Church & Dwight Company, Inc.

Good morning, ladies and gentlemen, and welcome to the Church and Dwight third quarter 2024 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 forecast. These statements are subject to risk and uncertainties and other factors that are described in detail in the company's SEC filings. I would now like to introduce your host for today's call, Mr. Matt Farrell, Chairman, President, and Chief Executive Officer of Church & Dwight. Please go ahead, sir.

Good morning, everyone, and thanks for joining us today. I'll begin with a review of the Q3 results. Then I'll turn the mic over to Rick Durker, our CFO, head of business operation. Once Rick is done, we'll open the call up for some Q&A. All right, Q3 was another solid quarter for Church & Dwight. Reported sales growth was 3.8%, which beat our outlook of 2.5%, and that was thanks to strong results from our domestic, international, and specialty products businesses. Organic sales grew 4.3%, which exceeded our 3% Q3 outlook, with volume accounting for a very healthy 3.1% of our growth. Adjusted gross margin expanded 60 basis points. At the same time, we increased marketing spending, and we gained market share in the majority of our categories. Adjusted EPS was 79 cents, which was 12 cents higher than our 67-cent outlook. So a nice beat. The quality results were driven by higher-than-expected sales growth and gross margin expansion. Our online class of trade continues to perform well, with online sales as a percentage of global sales at approximately 21%. Next, I'm going to comment on each of the three businesses, and the first up will be the U.S. business with 3.3% organic sales growth. Volume growth was 2.6%, and this is the fifth consecutive quarter of volume growth in our U.S. business, with five of our seven power brands gaining market share in the quarter. Now let's look at a few important categories in the U.S. Innovation, of course, is a big contributor to our success this year and every year. As I comment on the categories, I'll highlight the success of the new product launches. I'm going to start off with laundry detergent. Arm & Hammer liquid laundry detergent consumption grew 2%, which outpaced a flat category, with Arm & Hammer's share in the quarter reaching 14.7%. The unit dose category declined 1.1%. However, Arm & Hammer unit dose saw a consumption growth of 16.5%, And we grew a share of 70 bps to 4.8% a unit dose. Regarding new products, this year we launched two new products into the detergent category, Arm & Hammer Deep Clean and Arm & Hammer Power Sheets. Deep Clean is our most premium laundry detergent, where we entered the mid-tier of liquid laundry. Deep Clean accounted for a little over 40% of Arm & Hammer's liquid laundry detergent consumption growth in the quarter, and it's highly incremental to our franchises. The second new product is PowerSheets. This is a new form of laundry detergent. And you may remember in August of 2023, Arm & Hammer was the first major brand to offer this new unit dose form in the US. Our fresh linen scented sheet is now the number two sheet on Amazon. And since launching this product into bricks and mortar this year, we have seen high consumer interest in the form. Arm & Hammer is the number one sheet brand at Kroger. It's also the number two brand in all food. We feel great about the future prospects for this new form. Now I'm going to switch over to litter. The category was flat in Q3. That's category consumption. As expected, Arm & Hammer litter consumption declined 1.5%, and this reflects the absence of a competitor out-of-stock situation, which benefited our prior year market share. The good news is we've held on to about half of our prior year share gains. Our new lightweight Arm & Hammer clumping litter, which is our new product this year, is outperforming our expectations as our share of the lightweight category continues to grow. This is important because lightweight accounts for 17% of the clumping litter category. Hardball became the number two major brand in lightweight segment in Q3. Now I'm going to switch over to personal care. The gummy vitamins business continues to be a drag on the company's organic growth. The gummy vitamin category declined 0.3%. We can call that flat in Q3, which is an improvement from the category declines in the past few quarters. The bad news is our consumption was down even greater. We were down 10%. The improvement of this business is taking far longer than we expected. and as you saw in the release, has reduced our expectations about the long-term growth and profit of the business. This resulted in a $357 million write-down of the book value of the assets. We continue to move forward with our stabilization actions, which include new packaging, upgraded formulas to improve the consumer experience, and higher marketing investments, which gives us some degree of optimism for the business as the innovation that we have coming. in 2025. Next up is Batiste, which continues to see strong growth with consumption up 6% in Q3, growing share to 46%. Batiste continues to be the global leader in dry shampoo. This year we launched Batiste Sweat Activated and Batiste Touch Activated. These innovations continue to bring new users to the category, which is very important. And already these two new products account for 2% of the dry shampoo category. And Sweat Activated is the number one new product on dry shampoo. Over in mouthwash, Thoroughbreath continues to perform extremely well. The mouthwash category was up 5% in Q3, but here's a few stats. Alcohol-based mouthwash was down 1%, while non-alcohol category grew 11%. TheraBreath is the number one alcohol-free mouthwash with 35 shares and is the number three brand in total mouthwash with an 18 share. Getting over to new products, this year we entered the antiseptic segment of the category with the launch of TheraBreath Deep Clean Oral Rinse. It's important to note that the antiseptic subcategory represents about 30% of the $2 billion mouthwash category. And our launch into antiseptics has accounted for 100 basis points of our 400 basis points year-over-year growth in market share. So great indicator of the future for the antiseptic launch. Hero is the number one brand in acne care with a 22 share and continues to drive the majority of the growth in the category. The patch category grew 42%. While Hero grew patch market share by 1.7 basis points to 57 shares. So Hero continues to launch innovative solutions and patches, and we're very bullish about the future of that brand. I'm going to provide you with a couple of remarks on promotional levels in our household categories. In the liquid and laundry detergent, we've seen stable sold-on promotion in the low 30s over the last few quarters. Over in unit dose, pretty much the same story. Percentage sold on promotion is also stable, averaging in the low 30s over the last few quarters. Litter is a different story. In litter, conditions are different and promotional levels have increased. And here's the trend line. So if you look at Q1, sold on deal was 15.5%. Q2 was a little over 18%. In Q3, it was 19.5%. It's going to be even higher in Q4. The increase in litter promotions is primarily driven by one major competitor, where sold-on deal exceeds 40%. All right. Turning now to international and specialty products, our international business delivered organic growth of 8.1% in Q3. That's right on our algorithm of 8%. This was driven by strong growth in every one of our subsidiaries as well as our global markets group. Finally, specialty products. Organic sales increased 7.5%. That's three quarters now of solid organic growth for this business. We're confident that this division will achieve 5% organic sales growth this year and will hit our evergreen growth target. So we feel great about our progress in specialty products. This is commentary on the consumer. In July, we noted a deceleration in consumption in our categories. This continued in Q3 as we expected. After seeing 4.5% growth in our categories for the first five months of the year, June, July, and August were closer to 2.5%. Now, in September, we saw consumption in our categories strengthen to about 3%. And then in October, category consumption was up 5%. But let's all remind ourselves that the hurricane and the port strike no doubt influenced those results. So we remain cautious in Q4 regarding the U.S. consumer and category growth rates. I want to wrap up my comments by reiterating that the company is performing well with all three divisions delivering strong growth. I want to thank all the Church and Dwighters out there for doing such a great job each and every day. Great team. And now I'm going to turn it over to Rick to provide more color on the quarter and full year outlook.

