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.

Price pinch, give it the hammer. Workload overload, give it the hammer. stuck in the funk give it the hammer hard times no time when times get tough the tough give it the hammer arm and hammer more power to you

So we think right message, right brand, right time. We're going to be launching it to consumers on Monday. So you guys have got a sneak peek here. National TV, digital, all the influence in social media you'd expect on e-retail and through PR. We're excited about the campaign. We think it's going to bring a whole new generation of consumers back into Arm & Hammer. They're going to stick with us after. So thank you for your time. I'm going to turn it over to my partner in crime and the leader of all things digital, Sarabi Pokhriyal.

Thank you, Barry.

You're welcome.

Hi, everyone. So good to see you. Flattered to be here leading digital for Church and Dwight. My name is Surabhi Pokhriyal. So I would say digital acceleration is actually a stated and acted upon priority for us because this is a new section. I'll do a little bit state of the union of what the industry is seeing and then give color on what Church and Dwight is saying. So you will notice here we say 70% of all purchases in the U.S. are going to be digitally influenced by 2027. Just for context, 60% of all sales in 2023 are already digitally influenced. What that means is not just the sales that we do on Amazon, Walmart.com, Target.com, and so on, but sales that are happening in brick and mortar because of how the consumer feels inspired to make a decision in-store using the digital knowledge they have. So when you're walking the Target aisle and looking up a review on some other retailer, that's what we are calling digitally influenced sales. Similarly, the industry also tells us 81% of U.S. consumers are omnichannel shoppers. That is every channel shopper because the consumer doesn't discriminate online or brick and mortar. They just want the right price, the right value, and the right product. And we know from the industry that consumers that shop both online and in-store have a larger basket size. One example on online how the digital shelf changes, this is a GIF image of every hour how our results change and how fungible and how volatile the online digital shelf is. It literally changes by the minute depending on what you're searching and how the results show up. So we aspire to win on those top five to ten results so our brands show up and the consumer needs us. This is one example. We really want to be there where the eyeballs are. So in the last so many years, as we pivot to digital as our choice of channel to communicate with the consumer, be it social, search, programmatic, we want to make those authentic, relatable relationships with the consumers and truly make it more edutainment. So while we are educating them, we are also entertaining them and not really throwing a media creative out explicitly. At the same time, the proverbial marketing funnel has so on flattened because the consumer has the right to go from inspiration, liking a product, considering to buy it, and actually buying it within milliseconds. So you will notice on the right, we're actually doing campaigns where consumer can go be inspired about, say, OxyClean in this case, and go buy it at a retailer of choice, all from within the creative media. And we see millions of clicks happening that way and flattening the marketing funnel. Let's talk some numbers. Back in 2016, about six years back, only 2% of our sales were digital, quote unquote, e-commerce sales. We closed 2022 upwards of 16%. Of course, COVID accelerated this behavior because the consumer chose to buy online when they had no other options. But what we are seeing is... When the consumer learns a new behavior, you cannot take convenience back from them. It becomes a very sticky behavior, and we see sustained post-COVID momentum, and that's how we see digital sales accelerating for us, for all our brands. Saying that we have a digital-first ambition actually means that we are pivoting from digital being a capability builder to digital being a business builder. So we come with a commerce-first mindset. We spend a ton of media in overall marketing, and a large part of that is digital media. We also are very cognizant that digital cannot be a function by itself, and we need to elevate all boats, and which is why we are investing a ton of effort into training and educating, quote-unquote, traditional folks who may not have a digital responsibility and launching educational programs internally. This is a good example of how in-store and online, we want to make sure that we win with the consumer when she is on her way and doing footfalls in the store. At the same time, we want to make sure our content online is truly thumb-stopping so that we win with her in every single channel. So in-store, you want to be at eye level, easily reachable, and have the right adjacency. But online, you want to have the right short-form videos, the product descriptions, and so on. I'll give an example. Online, every keyword is actually an aisle in itself. So you type in litter, that's your endless aisle. You type in dry shampoo, that's your endless aisle. And we want to win in both of those aisles, both in-store and online. Personalization is also a big focus for us. We know that the consumer yearns for a one-to-one kind of connection, and we can no longer serve the same creative to every demographic. So in this example, a fantastic dry shampoo brand, the number one in the US and with the largest market share, we saw a ton of consumer engagement and much high purchase intent when we started doing creative, which is the right media, the right messaging for the right hair type. We also are conscious that digital being such a fast-moving area, we cannot just accelerate what we already do in digital, but also be mindful of what might come at the helm in the future of. On the left, you will see a lot of examples from Douyin, that is TikTok in China, and you have probably seen many examples of how live streaming is a huge thing in China, and we sold, say, 60,000 bottles of Batiste in under five minutes. At the same time, in the Western world, live streaming is a newer concept because it's not meant as much for social commerce as it is meant for social discovery. So we are partnering with a lot of retailers, Walmart, Amazon included, to see how might live streaming be a bigger concept. And we have experimented a decent amount of this. This keeps us at tip of the spear to make sure we do well, not just what we already do well in digital, but find newer avenues to scale. Our current marketing spend of all the monies we spend in media, 70% is via digital channels. That is a big jump from, if you see on the left-hand side, about 2016, 2017, this number was 35%. So large part of the media used to be print, store, and TV, where we just had a few asset types each campaign. And now, like Barry was showing, we have a variety of campaigns, everything from video, OTT, social, influencer, retail media, of course, and audio, that we are able to reach a variety of consumers with dozens of assets per campaign. So we are able to personalize the messaging at the cohort level and get better reach, sufficiency, and, of course, media ROI for that. All this cannot be done without raising the intellectual capital of the most prized asset in our company. That is our people. We are very committed to raising digital IQ of everybody within the organization. And we launched large scale digital commerce certification programs for not just the people who do digital day in and day out, but quote unquote, the traditional or analog marketers so that nobody will be analog anymore. Everybody has to jump on the digital bandwagon. I'll quote Wayne Gretzky quickly here to say, I skate to where the puck is going to be and not where it has been. That's exactly the sentiment we live and breathe in terms of digital acceleration in the company. Be it consumer insights and analytics where we want to listen to the consumer using their ratings and reviews, consumer sentiment on social, and design new product innovation, or get back to them with the right solutions. Be it our acquisitions with digitally savvy brands like Hero and TeraBread, who do a fantastic job at elevating all boats within the company, And having a one commercial team mindset where digital is truly a center of acceleration for Church and Dwight. So with that, I will pass it on to my peer in international that also sees a ton of digital accelerations. So that is my grade.

