Church & Dwight Company, Inc.

Good morning, ladies and gentlemen, and welcome to Church and Dwight's Third Quarter 2023 Earnings Conference Call. Before we begin, I have been asked to remind you that on this call, the company's management may make forward-looking statements regarding, among other things, the company's financial objectives and forecasts. These statements are subject to risk sentence guarantees and other factors that are described in details in the company's SEC filings. I would now like to introduce your host for today's call, Mr. Matt Mr. Matt Farrell, President and Chief Executive Officer of Church and Dwight. Please go ahead, sir.

Thank you, operator. Good morning, everybody. And thanks for joining us today. I'll begin with a review of Q3 results, and I'll turn the call over to Rick Durker, our CFO. When Rick is wrapped up, we'll open a call up for questions. So let's begin. Q3 is the fourth consecutive quarter of solid results beginning with Q4 2022. Reported revenue was up 10.5%, which exceeded our 8% outlook. Organic revenue grew 4.8%, also exceeding our 4% outlook. It's worthy of note that our global consumer business posted 5.8% organic growth, which exceeded our expectations. Going the other way, our SBD business accounted for one point of negative growth. Gross margin expanded 270 basis points. and marketing as a percentage of sales increased 80 basis points to 11.5% of sales. Adjusted EPS was 74 cents, which is eight cents higher than our 66 cent EPS outlook. And that result was driven by higher than expected sales growth and the gross margin expansion. It's important to call out the 2.7% positive volume growth in Q3. It's the first and eight quarters And our expectation is that positive volume growth will continue in Q4 to finish out the year. But we continue to grow in the online class of trade. 17% of our global sales were purchased online in Q3, compared to 16% in the year-ago quarter. Just a few comments on the economy. Unemployment remains low in the US and in most of our major international markets. Unemployment is a stat that we closely watch regarding the health of the consumer. Household balance sheets are more stretched as savings are lower and credit card debt is higher. Student loan repayments are restarting. Mortgages and auto loans are more costly. Why? Because of higher interest rates. And higher oil may lead to higher gasoline prices. So a higher cost environment leads to trade down as consumers look for the best value, especially in our household categories. And we are well positioned for this trade down given that 40% of our portfolio is value products. Now I'm going to comment on each business. First up is the U.S. The U.S. consumer business posted strong 5.5% organic sales growth, of which 3.6% was volume driven. Seven of our 14 power brands held or gained market share in the quarter. And for context, the brands that grew share represent 65% of our U.S. sales. Private label is another stat that we closely watch. The good news here is the weighted average private label market share in our categories is stable. Now I want to look at a few of the more important categories in the U.S., starting with laundry. Arm & Hammer Liquid Laundry continues to see consumption growth driven, in part, by the continued trade-down to value brands and by media support behind our new Give It the Hammer advertising campaign, which celebrates the great value that Arm & Hammer offers in tough economic times. Arm & Hammer Liquid Laundry Detergent held share in the quarter as the category grew 5%. We're now at 14.3% share and extra, our extreme value offering, grew consumption 6.1% and increased market share to 3.8%. Regarding new products, we launched a new unit dose form of detergent, Arm & Hammer Power Sheets Laundry Detergent. As the first laundry detergent sheet from a major brand in the U.S., PowerSheets is a convenient new unit-dose form of detergent that delivers an entirely new laundry experience. It is mess-free, it's lightweight, and eliminates plastic bottle waste while delivering the trusted Arm & Hammer powerful cleaning performance that consumers have come to rely on and love. We launched the product online in August. In September, PowerSheets was the number one laundry detergent item during Amazon's September Prime Day event. So we're off to a great start with this innovation, which will roll out even more broadly in 2024. Now litter. Arm & Hammer litter also continues to perform extremely well, with 11% growth outpacing the category, which was up 8%, and growing share to almost 25%. Consumers continue to choose Arm & Hammer litter offerings. We have steady demand for our premium litter offering, which is a black box. but our orange box in particular is driving the growth as it offers a great value for the cost-constrained cat owner. Our new Arm & Hammer Hardball Lightweight Clumping Litter is off to a solid start as distribution expands in the lightweight segment where we are underrepresented today. Turning out of personal care, Batiste grew consumption 14% in the quarter as we continue to build dry shampoo awareness and drive household penetration. The dry shampoo category and Batiste have room to run as we continue to invest to build awareness and drive trial, especially through sampling. Hero, which was acquired last October, captured the number one market share position in the total acne treatment category. In the acne patch subcategory, Mighty Patch is over 50% share. Retail distribution continues to grow and we still have room to run as we expand across all classes of trade. The Hero team is doing a spectacular job growing this business. There continues to be a great deal of buzz here at Church & Dwight around the Hero brand and its future growth potential. Similarly, TheraBreath, which was acquired in 2021, is performing extremely well and has been gaining share at a rapid pace. In Q3, TheraBreath took over the number one share position in the non-alcohol segment with almost a 29% share. Distribution of Thoroughbreath has more than doubled since the acquisition date, and we expect this brand to be a long-term grower for Church and Dwight. Regarding a couple of businesses that depressed our results last year, Waterpik continues to stabilize with Q3 coming in close to plan, similar to Q2. Waterpik all-channel consumption actually was up slightly in Q3. Turning to gummy vitamins, while VitaFusion was close to our expectations in the first half, our consumption was down 11% in Q3, partly due to distribution losses at many retailers due to our supply issues in 2022. And our job now is to win back retailer confidence and then regain lapsed consumers. Next up is international. Our international team is doing a great job delivering organic sales growth of 7.3% in Q3. driven by broad-based growth in most of our subsidiaries and our global markets group. Volume contributed 2.3% of the growth, and this was led by Sterimar Nasal Hygiene and OxyClean. Both Sterimar and HERA are gaining distribution across our international markets, and we expect more to follow. And finally, specialty products. Organic sales decreased 10%, but this is largely due to one product line called Megalact, which is being hurt by inexpensive imports. Excluding Megalac, the remainder of SBD delivered positive growth of 2%. I'm going to wrap up by saying we just closed out a strong October, and we expect positive volume growth for a second consecutive quarter in Q4. We raised our reported sales outlook to reflect the strength of consumer demand for our products while maintaining our full-year EPS outlook. Now, when we are performing well going into the fourth quarter, it's an opportunity to invest in the business. This is a long-standing practice of reinvestment at Church and Dwight and is well understood by our long-term shareholders. We take a long view with respect to the health of the business. Our business model is working. Our value offerings are performing well, as are our premium offerings. Innovative new products are contributing to our growth. And we have one of our best new product lineups coming in 2024. Acquisitions are on track and significant cash generation positions us to continue to add TSR accretive brands to our portfolio. And now I'm going to turn it over to Rick to give you some color on Q3 and the full year and the investments we'll be making in Q4.