All right. Thank you, Matt. And good morning, everybody. We'll start with EPS. On a reported basis, we had a loss of $0.31 a share, primarily due to non-cash asset impairment of our vitamin business. Third quarter adjusted EPS was $0.79, up almost 7% from the prior year. The $0.79 was better than our $0.67 outlook and is a high-quality beat, primarily driven by higher than expected operating profit. Reported revenue was up 3.8% and organic sales were up 4.3%. Organic sales were driven by volume of 3.1% and positive price mix of 1.2%. Volume was again the primary driver of organic growth and we expect volume growth to continue in Q4. Our third quarter adjusted gross margin was 45%, a 60 basis point increase from a year ago, primarily due to productivity, volume, mix net of the impact of higher manufacturing costs. Let me walk you through the Q3 bridge. The gross margin was made up of the following, positive 140 basis points impact from volume and mix, a positive 130 basis point impact from productivity, and a 10 basis points positive impact related to acquisitions. This was partially offset by 220 basis points from higher manufacturing costs. Moving to marketing, marketing was up 18 million year-over-year. Marketing expense as a percent of net sales was 12.3%, or 80 basis points higher than Q3 of last year, and helped drive share gains. For Q3, adjusted SG&A increased 20 basis points year-over-year, primarily due to international R&D and IT investments. Other expense decreased by 11.9 million. We now expect other expense for the full year to be approximately 65 million on an adjusted basis. In Q3, there was a tax benefit of 25.9%, and this was related to the vitamin impairment. Excluding that impact, our effective rate was 23.8%, and that compares to 24.1% in Q3 of 2023. The expected adjusted effective tax rate for the full year is now approximately 22.5% versus the previous outlook of 23%. And now to cash. For the first nine months of 2024, cash from operating activities was $854 million. an increase of almost $70 million driven by higher cash earnings. We now expect full year cash flow from operations to be approximately $1.1 billion. We're having a great year in regards to cash. CapEx for the first nine months was $125 million, almost a $4 million increase from the prior year as capacity expansion projects proceeded as planned. We expect 2024 CapEx of approximately $180 million as we complete the majority of those investments that were initiated in 2023. and we continue to expect CapEx to return to historical levels of 2% of sales in 2025 and beyond. And now for the full-year outlook. As Matt mentioned, while we saw U.S. consumption in our categories improve slightly towards the end of the third quarter, we remain cautious regarding the U.S. consumer and category growth rates for the remainder of the year. We continue to expect our organic revenue outlook to be approximately 4%, and reported sales growth to be approximately 3.5%. We continue to expect full-year adjusted EPS to be approximately 8%, During the gross margin, we now expect expansion of approximately 110 basis points at the high end of the previous range, and we now expect marketing as a percent of sales to be above 11%. And as you read in the release, to the extent our business does better than our outlook, we plan on incrementally investing behind marketing and SG&A to help enter 2025 with momentum. And with that, Matt and I would be happy to take any questions.