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

All right, thanks, Mike. Okay, I'm trying to bring it home here. You haven't seen this slide before. I'm going to talk about how we run the company. And this is a snapshot of our consumer business. We have seven SBUs. You see the first six on the left side are the U.S. businesses and an international on the far right. So this is how we break down all the brands that we manage. And we manage dozens of brands, but you see most of the power brands are listed here. You may be wondering why Arm & Hammer appears for fabric care, home care, and personal care. In fabric care, we have an arm and hammer detergent. In home care, we have baking soda and litter. And over in personal care, we have toothpaste and underarm deodorant, et cetera. These are all broken down into very manageable businesses. And over in international, as Mike just described to you, we have a third of the business is the GMG, our export business, and two-thirds is the subsidiaries. Okay, so here are five operating principles which I'm gonna kind of walk through. The first thing is leverage brands. So we focus on brands that consumers love. It's not brands consumers like, it's brands consumers love. They're gonna stick with you and gonna walk out of the store looking for your brand. The second thing is we've been a long time friend of the environment. This company was founded in 1846 and the founders of the company were environmentalists and that's continued to this day. Leverage people I'm going to talk about. We have a wonderful group of people in our company. We have 5,200 employees. We have over $5 billion in sales. We have over $1 million of sales per employee. And leverage assets. Many of you who are long-term holders know that we're focused on being asset-light. And finally... If you do the first four right, you get good returns. But if you're able to make smart acquisitions, integrate them, and grow them, you're going to get great returns. And that's what we have gotten over the years. Okay, leverage brands, I already mentioned that. We have 14 power brands that make up 85% of our sales and profits. Friend of the environment, and we'll go in a little bit deeper on that. So you've probably seen this before. It's a good reminder that if you went back to the 19th century, we were putting trading cards in our boxes of baking soda. And those cards were pictures of birds. And they said, save the birds, save the planet. In 1907, we started using recycled paperboard in our cartons. No one was doing that back then. We were the first to take phosphates out of laundry detergent back in the 70s. And we were the first and only sponsor of the first Earth Day. And 20 years later in 1990, Church and Dwight was still the only corporate sponsor for Earth Day. More recently, we started to plant trees in the Mississippi River Valley to try to offset the carbon dioxide that we put into the air. And if I go all the way to the far right, now we're committed to science-based targets. So when you plant trees, you remember from fifth grade science, you take CO2 out of the atmosphere. In science-based targets, what we're focusing on is spending money on CapEx to reduce the amount of CO2 we put into the atmosphere. All right, so here's some of our goals. So you see, we aim to be 100% carbon neutral by 2025. That means we will have planted enough trees since 2016 to offset all the CO2 we put into the atmosphere. And it's pretty considerable. For a small company like ours, we put 350,000 tons of CO2 into the atmosphere annually. So this is really important to us. You see the mention of science-based targets below there. Water, we're trying to reduce water uses 10% annually. And then solid waste recycling, we'd like to be recycling 75% of the solid waste from all of our sites. Got a lot of recognition about that, the FTSE, EPA, Green Power. Safer Choice Partner, we've been a Safer Choice Partner for the past seven years. And, you know, this is important to our management team. It's important to our employees. It's important to the families of our employees as well. It's also important to our consumers. So you can see it's a top priority for so many consumers today, particularly younger consumers. All right, the fifth principle is leverage people. So we say we have highly productive people in a place where people matter. You know, when you invest in a company, You bet on people and you bet on ideas and their ability to execute those ideas. And I can tell you, we have a really strong management team, but it's not just the management team. It's also the 5,000 people that we have in our company. 