are ordered online today. We believe by the end of the decade, it will 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. And we're going to bring the whole crowd up here now so we can play the band. All right.

Questions and Answers

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Steve Powers, you're up.

[Steve Powers, Analyst at Deutsche Bank Aktiengesellschaft]

Yeah, 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 & Dwight of late. It looks like both sort of at the high-end of PNG and as well as the private label. Maybe just some perspective on what you see going on there, if that's emblematic all channels or just sort of what we see in the track data. And then looking into '24, specifically with Deep Clean, a little bit more details on the rollout there. Do you expect it to be incremental in terms of phasings for the ARM & HAMMER brand on the shelf, etc? Thank you.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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 '22 that we're not going to repeat in Q4 of '23. 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?

[Barry Bruno, Executive Vice President, Chief Marketing Officer and President - Consumer Domestic at Church & Dwight]

Yeah, sure. Matt, I think you covered it largely, right? So we're going to support the launch of Deep Clean, as you'd expect, as well as fabric sheets. Part of that is going to be part of the share growth story that you're going to see in the months and weeks ahead. And if you look at the last week of track data, share's up in just the last week, if you're bored.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Carlen, do you want to pile on it all?

[Carlen Hooker, Executive Vice President, Chief Commercial Officer at Church & Dwight]

Yeah, I want to. In terms of reception from the retail it is going to be positive. And you asked about incremental phasing, the incremental phase is very [Indecipherable] by the response from the retailers.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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

[Dara Mohsenian, Analyst at Morgan Stanley]

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 the SI coverage inks, you get confident and unexpected things happen. So maybe in that vein, just obviously, numerically, you've answered the division's 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? Do you have more confidence in the earnings growth and evergreen, but just that specific question would be helpful.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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 years ago, 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.

[Michael Read, Executive Vice President, International at Church & Dwight]

Yeah. 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 the 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. 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&A for those growth investments to cement this higher evergreen model into the future. And so that's why operating margin doesn't change. But it helps give us more degrees of flexibility, which is great.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Sure.

[Dara Mohsenian, Analyst at Morgan Stanley]

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 two brands in 2024, maybe the distribution opportunity in the US and how big international is as you think about the growth opportunity for those two brands?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Okay, well. I want to throw it Mike to talk about international and get Carlin, have a crack at. And how we're thinking about it in the US.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

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

[Michael Read, Executive Vice President, International at Church & Dwight]

Yeah, I can take that first from an international perspective.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Hang on, boss.

[Michael Read, Executive Vice President, International at Church & Dwight]

I have got a mike.

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. So there's a real demand for it. So we're pretty excited about it.

[Carlen Hooker, Executive Vice President, Chief Commercial Officer at Church & Dwight]

And then I'll talk to the US. I would say a similar story. I mean, retailers are incredibly excited about both Hero and TheraBreath. We've seen tremendous growth in distribution gains this past year. 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 retailers are actually calling you asking. So, we really see a tremendous potential for both Hero and TheraBreath across all channels, I would say, agnostic of channels.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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

[Carlen Hooker, Executive Vice President, Chief Commercial Officer at Church & Dwight]

Yeah, 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 phasings. So, a lot of space coming from both those brands.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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

[Rupesh Parikh, Analyst at Oppenheimer]

Rupesh Parikh, Oppenheimer. So just, Rick, question on guidance. Does your guidance incorporate any benefits from share buybacks or debt paydown? And then I have a follow-up question.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Yeah, no, 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.

[Rupesh Parikh, Analyst at Oppenheimer]

Okay. And then maybe two questions just on innovation. So, Matt, you said it's the best lineup, I think, in your 17 years. How do we think about the contribution? Because I think you previously said it's typically a one-point to 1.5-point contribution from new products. And then the Power Sheets, any sense whether you're bringing new customers into the franchise or whether you're sourcing from existing Arm & Hammer users?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Yeah, 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.

[Barry Bruno, Executive Vice President, Chief Marketing Officer and President - Consumer Domestic at Church & Dwight]

Yeah, sure. Our Sheets is still in early days. We're three or four 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 in a vacation home, etc. So, still three months or four months in, we don't have the full analysis of exactly where, but yes, absolutely new. Would you add anything to that?