All right. Thank you, Matt. And good morning, everybody. We'll start with EPS. Third quarter adjusted EPS was at 74 cents down 2.6% to the prior year. As Matt mentioned, the 74 cents was better than our 66 cents outlook, primarily due to higher than expected sales growth and gross margin expansion. Net sales were up 10.5% and organic sales were up 4.8%. Over half of organic growth in the quarter was driven by volume. The total consumer business was up 5.8% organically. Our third quarter gross margin was 44.4%, a 270 basis point increase from a year ago, primarily due to improved pricing, volume, productivity, and the impact of the hero acquisition, net at the impact of higher manufacturing costs. Let me walk you through the Q3 bridge. Gross margin was made up of the following, positive 140 basis points impact from price volume mix, positive 120 basis points from acquisitions, and a positive 160 basis point impact from productivity, partially offset by a drag of 150 basis points due to inflation. Moving to marketing, marketing was $27 million up year over year. Marketing expense as a percentage of sales was 11.5% or 80 basis points higher than Q3 of last year. For SG&A, Q3 adjusted SG&A increased 310 basis points year-over-year, primarily due to higher incentive comp, improved business performance, SG&A related to the HERO acquisition, and investment spending. Other expense all in was $21.8 million, a $2.4 million increase due to higher average interest rates. For the full year, we now expect other expense of approximately $95 million. For income tax, our effective rate for the quarter was 24.1% compared to 20.2% in 2022, an increase of 390 basis points as the prior year rate included the benefit of a non-recurring state tax reduction. We continue to expect the full year rate to be approximately 22%. And now to cash. For the first nine months of 2023, cash from operating activities was $795 million. an increase of $261 million due to higher cash earnings, including the positive impact from recent acquisitions and improvements in working capital. Turning to the full year outlook, we now expect the full year 2023 reported sales growth to be approximately 9%, up from our previous outlook of 8%. We continue to expect organic sales growth to be approximately 5%. We now expect full year reported gross margin to expand 210 basis points, up from 200 basis points, This is an encouraging trend as we continue to move closer to restoring gross margins to pre-COVID levels. We continue to expect a double-digit percentage increase in gross profit until the year 2023. Looking at inflation, we continue to expect around $120 million of higher manufacturing costs in 2023. This is well below what we have experienced the last couple of years. While many commodity prices remain below prior year levels, resins and oil-based commodities are a bit higher. We continue to expect full-year marketing as a percent of sales to be 11%, and we continue to expect full-year SG&A to be higher in both dollars and as a percent of sales compared to 2022. SG&A is expected to be higher than our previous outlook driven by incremental R&D investments, higher incentive compensation given our strong performance, and a bad debt reserve related to one specific customer situation. As in past years, when we have strong business performance, we invest for the future, Our investments will focus on driving future growth with higher marketing dollar investment, R&D investment, including clinical studies, and accelerating product registrations in international markets, as well as driving efficiency, including investments in automation and technology. We continue to expect full-year adjusted EPS growth to be approximately 6%. And as a reminder, our EPS guidance includes the step-up of marketing that we've been talking about and higher SG&A. We continue to expect full-year cash flow from operations to be approximately $1 billion. Our full-year CapEx plan is now expected to be approximately $230 million as we continue to make capacity investments. And we expect to return to historical levels of CapEx about 2% of sales by 2025. Moving on to Q4, we have a strong outlook and expect reported sales growth of 5% and approximately 4% for organic, with volume contributing 1% or better. Organic growth rate in Q4 reflects positives from hero, litter, and thoroughbreath, and negatives from not repeating some low-margin laundry promotions. We expect gross margin expansion, a significant increase year-over-year in both marketing and SG&A, and marketing is expected to be in excess of 14% in Q4. Adjusted EPS is expected to be 63 cents per share, a 2% increase from last year. So to summarize, a strong nine months of the year behind us, we saw the inflection point of volume growth as expected, and we are spending on marketing and investments to build momentum for 2024 and beyond. And with that, Matt and I would be happy to take questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Rupesh Parikh from Oppenheimer. Please go ahead.