At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star and one if you would like to ask a question. And we'll take our first question from Chris Carey with Wells Fargo Securities. Please go ahead. Your line is open.

Hey, good morning, guys. Thanks for the question. Hey, how are you? I'm going to start with the outlook for Q4. I want to understand if there are any inventory timing dynamics, which are going into Q3 or Q4, or if this outlook is primarily reflecting, I guess, a view that consumption trends should start to decelerate through the quarter as you lapse some of these atypical benefits that maybe you've seen of late. And so we should be expecting that. um and perhaps just some lingering conservatism about not trying to call any improvement in category growth rates um versus say you know again some sort of inventory or shipment timing dynamic yeah i'll take the first one uh part of it on inventory and then matt will talk about the category uh consumption growth rates uh you know we we hear

Small things on retail inventory, but not anything that we would call out and not enough to impact anything. There's small examples, but not enough to influence what we would be calling.

Yeah, and Chris, as far as the categories grow, if you just, you kind of look at Q1, Q2, and Q3 for some of our major categories. So if you look at the liquid laundry detergent, Q1, Q2, Q3, the category was up three, up one, flat. When you look at litter, up five, up two, flat. And then going to mouthwash, up 13, up nine, and then five. Patches are pretty steady, high double digits. But the acne category is 14, eight, seven. But obviously hero being patches, so we're somewhat unaffected by that. But if you just look at the trend, you can see a deceleration. So that's one of the reasons why we'll say, hey, we're still cautious about the economy. That's the category. We tend to be doing better because we're taking share. But that's always the only lever you have when things are starting to slow down. So yeah, we feel good about our performance. We called 3% in Q3. We put up a 4. We had some good performance in our brands and some share take. But, you know, kind of like where we are going into Q4.

Okay. That makes sense. Then one quick follow-up would be, you know, there's an expectation over time for the U.S. business to be delivering 4% top-line growth. Clearly, you're still trying to figure out what the appropriate level is in the current environment, you know, relative to where the categories are going. But how much visibility do you think you have in that top-line growth objective in the U.S. from here? It's not really a 2025 guidance question per se, but just the ability to deliver against an objective which came up by about a point relative to past in the current environment, and if not, how long you think you'd need to get there again. So thanks so much.

Yeah, that was sort of a veiled attempt at 2025 guidance. You take that highly well, thanks. I want to correct you on one thing. As far as our algorithm goes, when we moved from 3% to 4% top line, the U.S. portion of that was going from 2% to 3%. Obviously, that's the big dog. It's the lion's share of our business. The expectation is that we're going to grow at 3% going forward.

So 3% for the domestic business, 8% for international, 5% for SPD. That's how we get to our 4% company.

Yeah, sorry if I didn't come across. That was really embedded in the question. Thanks.

Yeah, and look, we've got to look at our portfolio and say, when you have a long-term algorithm, it's not just 25. It's 25, 26, 27. So we look at the strength of our brands. We look at the innovation we have planned over a three-year basis, 25, 26, 27. And consequently, we encourage that if you look back, our history is we hit our algorithm just about every year. In fact, you know yourself over the last 10 years, we've hit 4%. That was one of the reasons why we said, hey, we make that our algorithm.

