Church & Dwight Company, Inc.

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

All right. Thanks, Matt. So we're going to go through quite a few things. Evergreen model, how we finished 2022. We're talking about 2023. And we'll also talk about capital allocation and cash flow. So first off, this is how we begin and end most presentations. This is our organic evergreen model. So we start off with 3% of sales. We have gross margin expansion of 25 basis points. We have marketing that's usually flat on a percent of sales, but higher dollars. We leverage SG&A to get to 50 basis points, and then we expand EPS by about 8%. That is our long-term algorithm. So in Q4, what happened? So in Q4, we had a better-than-expected quarter. We were 300 basis points better on reported sales. Half of that was organic, half of that was a little bit of FX, and then the hero acquisition did better than expected. So thumbs up on reported sales growth, thumbs up on organic sales growth. Gross margin was a contraction. That's what we expected. and we've stair-stepped better throughout the entire year in 2022. We expect that to continue in 2023. Adjusted EPS was $0.62 at the high end of our range, and then cash from operations I'll talk about on the full year, but we significantly beat our cash flow projections as well. For the full year, we came in around 3.5% reported sales growth versus 3%, about 1.5% versus 1% on organic, and then gross margin was way down. You heard Matt say 250 million year-over-year inflation was the driver behind that. Adjusted EPS was 297, high end of the range, and then reported EPS was down 49% or $1.68, and that was really the flawless non-cash impairment. And then cash from operations was $885 million versus our outlook of $800 million. And that's really strong cash earnings and improved working capital, primarily inventories were coming down back in line, especially for our discretionary businesses, which was good to see. Okay, moving to 2023. So we try to simplify the outlook. We have the detailed outlook on the next page, but this is a chance just to take a step back and say, how are we doing? Our outlook is zero to 4%. The midpoint is 2% EPS growth. Before we get into the investments on marketing, SG&A, and the impacts below the line, Our core adjusted EPS growth is 10%, double digit. So we're really pleased with how strong the business is performing. We've chosen to make investments in brands and people. And so we're increasing our marketing spend up to 10.5% of sales, and that's about a $30 million investment or a 3% drag on EPS. Incentive comp normalization, we didn't have a very good incentive comp year this year. Back to par is about $30 million or so, and that's another 3% drag. And then interest and taxes is a 2% drag. Here's a detail of the financial outlook. So 5% to 7% reported sales growth. 2% to 4% organic sales growth. That 300 basis point difference is largely the hero acquisition. The detail for organic for the divisions is 2% to 3% for the domestic division, 3% to 5% for international, and SBD at 5% to 6%. Gross margin for the first time in a long time expands by 100 to 120 basis points. That is exciting for us, right? We've had a stair step down over the last few years. This is a road to recovery, and we'll get into the details in a minute. Marketing, that's the investment I talked about. SG&A is higher, and we'll talk through that. Operating margin is flat. And then other expense we're calling out as a drag of $110 million. We're $35 million higher on interest expense next year because of hero debt, and we have some variable debt that has rates going up. Effective tax rate is 23%, and then the EPS growth is 0% to 4%, and cash is strong, up 5% or so to $925 million. Here's a track record of reported sales growth. I don't think we've shown this slide before. We usually just show organic, but we thought we'd show both. So over the last 10 years, we've averaged 6% of reported sales growth. And in 2023, we expect no different, 5% to 7%. Organically, here's the 10-year track record. Our average is around 4%. Our organic model, evergreen model, is 3%. And our range in 2023 is 2% to 4%. Now, one of the most important things about organic sales growth is how do you get it? And I'd say if you look back at the last eight to 10 years, most of our growth is volume growth. If historically our evergreen model was 3%, then we would have 3% volume growth and pretty much flat on pricing. 