[Surabhi Pokhriyal, Chief Digital Growth Officer at Church & Dwight]

Yeah, it's four months in the market, Rupesh. Got around 6,000 reviews and a 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.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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

[Rupesh Parikh, Analyst at Oppenheimer]

Thank you.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Get ready, Andrew. You're next after Chris.

[Chris Carey, Analyst at Wells Fargo & Company]

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?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Yeah. I'll take a swing at VMS and you guys can prepare for the other pieces. So if we look at the category, categories really struggled this past year. If you look at the first three quarters, it was down in the first quarter, up like a point in the second quarter, down in Q3 and down 4% in Q4.

So the category is still recovering from the COVID success where the categories just rocketed. We were down even more in 2023. So we've -- 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 '24. And okay.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Yeah, 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%.

[Chris Carey, Analyst at Wells Fargo & Company]

And just one quick one as well. Just with the balance sheet going to where it is, your capacity to do deals has accelerated. 2023 is the first time in 20 years you haven't done a deal. Can you just talk about the tension of not doing a deal, 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 a high-interest-rate environment? I don't know where -- but six months from now, we don't have a deal. Are you starting to get anxious about that or just how are you thinking about that in the context of shareholder returns are number five on your TSR accretive M&A priorities? So any context to that?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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 yeah, 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 I guess 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.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Yeah. The only thing I would add is we're in a great position like we never chase after a deal just to do a deal and we say no a lot. We have a lot of rigor around that. This team on 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. So we'll let the cash build, as you said. If it builds for a period of time, then we'll look at doing a buyback. Meanwhile, at 5% or 6% interest, it's fine to be in the balance sheet.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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, so.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

We're very lean. Matt, you might one-up that. We're tripling it in 2024 with our European footprint.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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.

[Andrea Teixeira, Analyst at JPMorgan Chase & Co.]

Thank you. Andrea Teixeira from JPMorgan. So my question, Mike, I have a question on the organic growth into 2024 and then one on follow-up on M&A. First on the organic growth for 2024. I understood you mentioned, Rick, two-thirds coming from volume. So if my math is correct, it's about 3% volume growth for 2024. And with your -- and so kind of like with your cadence of EPS being zero in the first half and the first half is the easiest comp for volume, can you walk us through, number one, point A of that question, getting HERO and THERABREATH and all of those with more ACV? And then having the easy comps 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&A is that like what are the categories that you believe you should better buy growth over greenfield? Thank you.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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

[Andrea Teixeira, Analyst at JPMorgan Chase & Co.]

Yeah.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Yeah. 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? Yeah, 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.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Yeah, 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 two of concentration in laundry and when that happened, whether it's the 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.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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

[Unidentified Participant, at Church & Dwight]

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 you 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? 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?

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Yeah, okay. So the first one is on gross margin cadence. 50 basis points to 75 basis points 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 -- yeah, 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 a share in about 60% of our sales. That is a good metric and a good scorecard. So right now, we believe that number is the right number.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Yeah. And the other thing, Peter, I'm sure Barry Bruno put his hand up for spending more marketing money to the extent that we're.

[Barry Bruno, Executive Vice President, Chief Marketing Officer and President - Consumer Domestic at Church & Dwight]

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

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

But look, when you got all these new products launched and it's a target-rich environment, there's lots of places we could spend money. We've got the sheets that we just came out with. There is an awareness about that. You got to spend some dough in order to flow that out. But yes, there's lots of opportunity.

[Anna Lizzul, Analyst at Bank of America]

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?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Yeah, I would also add that.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

But it's not a cause effects. Thanks.

[Barry Bruno, Executive Vice President, Chief Marketing Officer and President - Consumer Domestic at Church & Dwight]

Yeah.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

I would also add that in 2023, the rest of the portfolio, ex-THERABREATH, ex-HERO did hit or exceed our evergreen model, so we feel great about the strength of the portfolio.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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 ex-HERO, tell you that the base business is strong.

Okay, let's move over to the far table now.

[Kaumil Gajrawala, Analyst at Jefferies Financial Group]

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

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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.

[Kaumil Gajrawala, Analyst at Jefferies Financial Group]

Got it. And the 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 many different places? Do you have a supply? How will you balance the marketing, maybe just going over that a little more?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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

[Rick Spann, Executive Vice President, Chief Supply Chain Officer at Church & Dwight]

Yeah. So we have a third-party manufacturer...

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Hang on, Rick.