3,000 of those people are in supply chain. It's 60% of the company. That is the backbone of Church and Dwight. And when you think about what's the culture in Church and Dwight, any member of our management team could take you through this. It's a blue-collar company. That's not a dress code thing. This is how you will go to work every day. It's a roll-up-your-sleeves environment. We've got a lot of high-aptitude people in the company. Many of them have worked in other large CPG companies, wanted to go smaller where they could make a difference. So it's blue-collar, high-aptitude, underdog. So we compete against companies that are far, far larger than us, and you know who they are. We never use that as an excuse. We beat these big companies every day. The fourth thing is getting the facts. So as a company, we're maniacal about numbers and data. And, you know, once upon a time, people made decisions based on the person who had the gray hairs in the room, the gray beards like me. So, you know, I know best. I've got, you know, 40 years experience. No more. That is not how business is done. Now it's done based on data. And we're oriented towards data. And we have data scientists in the company now. And we're becoming more and more focused on predictive analytics. Just to kind of round it out, digitally savvy is something that's very important to us. That's something we've focused on over the past five or six years. Diversity is the last one. Second to last one, and finally, it's take risks. We want to be risk-takers in the company. The way we illustrate that, we actually have a picture of Johnny Depp from Pirates of the Caribbean that we use when we're talking about this internally and say, hey, this is who we are. So I just want to give you a little bit of background on that. And here's some numbers. Here's all of our competitors, and here's our revenue per employee. And I think this is an underappreciated statistic when it comes to investing. It makes a big difference. When you have fewer people, you get focused on fixing things, making things better, and it's magic. All right, we have a simple compensation structure in the company. Many of you know from following us for many years, it's revenue, gross margin, cash, and EPS. And what that does is it makes the company financially literate. So when we're talking about gross margin, we're talking about gross margin in every part of the company. When I go into a plant, we have 15 plants. We do town halls with all three shifts. We'll talk about gross margin. What is it? How you get it? It's part of our compensation. And then as far as how do you get gross margin, good to great is the name of our productivity program. It's a book that everybody's heard about, probably no one's read, but that's the name we use to describe our productivity program. Supply chain optimization, that's also how do we run our plants, what kind of capital we're putting in our plants. Which plants should we make a product at? New products, if you introduce new products that have higher gross margins, it's going to help you as well. And then finally, acquisition synergies. We like to buy businesses that have gross margins that are at or higher than our current gross margins. All right, leverage assets. Rick took you through this before. We pride ourselves on being asset light, and historically we've been around 2% of sales. It spiked back in 2009 when we built our gigantic plant in York, Pennsylvania. It's spiking more recently because we're investing in so many different categories. But that's a good signal. You don't put in new capacity if you don't think you're going to grow. So we're going to be able to fill that up over the next couple of years. All right, and finally, leverage acquisitions. I mentioned that before. If you do that well, you can turn good returns into great returns. All right, and I just want to repeat the acquisition criteria in case you missed it previously. So we invest in brands that are number one or number two in their category. You're not going to see us invest in a brand that's number four or five and tell you, the investor, oh, we're going to drive that to number one. That's not going to happen. The brands are number one and number two for a reason. So that's what we focus on. They need to be high growth, high margin, and fast-moving consumables. Asset light is our preference. We want to be able to leverage our substantial footprint around the world. And again, it needs to have a long-term competitive advantage. So with respect to cash, we have 14 brands today. We have like 20 tomorrow. I just want to kind of end on the look ahead. So you saw in the release, we said, hey, we've got strong fundamentals going into 2023. We got top line strength, both reported and organic. We've got gross margin expansion. We've got a terrific new product pipeline. You only heard about one today, but there are many others as well. We're jacking the investment in advertising. That's going to help us not only in 23, but in future years. Rick took you through the capacity expansion. And finally, we generated lots of cash. And so we're on the hunt for our next power brand. And with that, I'm going to bring up the rest of the management team, and we'll do some Q&A, play Stump the Band for a little while. All right. Come on up, gang. It's a good-looking group, huh? I don't know about that. All right. Okay. All right. All right, Kevin, I'm going to call on you first.