2022 is a little bit of an aberration, all the pricing that's happening all over the industry because of all the inflation that's happening all over the industry. But you can see in Q3 of 2022, we had really the low point for volume growth. And we have an improvement in Q4. We have further improvement, although negative, in Q1. Further improvement, although negative, in Q2. And then we inflect positively in the back half of 2023 is the expectation. Now moving to gross margin. So 100 and 120 basis points. Why do we believe that we can expand? Inflation is moderating. We still have inflation. It's just moderating. Productivity programs are doing well. Margin accretive acquisition, that's hero. And we're improving our case fill in a big way. So you can see that 41.9 goes to around the midpoint, 43%. And if you look at the track record, 45 is kind of where we were. And so we have room to run over the next few years. And here's the detailed gross margin. This is the bridge. In 2022, we were down 170 basis points, and there was a massive headwind because of inflation. In 2023, we think, yep, we still have inflation, down 240 basis points. But price-volume mix plus productivity offset inflation for the first time in a long time. And then we have help from our acquisition. So that's how we're up 110 basis points year over year. On marketing... So similar story, we have full year marketing support, we have better product supply, we're going to get to 10.5%. If you do the simple math and look at our high watermark back in 2020, it was around 12%. Now remember, we took price these last three years, and we don't raise marketing dollars just because the price of the widget went up. So 12.1, effectively, if you strip out the price increases, is around 10.7%. So between 10.5% and 11% is equivalent to that 12%. So by stair-stepping up to 10.5%, we really feel good about the support we have for the brands. SG&A is higher, and it's higher for a few reasons. Hero has standalone SG&A. That business is off and running, doing a great job. $30 million of normalization for incentive comp and equity. And then number three, I also want to leave this group with our long-term evergreen leverage targets remain in place. We have a stair step up in one year, but the behavior doesn't change going forward. And we've had consistent, strong, adjusted EPS growth, low double or high single-digit growth for a long time as a track record. Last year, we took a step back, down 1.5%, but we're taking a step forward this year in 2023, and we expect that to have further steps forward as we move along. There is a first half, second half story. First half, EPS is expected to be down. Why? Because we had continued choppiness of our discretionary brands. We've kind of telegraphed that last quarter. We said for the next six months or so, we have continued choppiness for those discretionary businesses like Waterpik, Flawless, and even Vitamins as we're lapping Omicron impacts. International supply challenges, return to normal promotional levels, and higher marketing dollars. We have higher marketing spend year over year in the first half than the second half. And then the second half is impacted by improved productivity, improved global supply. We have volume growth. That was that chart I showed you earlier. Moving on to cash flow. Our free cash flow conversion for many, many years has been industry-leading, on average around 120%. And this past year, we're around 97%. Why is that? It's because of the CapEx investment we're making in capacity, laundry, litter, vitamins. And then in 2023, we'll also expect free cash flow conversion to be in the 90s. How do we generate cash? Well, part of it is how we manage working capital. We've gone from 52 days cash conversion cycle all the way down to 19 days. So overall, just extremely happy on how we've leveraged our balance sheet and improved our working capital. We took a stair step up in 2022 because we had elevated levels of inventory, primarily for our discretionary businesses. But as you heard in the Q4 release, we've improved those inventories. We still have more room to go, but we've improved those inventories and And then we have a really strong balance sheet. So we ended the year at 2.1 times in 2022, and we expect to end the year at 1.7 times. So we have plenty of firepower to do an incremental deal or deals. We have enough room to go up to $3.2 billion of a deal and stay and maintain our investment grade rating. Okay, just talking about capital allocation. Number one that we always talk about, TSR, Creative M&A. We want to do the Hero deal. We want to do the TheraBreath deal again and again and again. Those businesses are great. Those are the fast-moving consumer goods that we're focused on that Matt just mentioned. CapEx for organic growth. We'll talk more about that in a minute. MPD, debt reduction, and return of cash to shareholders. So this is the capacity slide. Laundry, litter, baking soda, vitamins all have capacity, projects in place, technology, sustainability. All those things help drive our organic growth. But overall, we're not a capital-intensive company. Look at the long track record for Church & Dwight. We're around 2% of sales. And in 2022, we took a step up to 3.3% as we started in the investment cycle for laundry, litter, and vitamins. In 2023, we'll be around 4, 4.5%. And then in 2024, we expect to step down. And then in 2025, we return to historical levels. That's our expectation. And then finally, our dividend increase. We had a 0% to 4% EPS outlook, and this is the high end of the range. We've been paying a dividend for many, many years, 122 consecutive years. And then finally, I'd like to turn it over to Barry, who's going to talk through MPD and how the U.S. consumer business is doing.

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