[Rick Spann, Executive Vice President, Chief Supply Chain Officer at Church & Dwight]

Yeah, okay.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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

[Rick Spann, Executive Vice President, Chief Supply Chain Officer at Church & Dwight]

We have a third-party manufacturer in South Korea who has a lot of them to grow right now, and they have a lot of property and they have committed to us that 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.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

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

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Could we spring for another one up here? Okay.

[Michael Read, Executive Vice President, International at Church & Dwight]

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 months, 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.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Then you can tick off like four countries or five countries, we've already launched with success?

[Michael Read, Executive Vice President, International at Church & Dwight]

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.

[Kaumil Gajrawala, Analyst at Jefferies Financial Group]

Okay. Thank you.

[Filippo Falorni, Analyst at Smith Barney Citigroup]

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.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Yeah. Well, look, when you talk about the promotional environment, you're generally talking about household. Household is where you have by far the most promotions, couponing, etc, etc. So, if you look at, say, liquid laundry detergent, unit dose, scent boosters sequentially Q3 to Q4, actually, the deal was declined.

Now, went the other way with cat litter. So, cat litter was up 70 basis points sequentially from Q3 to Q4. But if you look at the numbers historically, litter is around 15% sold on deal today. If you went back to 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. It's 33% in Q4 but you'd have to go back again quite a few years. And I think the high water mark was 40% quite a while ago. But then yes, this is quite a while ago so you'd have to say yourself, hey, all suppliers have absorbed these huge cost increases, had to raise price. Is it sensible to think that this is going to be dealt back? So, I think if you look at the trend, you'd say probably not just looking at the trend line. Yeah. Okay. Microphone over here?

[Javier Escalante, Analyst at Evercore ISI]

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?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Yeah. What was the last part of that, the 4% is actually --

[Javier Escalante, Analyst at Evercore ISI]

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%.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

That's one way to think about it, but no -- we wouldn't really comment on what our internal expectations are. But why don't we answer how extendable is HERO and THERABREATH and other?

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Yeah, 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.

[Barry Bruno, Executive Vice President, Chief Marketing Officer and President - Consumer Domestic at Church & Dwight]

Yeah, for sure. Both of them are extendable, there's no question about it, right? Oral care and skin care, two giant categories, depending on how you define them. 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 if, it's when. And we've got an absolute plan about adjacencies to move into for each brand. They're super strong brands. Consumers are asking for more and more from us. It's tempting to go faster. We just want to support them in the right way, especially they're foundation products.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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.

[Barry Bruno, Executive Vice President, Chief Marketing Officer and President - Consumer Domestic at Church & Dwight]

Great.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Okay. I think that might be it. Anybody else that has...?

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Olivia has been waiting.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

Oh, Olivia, so sorry, dead center.

[Olivia Tong, Analyst at Raymond James]

Thank you. I just wanted to ask you Rick about the SG&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 is that -- does that suggest anything in terms of the ones that aren't part of the seven? I imagine that they will change in terms of resourcing. It's just a function of how you're going in, but just wanted to make sure that I clarify that. Thank you.

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Yeah. 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. Yeah. Yeah, dollars are higher, in general. We're getting leverage for two reasons. Really primarily because 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 years 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.

[Matthew T. Farrell, President and Chief Executive Officer at Church & Dwight]

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

[Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations at Church & Dwight]

Thank you.

Participants

Corporate Executives

• Matthew T. Farrell, President and Chief Executive Officer
• Rick Dierker, Executive Vice President, Chief Financial Officer and Head of Business Operations
• Barry Bruno, Executive Vice President, Chief Marketing Officer and President - Consumer Domestic
• Surabhi Pokhriyal, Chief Digital Growth Officer
• Michael Read, Executive Vice President, International
• Carlen Hooker, Executive Vice President, Chief Commercial Officer
• Rick Spann, Executive Vice President, Chief Supply Chain Officer

Analysts

• Steve Powers, Deutsche Bank Aktiengesellschaft
• Dara Mohsenian, Morgan Stanley
• Rupesh Parikh, Oppenheimer Holdings Inc.
• Chris Carey, Wells Fargo & Company
• Andrea Teixeira, JPMorgan Chase & Co.
• Unidentified Participant
• Anna Lizzul, Bank of America Co.
• Kaumil Gajrawala, Jefferies Financial Group Inc.
• Filippo Falorni, Smith Barney Citigroup
• Javier Escalante, Evercore ISI
• Olivia Tong, Raymond James