There's a microphone coming right behind you.

No, we want to get you a mic.

Great. Kevin Grundy at Jefferies. So thank you for the presentation. A question for the group, Matt, certainly start with you. So last year, certainly probably one of the more challenging, if not the most challenging year that the company has dealt with, the macroenvironment. Economic environment, excuse me, certainly a challenge, but it was for your competition as well. So as you kind of do a postmortem on the year and you kind of think about supply chain, you think about your portfolio, you think about your relationships with retailers, what are sort of like the biggest learnings, would you say, operationally for the company? And then looking forward, what's the message for the investment community that there should still be a lot of confidence in the evergreen target?

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

Thanks for taking my question. So just on pricing, you know, I guess looking forward to this year, is there any pricing, new pricing incorporated in your guidance for this year? And as you look at elasticity, how do they play out versus expectations? Have they gone back to where you historically have been, or are they still better than history?

Was the second question price gaps?

Elasticity is the second question. Elasticity is how they compare versus your expectations and versus history.

Yeah, well, we'll do it the elasticities first. And elasticities have been surprisingly good over the past year. So and I think you probably heard that from all of our CPG competitors. The first part of your question was. Yeah, well, to start off, and he's going to have a little bit of a chance to think of a better answer, but my answer would be the following. We already have pricing in place that's going to be in the marketplace in February and March, but it was sold in already. So we don't have anything ahead of us with respect to, hey, we've got pricing planned in the second half or fourth quarter, because it's becoming exceedingly more difficult in order to push price through. Take it away.

That was a great answer. The organic outlook for us is 3%. It's price in 2023, and volumes are flattish. We had that in the release, and that's really because we had carryover price from 2022, and then there's additional price that's already been sold in, like you said, that's effective in February. So that's really the preponderance of the 3% organic growth next year.