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

Yeah, it's going to be, Rupesh, it's going to be a drag in Q4. So when Rick calls a 4% number for organic for Q4, that's net of SBD, which kind of reduces the contribution from the consumer business. So, yeah, at least one more quarter where we're going to be down maybe in Q1 as well.

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

Great. That's a good segue to my next question. So organic sales growth was maintained for the full year. So it sounds like those lower-margin laundry promotions is what may have limited that organic sales growth increase for the full year. Is that correct, or is there anything else weighing on the lack of organic sales growth?

That's true. Last year in the fourth quarter, looking back now, we had a lot of promotions that we thought were not profitable, so we culled them. They're not going to be in place for this fourth quarter, which obviously results in lower volume.

Great. Maybe just to follow up, just to relate to that, is there a way to quantify the impact of the lack of running those promotions?

Easier to do that when the quarter's over than do it right now. Now it's more conjecture. But it is a drag.

Okay, great. Thank you. I'll pass it along.

Yeah. Thanks, Rupesh.

Thank you. The next question comes from Bill Chappelle from Turbo Securities. Please go ahead.

Thanks. Good morning.

Bill.

Can you talk a little bit about kind of where we are for both HERO and TheraBreft in terms of as we're moving into next year, trying to understand The distribution, is it where you expect to be, or do we have tougher comps for both of those businesses in terms of growth in year two?