Okay.

Yeah, Lauren. Yeah.

Thanks. In the release this morning and then also in the presentation today, there was a notable absence of discussion around the VMS business. So I thought it'd be great to just get an update on where things stand from an internal standpoint, supply, raw material availability, and also from a consumer demand standpoint. You've had early cough and flu, a cold and flu. So where do we stand on normalizing demand or what you think that will look like?

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

Yeah, Lauren, I think we see the category as struggling as we're comping Omicron, and it's a discretionary category, right? When you're making a decision about $15, $20 vitamins, and as you saw in my Give It the Hammer campaign, your regular grocery bill is up $400. Consumers are stepping back from the category. So good news. Our supply rates are improving. Category is declining slightly. We're waiting to see what happens now as we get past the Omicron comp, how it looks. But we're going to be in a position to meet consumer demand as we get into the back half of Q1 here.

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

Yeah, what we said on the release is we had three categories that really hurt us last year, three brands. It's got Waterpik, Floss, and Vitamins. And we said three of those together, we expected modest growth in the aggregate in 2023, but it's not going to be pulling the train.

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

Olivia, you had your hand up before.

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

Okay, Rick, do you trust me to handle this one?

You want me to handle that? No, no, I'll let you go. To give you time to think. You know, gross margin is, like we said, stair-step up through the year. You know, part of that is the mix headwind in the front part of the year that we just experienced in the back half of this year because of the discretionary businesses. Like Wallace, Waterpik Vitamins typically have good gross margins. Another part of it is as our fill rates recover. I think you saw a slide that Barry had up there showing 93% fill rates in the first half, 97% fill rates in the back half. So as you have fewer truckloads, as you have fewer fines from retailers, all those things help gross margin as your supply improves. SG&A, we haven't really gotten to the quarterly SG&A. SG&A is higher in Q1, and part of that we put in the release was just timing of equity grants as well.

Okay. Thanks, Mark Astrakhan. That's Stiefel. Two related questions. So one, M&A was just a stronger contributor, I think, than many expected in the fourth quarter. What drove that? And then how do we think about the contribution from M&A for 23 relative to what you had said about HERO?

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

And just to give you a couple numbers, we'll end the year for Hero in 2022 around $180 million. We said when we bought it, it would be a 15% grower in 2023. You roll that forward, then that means it's about 3%, and you're going to take the Q4 of 2022 out of the comp. But it's about a 3% tailwind for 2023.

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

Well, we're investing more marketing, and I'll let Barry talk to you a little bit. But we are, as we expand distribution, we're going to spend more marketing for national campaigns, right? So it is a virtuous cycle for Hero.

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

Okay. Jonathan, right here.

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

Yeah, well, I'm sure you know the way it works is in order to raise price, you have to have a cost story. And without the cost story, you don't get the price. And the retailers have all the data about what's going on in the marketplace with respect to commodities, transportation, et cetera. So it is a negotiation about, hey, this is what we're seeing on the cost side. We need this price increase. And then there's a debate. And Paul lives this every day. Give Paul the mic and he can share it a little bit with you. But, yeah, that is it around the world with all the retailers. You can only go as far as you can justify with cost.

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

Hi, thank you. Anna Lizell with Bank of America. I was wondering if we could go back to the conversation around marketing investment. I'm just wondering if you can talk a little bit more about how you're planning to allocate this increased investment between your legacy brands and maybe some of the more recent acquisitions. And then just in terms of acquisitions, how are you thinking about maybe the personal care side versus discretionary? just given the success of some of your more recent acquisitions like Hero versus some which maybe have been less successful in the past?

I'll let Barry comment on the marketing. With respect to acquisitions, we only have one person in our entire acquisition M&A department, which is very Church and Dwight-like. So we don't have a dozen people that are studying categories saying, wouldn't it be wonderful to be in this category? Yeah, it might be, but you can only buy what's for sale. So anything that's for sale, particularly in the U.S., that's consumer products, we are aware of. And you know what our acquisition criteria is as well. And even in the last six months, there's three acquisitions that we passed on that had good economics, but we didn't think they had good long-term potential for the company. But because we're able to make so many different products, we're in so many different categories. You know, we can put liquid in a bottle. We can put powder in a bottle. in a in a box we put anything in a tube we know how to make lots of things so it consequently we can throw a pretty wide net as far as things that we we might be able to take on as a company um but i'll i'll dish it over to to uh sure yeah we've got a lot of brands in our portfolio right but we've got a classic brand classification approach we take and it won't surprise you there's seed and there's grow and they're sustained in milk

80% of the incremental dollars that we're putting in is going against those seed and grow brands. It won't surprise you if I say a seed brand is a hero, is a thoroughbreath where we're pouring kind of gasoline, or maybe seed is better, say pouring water on them. Maybe gasoline is a bad example. But that's where the spend is going, right? We make hard choices about it. We'd always like to spend more, but those in our brand classification, we know where we want to put those dollars, and that's how we allocate it. So I won't get into those specific brands here, but that's how we approach it. When you've got 14 power brands, you've got to make hard choices, but we know where to put those dollars to work, we think, and Hero is certainly one of them.

Okay. Okay, let's move to another table.

Thank you guys. Some of your competitors have talked about retailers reducing their inventory levels. I wonder if you guys have seen any impact in your business and particularly what categories you've seen most of the impact?

Yeah, okay. Well, Barry and Paul deal with this every day. But I can tell you that in the fourth quarter, we had a major e-retailer significantly reduce the remunerations and their days of supply. So that was a hit with respect to the fourth quarter. We did see a lot of that pullback happen mid-year in 2022. But more recently, it was more e-tailers. But I'll let Paul and Barry comment on that. Take it away.

Yeah, by and large, we're back to a ship-to-consumption model. I'd say the retailers, some may have their other challenges within their own network. They want to ship more product, but they may have constraints at their DCs or getting it out of their own DCs to their stores. But by and large, it's a ship-to-consumption. You guys are in stores across the country. You see what I see. We need more inventory on the shelves. It's just a matter of catching up. But I do not feel like what Matt described last year. is anywhere near, more at the other side of that bookshelf that we want to get back. They want to get back. It's just getting that product through their warehouse and through their network, but very small.

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

Okay, let's get a mic over here.

Thanks, Chris Kerry, Wells Fargo. So from a ship to consumption standpoint, you know, we've continued to see scanner trends, which are a lot stronger than your underlying results. Right. So even this quarter, there might have been a 10 point gap between what you did and personal care delivery versus what we can see in scanner. And so are we starting to get to the point where. you know, non-e-tailer, so large e-retailer, that is going to remain noisy. But are you getting back to a shift to consumption in your core, you know, brick and mortar retailers? Because again, you know, we're seeing stronger results in personal care consumption than what you're actually reporting, right? And it's making it a lot harder to actually call quarters and understand what the underlying trend here is, right? So if you're back to shift to consumption, that would seem to be a positive development. But I guess what I'm hearing is actually that inventory will remain volatile in the front half of the year. So I'm just trying to square this.

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

Yeah, I was going to answer. If you had punted to me first, I would have said the syndicated piece does matter, right? A lot of the personal care brands and what those retailers are, what you can see versus what we see. And that's not an excuse. That's just kind of where the business is, and some of those just aren't tracked the way that you guys are seeing it in the system.

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

Yeah, let me give you some help with sold-on deal for the categories that generally have lots of promotion and then Rick or Barry or Paul can try them in. So if you look at the liquid laundry detergent, Q2 versus Q4, you'd see that the sold-on deal was 31% in Q2. It's 33% in Q4 for liquid laundry detergent. If you look at unit dose, it was 28% sold-on deal. in Q2, and it's 33% in Q4. So it's 500 basis points move. And then the other category that's a lot of promotion in is litter. So litter was 11.5% sold on deal in Q2, and it's 14% in Q4. So you've seen a move up. Now, historically, liquid laundry detergent is kind of mid-30s sold on deal. Litter, however, is still low. It's typically high teens. So things have heated up a little bit in the last couple of quarters, but it hasn't gone to the point where it's a rocket ship or it's a big spike. It's sort of gradual. And as we look ahead to 2023, I would say our sold-on deal will probably be similar to what we did in Q4 evenly throughout the year. So if anybody wants to chime in, you can.