Remember, in year one, let's say it's 2023, when we were gaining distribution was throughout the year, so we'll have full year benefit of all the distribution gains in 2024 versus 23. So that's a positive. So naturally, the comps are more difficult once you've got it in place, but the demand for the product is surprising us. In fact, the demand has been exceptional wherever we've launched it. The second thing is we'll be launching Hero in dozens of countries next year through our global markets group. And that will happen throughout the year, so that's not a Jan 1 thing, but I see a lot of opportunity there as well. Now, TheraBreath, you know, TheraBreath was acquired in December of 2021, and they had far more distribution already than Hero did when we acquired TheraBreath. We did expand that in 2022, but I'd say 2023 versus 2022, there's less benefit from distribution gains in comparison to Hero. What's happening is because the demand for TheraBreath and the consumer is voting in favor of TheraBreath, What's happening is retailers are willing to give us more shelf space, and we fully expect to get more shelf space when the resets happen in 2024.

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

Got it. And then, Segi, just kind of trying to understand the spin or the accelerated spin. in 4Q to kind of keep your EPS guidance in check. Is that more SG&A? Because it does sound like you'll have some, your benefit on gross margin by just pulling back on some of the promotions. Or is there a, will it hit SG&A and gross profit in terms of kind of how you're trying to reinvest in business to keep things going in 24?

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

Great. Thanks.

Okay, Bill.

Thank you. The next question comes from Chris Carey at Wells Fargo Charities. Please go ahead.

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

These are promotions that happen in Q4-22 that didn't happen in Q3 or Q2-22. So it was isolated to Q4 last year. And the decision to pull back on those is because we can. And besides, as I said earlier, there weren't the best paybacks. So we said, you know, this is a good time not to repeat them.

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

Well, Chris, we feel great about the business. You see the kind of numbers we just posted in Q3, and the gigantic number, 5.8% organic growth for the consumer business. And then when thinking about Q4, we got another 4% organic growth, and that's got a drag from SPD as well. And we expect a second consecutive quarter of volume growth. We hope to start stringing these together. We're going to have volume growth each quarter for the next four or five quarters. Gross margin, you're right. As Rick said, if we hit the number that's in the box right now, we'll be 150 basis points short of our high watermark for gross margin, which was 45.5 back in 2019. We would expect to get more of that back next year. Not all of it, of course, but we expect gross margin expansion. One of the good things about this year is we came all the way back with marketing as percentage of sales. Last year, we were at 10%. We started the year saying, hey, let's try to get to 10.5%, and then we're all the way to 11%. That's behind us now. The other thing I said was we have one of our best new product pipelines coming in 2024, and it's pretty broad-based, so There's a lot of things we feel real great about, and so we're very confident in the strength of the business.

Okay. Thank you.

Thank you. The next question comes from Steve Powers from Deutsche Bank.

Please go ahead.

Great. Good morning. Thank you. A question first is on the fourth quarter guidance. There's two questions, actually. The first one, maybe my numbers are off, but it feels like, you know, you kind of need to do 64 or even 65 cents in the fourth quarter to get to 315, based on what you've done the first nine months. Just want to see if I'm missing something in that math. And then, as we're talking about that, Rick, you know, just the gross margin, I think it implies about a couple hundred basis points of gross margin expansion. I don't know if you're able to kind of preview how you think the bridge between price and volume and productivity and inflation will kind of balance out in that 200 basis point.

Yeah, no problem on the first one, Steve, but if you could repeat the second one, it would be healthier.

Sorry, I think it's about 200 basis points of gross margin expansion implied in the fourth quarter. Just how do you think that's going to kind of shake out between the benefits of price and volume versus productivity offset by the lingering inflation?

Yeah, got it. Okay, well, the first one is on EPS. You know, we've, if you take a big step back, we've looked at, we typically repurchased shares on a annual basis to offset share creep. We didn't do that this year. We may get ahead of that in 2023 for 2024. So that That and rounding will probably get you most of the way to the difference on your EPS for Q4. The second thing on your gross margin bridge questions, I would say, of course, the price component, the price volume mix component, the gross margin bridge comes down a little bit more in Q4, the price piece. But the volume and mix piece are going to go up because we used to have acquisition by itself, which was hero and that gets blended into kind of the mix of the portfolio um so i would probably say in q4 a big uh a big tailwind from price volume mix um a little bit lower productivity just because it's timing and those projects are choppy and then of course uh we go backwards a little bit on on manufacturing costs and inflation uh year over year so those are kind of the the three pieces to the the main three pieces of the gross margin bridge okay that's perfect

And if I could, I guess this is more of a philosophical question. So if we go back to 2021 and coming into 22, the original expectation was that evergreen was on the table. It didn't play out that way, obviously. But if you think about that, if we had grown evergreen in 22 and 23, we'd be looking at know three dollars and fifty cents thereabouts of earnings in 23 not 315. so i guess the question is you know as we look forward is are you guys approaching the future trying to claw back that 35 cents uh over time or you know have we sort of written off 22 and we're we're kind of philosophically running you know evergreen from here well steve i mean i think everybody

Any public company with a question like that is going to say, hey, 2020-2022 was the last year of a three-year COVID event. In 2023, there were three things that hit us. It was Waterpik and vitamins, you know, post-COVID, and then Flawless. So the business then gets to re-baseline, Waterpik, vitamins, and Flawless in 2023, and then we kind of grow from there. So I think that's the simplest way to think about it. There were three isolated incidents that affected us in 2022. We've got our eyes open about that. Those businesses, vitamin is certainly stabilized. Pardon me, Waterpik is stabilized. Vitamins is still declining, but we have a path back to stabilize that business next year.

Appreciate it. Thank you very much.

Thank you. The next question comes from Dara Mohsenian from Morgan Stanley. Please go ahead.

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

Yeah, well, it's kind of a simple problem that we weren't able to supply in 2022. Uh, so we got punished by retailers in 2023, uh, losing shelf space, a little interest in, uh, taking new product launches, et cetera. And so consequently, you lose shelf space, you're going to lose consumers. And so now the whole game is this win in the resets in 2024, which now is do we have a lot of visibility to that? We have some right now. We'll have more. We talked to everybody in January. But the fight is really to win back more shelf space in 2024. Some good news with respect to vitamins. We are the number one gummy vitamin on Amazon. And we have been doing extremely well there this past year. So that's going to be a bigger focus for us going forward as well. But we do think it's just execution and blocking and tackling, Steve, to get that business on firm footing.

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

Okay, great. I think you touched on that you think you're well-positioned for consumer trade-down. Are you actually seeing that? And then maybe also, can you just give us a sense of the promotional environment you're seeing? Obviously, you touched on the laundry issue specifically, but just in general, the promotional environment.

Yeah, look... To trade down, as I mentioned in my opening remarks, in the litter class of trade, the litter category, we have a black box and an orange box. And a black box is premium. The orange box is value. And so consumers are staying within the franchise, trading down from black box to orange box. And it shows in our shares. So our shares are almost like 25% in litter. Your other question was more broadly with respect. Let me comment on that. Laundry as well. Laundry, we've been doing trade down since the beginning, I guess the middle of 2022, quarter after quarter. This past quarter, liquid laundry grew with the category, but extra, you see, has started to grow. That, again, is a sign of the times. It's a deep value laundry detergent. Once again, I think our portfolio was well positioned for a difficult economic environment. Of course, as long as unemployment stays low and people have jobs, we think that people are going to be discerning when they go shopping, but they have money in their pockets to shop, so I think the best value is going to win. When it comes to the promotional environment, liquid laundry, just to give you some numbers, round numbers, if you looked at liquid laundry sold on deal in Q1, it was around 32%. In Q2, it was like 33.5%. And Q3 was 35%. So liquid laundry has been creeping up during 2023. So it's around where you expect it to be pre-COVID. So it's coming kind of all the way back. Same is true for unit dose. If you look at unit dose sequentially, Q2, Q3, 31% sold on deal in Q2, 36% in Q3. Now, litter is a different story. I think it's largely because of the difficulties that one of the competitors has had and has consequently pulled back on promotion. The trend for litter, Q1, Q2, Q3, is like a 15% in Q1, 14.5% in Q2, and 14.2% in Q3. So that kind of gives you a sense for the trend. I'd say in vitamins, the... It sequentially is up 200 basis points from Q2 to Q3. There are some competitors that are spending 55% sold on deal. You can't make a lot of money that way, but it definitely does grab volume. But I think those four categories, liquid launch, unit dose, litter, vitamins, give you a sense for what's going on in a promotional environment, Steve.

Great. That's helpful. Thanks. Okay.

Thank you.

The next question comes from Lauren Lieberman from Barclays. Please go ahead.