I would also say year-over-year, yeah, it's a drag because we're lapping a period where we didn't really have as much promotion. Fill levels were low. And so now as we get back to normal levels of promotion, is it a year-over-year drag? Yes. Is it offset? Is it off base from what our historical levels have been? No.

But supply allows us to get back to advertising and trade that are at normative levels, I would say. Right. We're not we're not wildly off where we've been historically, but that allowed us to in Q4 get back to normative levels. OK.

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

I'll take a second shot at M&A and I think that some of what was in the earlier question was if perhaps you're thinking about discretionary differently in the context of future M&A it does feel like when you think about something like Zycam where you bought a cold remedy company at a time where nobody was getting a cold it also sounds like a lot of discretionary assets that you might be looking at are also equivalently struggling forgetting about what's in your business right now so Can you maybe just talk about how you're thinking about M&A is discretionary still on the table, or has this recent experience maybe changed your mind about discretionary as part of your business?

Yeah, well, let's go back to Zycam for a minute. We bought Zycam. That's a brand that had very strong brand equity, and we knew we were buying it in the middle of COVID. We thought long-term this is a business that had opportunity to grow, and the opportunity with respect to Zycam is similar to a brand like Emergen-C. which is not episodic now, and it's sort of an everyday brand that many consumers use. That's the opportunity for Zycam long-term. It's converted. It also is having Zycam in a gummy form. You've got to keep in mind we're in supplements with VitaFusion, so it made a lot of sense for us to add on to that a Zycam. So just to give a little bit of context. Now, as far as discretionary versus non-discretionary, yeah, a recent experience does influence our attitude going forward. And certainly, if you're going to buy a discretionary brand, the question is going to be how resilient it's going to be to downturns in the marketplace. Because obviously, certainly with respect to Vitamins, Flawless, and Waterpik, the economy did affect the performance of those brands over the past year or so. It does influence that. It doesn't mean that it's hard and fast. We're going to put an X through them. But I will tell you that devices you can put an X through going forward. Thanks. Okay, Steve.

Yeah. So Steve Powers from Deutsche Bank. So I wanted to go back to pricing. Two-part question. The first one is just pricing in the quarter relative to what we're seeing in scan data. Pricing came in light. So I don't know how much of that is the promotion, how much of that is some of the mix that we don't see, but just you can bridge that gap would be helpful. And then as you go forward, for as much pricing as you have taken and are taking, your pricing net of cost inflation still has not cut up. and it's not expected to catch up in your gross margin bridge. All your gross margin is productivity and fill rates and mix, which is great. A lot more emphasis on volume resumption in your messaging and value. So just philosophically how you're thinking about that. And, you know, I guess a little bit to John Feeney's question about just why not price a bit more if the elasticity is favorable to close that price versus cost inflation gap.

Yeah, I'm starting to audition to Rick. So as far as the fourth quarter goes, certainly mix had an impact, as we talked about earlier with respect to Waterpik and Vitamins and Flawless year over year. Promotions, which I went through also since that's kind of been heating up Q2, 3, 4. It's gradual, but it still had an impact in the fourth quarter. But I would say the two factors would be mix number one. And number two was heat up and sold on deal, as far as the trend with respect to price mix.