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

Yeah, well, look, our number one objective is to win in acne. And it's on acne patches and also related products to acne. And that's pretty broad. You know, this is a really, really big category. And the opportunity is not just in Europe. We plan on launching in dozens of countries in 2024 with HERO. So we think there's just so much runway, and there still needs to be greater awareness of the patch form, which is another reason why we want to make sure we don't get too much of our focus outside the patch category. Now, Hero is a fabulous brand. It resonates with consumers of all ages. We definitely do have the right and the permission to go to categories that are adjacent to acne. And, yeah, that could be in our future. But in the near term, the focus is on patches.

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

Hey, Lauren, it's Rick. I would say our math does not lead to two to three points of organic contribution from Hero. Remember, there was sell-in to new retail distribution in Q4 last year for Hero. So from a comp perspective, it just doesn't give you that much that you're calculating. I think overall, we think consumption is still really strong in Q4. And October was off to a great start. I think Matt mentioned it. It was one of our highest shipment months uh ever in the history of the company so we feel really good about um our momentum right now and you know we've we've made some choices to discontinue some promotions and i think that's what kind of the the nuance is for folks that they weren't expecting yeah and lori it all depends on your perspective you know people depends on the narrative you know do you want to look at sequential you know q3 to q4 do you want to look you're just a year over a year

and look at comps and say what was in last year versus this year. We have total confidence in where we sit right now with respect to the demand for the products as evidenced by such a strong October. We think we got a good number for Q4. Sometimes people accuse us of being conservative. You know, one thing is for sure about Church and Dwight is we take the long view. We don't have short-term thinking. And I think that anybody listening to the call, and certainly our long-term shareholders, understand that we're always palms up and try to make sure people create understanding for not just you, the analyst, but for our shareholders. And we're really confident not only in Q4 but in our future.

Okay, great. Thanks so much. I appreciate it. All right.

Thank you. The next question comes from Anna Lazul from Bank of America. Please go ahead.

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

Yeah, you may be referring to Litter. There's some help from Litter sales-wise in Q3, and some of that will continue in Q4. But there's lots of opportunities to invest when it comes to marketing. There's not just the advertising side. Remember, we had some new products we just launched like the laundry sheets, but sampling is another avenue for us. We've had remarkable conversion rates on sampling of, say, Thoroughbreath. I think that also can be true for laundry sheets. There's non-working media as well that we can get after in Q4 to prepare for 2024. Over in R&D, There's clinical trials that we can start earlier than expected for one product in particular that we're looking at. It's just a whole list of things that we can go after. Generally, we're always going to be supporting the businesses that need the help, so that would be vitamins, for example. But then you want to feed the strong as well, and we've got a lot of businesses that are on fire right now. So we'll just pour it on in Q4.

Great. Thanks very much.

Okay.

Thank you. The next question comes from Andrea Teixeira from J.P. Morgan. Please go ahead.

Thank you. Good morning, everyone. So I wanted to go back to the 4% organic guide for the fourth quarter. I'll take another swing on that one. You said the 50-50 volume, Rick, would be even higher now in the fourth quarter. So it does imply a really much bigger step down in pricing. And I understand that with the discontinuing of some of the non-profitable promo that you had, that would imply that obviously you had pricing realization higher. So I was trying to see what is implied in your guide. And then related to that also in terms of pricing, And then related to that also, how long do you think it's going to take? Cause it seems as if you were starting to lap those, those promos and, and reducing those problems at the trade. How long do you think this is going to linger for another three quarters into 2024? Okay.

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

And then any other, one of the things if we step back then strategically, if you have always told us, right, you have 40% of your um of your portfolio in value um which implies obviously the 60 the other 60 somewhere between mid-tier to above um and of course the consumer is moving down is that like what we've we've been seeing now is that probably now we're starting to feel it right it's like you know it's a race to the bottom in the sense that we'd rather not to have you know uh consumers trade down in general to you as well, because it's like at the end of the day, you want to create growth and you want to work with your retailers to create growth in the category for innovation. So I was wondering if you can kind of like go back to both laundry and a leader, because you have on those categories, you go across and it's great, but in some ways you also want to stop that movement in the sense that otherwise it's going to lower the total value of the category. So can you comment a little bit more on those two specific as well as the other one, which is the vitamin situation? I thought that at this point you would have lacked a lot of that impact and that retailers would give you back some shelf resets. And if you can comment on that for shelf resets into spring for vitamins next year.

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

And, Andrea, you know, we feel great about having this sort of portfolio that gives consumers a choice and can trade down. The thing you've got to keep in mind, too, is if you look back at Arm & Hammer Liquid Laundry, it has grown share just about every year that I've been here, year after year, in good times and in bad times. So it's not simply, yeah, it gets accelerated when you have an economic downturn. But what happens is people trade down, they discover the brand, and they stick with it. That's true for Arm & Hammer Laundry. Now, if you go over to Litter, you know, trade down between black box and orange box is great, keeping the consumer in the category. And certainly when the economy recovers, you know, people will trade back up to the black box.

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

Thank you. The next question comes from Olivia Tong from Raymond James.

Please go ahead.

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

We always thought it was we waited more towards Q4. We did have some marketing shift out of Q3 into Q4, largely because of MPD support. Like even our laundry sheets, we sold out so fast that we wanted to make sure the marketing was turned on when we had the supply. So we shifted some of that into Q4.

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

Well, if you look at the value detergent, there's value and there's extreme value. So you're right. Extra is the extreme value. And Arm & Hammer is the high end of value, maybe even the low end of mid-tier. And that has been the strategy for a long time. Pods is an area where we're underrepresented. And we only have a 4% share of pods when, in fact, in liquid laundry, we have a 15% share. Now, pods is unit dose, but so is sheets. And sheets has an advantage in that it's more sustainable. No more plastic jugs. So we do think that that's going to help us gain even greater share in unit dose. Yeah, it could cannibalize some Arm & Hammer pods, but we do think it's going to be attractive to anybody who's using pods today because we don't have the plastic pouches. This comes in a carton. And people who don't want to be carrying the big jugs anymore will migrate to sheets as well. So we think there's a lot of positives by adding sheets to the portfolio.

Thank you. Thank you. The next question comes from Peter Grom at UBS.

Please go ahead.

Thanks, Operator, and good morning, everyone. So I wanted to ask specifically about gross margins. You made a lot of progress this year, and Matt, you kind of mentioned that you saw this opportunity to kind of get back to this 45.5% target. But you also said, I think, in your response to Chris's question, that you wouldn't get it all back next year. So can you maybe help us unpack the reasons why that might be the case, just given the momentum you're arguing the year with? And then just maybe building on that, Rick, last year you kind of mentioned that you were less hedge heading into the year than previously. Can you maybe just give a comment or so on your outlook for inflation and whether or not you're kind of deploying a similar hedging strategy looking ahead? Thanks.

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

Thanks so much.

I'll pass it on.

Thank you. Next question comes from Nick Modi from RBC Capital Markets. Please go ahead.

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

Okay, yeah. Nick, we're always on the hunt, and we – to look at the hero was acquired last October 22. And, you know, we've looked at three other potential acquisitions since then, all of which we passed on. But we're you know, we're always on a hunt. You know, we got a quite a quite a strong balance sheet right now. A lot of cash building up. So we've got a bit of a war chest. I would say that the interest rates will obviously affect the bidding process in any one of these acquisitions or auction processes and obviously we're affected by that as well but you do want to buy brands that you know long term are going to be able to grow and interest rates yeah they may be high for a few years but they do moderate from it seems so you got to take the long view when you're when you're looking at assets but there's always something to buy and we've been pretty active at looking at what's available You had a second question, Nick, on promo?

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

Yeah, no, that's a timely question, Nick. Our international business was really first out of the gate on revenue growth management. And so we have six subsidiaries, and those six subsidiaries have all been linked up, regularly discussed the tactics in improving revenue. And, you know, it's all the levers between growth and net. And more recently, our U.S. business reorganized so that we can adopt more of those practices that our international businesses hone, but also link the U.S. into those six international subsidiaries. So yeah, the whole concept of revenue growth management is taking hold in the company, and that contributes to making decisions about unprofitable promotions.

Great. Thanks, Matt.

Thank you.

Thank you. The next question comes from Jason English from Goldman Sachs. Please go ahead.

Hey, Jason.