Yeah, and as for 2023, if you look at the components in the gross margin bridge, they're all squished together. But I'll tell you, by the end of 2023, we do think that we've priced the dollars on inflation. What you're seeing there is a negative mix, again, from the first half of the year on the flawless water pick and vitamin businesses. We talked last quarter as an example of And Waterpik units were flattish to down slightly, but everyone was trading down to lower-priced units. That's where it shows up on the gross margin bridge as a headwind. But overall, we feel really good about our pricing and what we've done. And if you remember, rewind the clock a little bit, we were the first to go out with laundry pricing. We're not the leader in that category. We were the first to go out in litter pricing because we knew it wasn't – if, but just when. And so we had the call story, we had the justification, and we moved. And so we feel really good about our pricing. It's a core competency in the company now. I would say about seven years ago, we started a pricing department, and we have people that all they do every day is look at pricing, where we should be and what we should do. And so we have all these plans in place, and we've had successful selling at retail because we have transparency and we have the facts to back it up.

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

Thank you. Just Andrea Teixeira from JP Morgan. Just to squeeze in to Steve's question on the pricing and also the volume side, I guess you had a big impact on the fourth quarter and the full year, 4% for those 20% of your businesses that were down. So I'm thinking, as we're thinking to the first half of this year, right, you're calling for a decline in volumes. Is that mostly on that or you're adding on a bit of elasticity in the first half of the year? It seems as if it's the opposite, like the existing, the other 80% is going to grow volumes, right?

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

Thank you.

Okay, things are calming down. All right. We've got a mic on this side of the room. Okay. Okay.

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

Thanks. Yeah, that's a great question. You know, number one priority in the company is always to grow our brands, right? Have brands consumers love, grow share over time in good categories. The number two priority is probably gross margin. Gross margin expansion leads to EBITDA expansion, leads to cash flow, right? We're known for cash flow generation. And I would say, you know, two things really help give us confidence over the next few years. If you look back at our history, we normally have about 50 million of inflation. We haven't had 50 million inflation, it feels like, for a decade. It's only been three or four years, but it feels like so long. You know, 290 million of inflation in 2021, 250 million in 2022. We're calling 125 million in 2023. That is not normal, right? And we're going to return to the days of normalized inflation. And meanwhile... Our productivity program is alive and well, even stronger than it's ever been. So as that you saw in the bridge, I think that was closer to 100-plus basis points. We target closer to 2% on productivity. So if that equation normalizes, I think that's a great way we're going to have gross margin expansion. And then number two, as our businesses like TheraBreath and like Hero are continue to grow and expand globally, that's going to be a great tailwind too.

Yeah, just some math. I think our gross margin just a few years back, pre-COVID, was around 45%. It's 41.9% in 2022. We're calling 100, 120 basis points improvements. So pick the midpoints. They go 41.9%, 43%. in 2023. And then I'll dish it over to Rick Spahn for a minute. By the way, Matt Duffy is here today. He's one of the people that drives our Good to Great program. And we target 2% of sales for cost savings annually. It's $100 million. That's a big number. It's a huge effort to make that happen. But that's what Rick's referring to. If we're able to sustain that going forward, it's any kind of help from commodities and input costs, we'll be able to return to expanding gross margin in the future. But Rick, anything to add about the target-rich environment? You've all seen Top Gun, right?

Sure. You know, four years ago, we made a conscious effort to increase our focus on our good to great program, our productivity program. We brought Matt Duffy in, who's in the room, as Matt said, to lead the program. And it was a push in the beginning. We couldn't get a lot of traction in the company. It's now part of our culture. We have marketing leaders asking us what else we can do to drive cost savings. We have the R&D community focusing on it. We've created a value engineering team whose sole focus is to break down our products and figure out more effective ways to go to market with those products from a cost standpoint. So it really is part of the culture now, and it's driving much bigger savings than it was four years ago.

As far as call-outs go, I neglected to point out that our entire M&A department is actually here on the stage. That's Brian Buecher.

Our whole department.

So if you want to talk to him after class, please do. All right. Any other questions in the room? I guess that concludes it today. I was so happy we were able to do this in person this year. I look forward to seeing everybody next year. Thank you.

All right.

to see beyond this predetermined me empty hallways calendars lost behind beds too warm to leave but I know like the sun I gotta rise eventually couldn't ever be my sunrise sunrise you're just a setting sun I pray you would pass me by you're only looking for a good time Bye. Bye.