Hey. Hey, folks. Thanks for slotting me in. So a couple quick questions. In response to Mr. Brougham's question, I was surprised to hear you say that you expect inflation next year to be above average. So I guess two questions related to that. First, what's driving it? And second, in context to that, What sort of pricing environment do you expect next year? Would you expect to see positive price growth in your key categories and from you in the domestic market?

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

and we don't have further plans to take take price really okay that's helpful and speaking of commodities i'm on the website for this mega lac product it looks like a pretty commoditized product and it sounds like you have a new competitive threat coming in undercutting you um first i'm talking about it so it's i'm assuming it's new i'm assuming it's still early inning so um Can you give us some context to assess the risk? Obviously, if everything else was up, too, and this drove it down 10, it's big. How big is it? Like, how big was it before this? How big is it this quarter? And how do you plan to deal with that headwind going forward?

Yeah, so Megalac has faced low-price imports for years, even pre-COVID. We were a little protected from that because of how difficult it was to get shipping containers. And so the U.S. market was a little bit more protected, and so Megalac did really well during those few years. So once shipping constraints were lifted, competitors came back in, low-priced competitors were there, and we've lost share. This is a very low-profit business, this one product line. And so we are looking hard at how to restructure that business. And so not a lot... um talk about today but uh i would just tell you yes revenue is down or volatile but the impact on profits is minimal okay that's helpful i appreciate it i'll pass it on thank you the next question comes from john anderson from william blur please go ahead hey good morning everyone thanks for the question uh just one um

If this is a shot, it may be too early for you to comment in detail, but mention a couple of times that you have one of the better or best.

You broke up.

Hey, John, if you can hear us, you broke up. We'll give another second or two.

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

Yeah, well, look, it's a logical question, but it is the first week of November, and we're going to unveil all those new products. and the January first week of February when we give our outlook for next year. So it's best to just stay tuned on that one, John.

Great, thanks. Can I squeeze one more in? Yeah, sure.

So we didn't really, you know, you whiffed on the first one, so yeah, go with the second one.

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

Well, look, this was a reset year for Waterpik. You know, the whole idea was to get close to plan, try to have a level year when it comes to sales. The business has been struggling because during COVID, people were pretty flush. People staying home. A lot of water flossers got sold in 2021 and some in 22. So that's where the struggle is in 23. And then there's always knockoffs that we have to deal with that we see more and more of those as well as some private label, which is not a new thing, but it's been more significant in 2023. But that business has been around for decades. It is the Cadillac when it comes to flossers. And we have innovation coming as well for Waterpik, which we'll talk about at the end of January, first week of February. But innovation and maintaining the brand equity that the Waterpik is the premier water flosser is our strategy going forward.

Thank you.

The next question comes from Javier Escalante from Evercore ISI. Please go ahead.

Good morning, everyone. My question has to do with volumes. If you can comment what was in the comp versus your growth of around 3%. Is there something that is going to anniversary in Q4? And also, if you can give us a sense of underlying category growth in terms of volumes and an all-channel basis and how you stand vis-a-vis that. Thank you.

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

I can't really help you with the volumes for our 17 categories. But what I can tell you is that if you look at October and that we had consumption growth in 12 of our 17 categories, so that continues to sustain what we saw in Q3. And remember, Q3 was, you know, half of our growth was driven by volume. And we see that to be 1% or better in Q4. But, you know, the good news is that in 12 of our 17 categories, We're seeing growth in October, so the beat goes on.

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

No. When you have volume growth, that would suggest that you are seeing consumers migrate to your product year over year. We have higher we're shipping more cases and more units. And like I said, we expect that to continue in Q4.

Okay, thank you.

Thank you.

The last question comes from Filippo Falawini from Citi. Please go ahead.

Hey, good morning, everyone. I'll keep it quick. So just a quick question on the marketing expenses, percent of sales. You clearly returned to 11%. Is Should we consider this a new normal for you guys? Or in the past, you've also done closer to 12. So just wondering if this is a new normal level of investment.

Thank you. We've said that 11% is where we wanted to get back to. And we thought it was going to be a stair step that would go from 10% in 22 to 10 and a half in 23, and then 11 in 24. And we're already now at 11. And we think that's a good level of spend

to sustain and grow our brands.

Great, thank you. Okay.

Thank you. There are no further questions. I will turn the call back over to Mr. Farrow for closing comments.

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

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.