Yeah, and I think, you know, just to add to that, you know, why do we take share over time? Well, one of the reasons is we have great innovation, and we're putting support behind innovation to go drive trial, to grow households. And that's kind of also where we're reinvesting as we over-deliver in 2024. So that's why we think we're going to enter 2025 with momentum.

Yeah, so when you have contracting categories, the way home is always going to be innovation and share gain.

Okay, thanks a lot, guys.

Thank you. We'll take our next question from Rupesh Parkeet with Oppenheimer. Your line is open.

Good morning, and thanks for taking my question. So just going back to the Biden business, so an impairment this quarter, how are you thinking about the path to stabilization and then growth? Do you think in 25 we may start to see stabilization in that business? And just any green shoots maybe you're seeing with the efforts there?

Yeah, what would be – we've been at this now for probably, More than a year and a half. The things such as graphics and packaging and messaging, those things that we can control, are in place. As far as innovation goes, that has not hit the market. We really haven't had any meaningful innovation for a few years now. And that's what, as I said in my earlier remarks, that's what gives us some optimism about stabilizing this business in 2025.

Yeah, maybe maybe some other green shoots. And as Matt said, we have probably 10 different things are happening at the core of it is we got to get the consumer being delighted in our product again, right and making sure that we're doing all of our reformulation so that consumers are picking our products and our brand that they know and they love for a long period of time. But some green shoots, I would say, we've seen Some lists and some retailers where a few of these things are kind of ahead of the curve, and so that's been encouraging. You know, we did, you know, one of those 10 levers was looking at price gaps, and we adjusted the price gap in a couple areas, and units are up dramatically. So there's good progress. Like Matt said, innovation really is coming in March, April of next year, so we've got to give that a shot, and we're optimistic.

Yeah, I'm here looking for green shoots. This is a small part of the business, but Little Critters has been really responsive so far. In fact, Little Critters gained some share in the past quarter. So that's a good thing. But really, the land share of the business is adult, and that's where we need the innovation.

Great. Thank you. Thank you, Apostle. Okay.

Thank you. We'll take our next question from Bonnie Herzog with Goldman Sachs. Your line is open.

All right. Thank you. Good morning. I had a question on your marketing investments. You called out expected stepped-up spend in Q4, and you raised your guidance a bit this year to more than 11% as a percentage of sales. So could you give us more color behind the greater investments in terms of types of spend, any changes with strategy, either channel, medium, et cetera? And then I would be curious to hear if more of the dollars will be shifted internationally or And then, if I may, finally, just on a go-forward basis, you know, should we assume you're going to continue to step up, you know, this spend as a percentage of sales in the next several years to support, you know, your 4% organic sales growth expectations, as you've called out in your evergreen model? Thank you.

Hey, Bonnie. That's a good, detailed question. I'll start, and I'm sure Matt wants to add a couple thoughts. When you look at our raise of marketing spend, going to 11% to somewhere between probably 11% and 11.5%, that's meaningful. That's $20-plus million in some cases, and some of that is international across markets because we're driving different brands, and they're doing really well too. But TheraBreath Expansion, Hero Expansion, Sterimar, Batiste internationally. But in the U.S., we have a lot of places where we're spending, but most of that spend is behind our innovation again. This is one of our best years of innovation. We believe that's why we're getting share in many cases. That's why we're doing so well and over-delivering even our top-line expectations. And so a lot of the marketing spend goes behind things like deep clean on laundry, things like sheets on laundry, things like hardball and litter and our new Batiste and our touch and move.

Yeah, and the other thing I would add to that is 85% of our advertising is digital right now. So we have a great ability to move around and take advantage of different vehicles at different times of the year. So I wouldn't say any more than that. We go brand by brand. But Rick's right. Internationally, this is part of where the spend is in the fourth quarter, as is domestic, even a little bit in especially products.

And as far as our future-looking marketing percentage, our algorithm is around 11%. It all depends on how our share. Share is the scorecard. So our shares are doing fantastically well. You heard in the release, five of seven. I think year-to-date we're 10 of 14 for all of our brands, all of our old power brands. So that scorecard is what really matters. And as long as we're gaining share and more often than not, I think that's the right level. And if we feel like it's not, then we'll adjust.

All right. Thank you. I did ask multiple questions in one, so I'll pass it along. Thank you.

Thank you. We'll take our next question from Steve Powers with Deutsche Bank. Your line is now open.

Thanks very much. Actually, to follow up on that, sorry, I might have missed it in your answer, but the marketing spend in the third quarter came in a little bit lower than at least external expectations, you know, obviously made up for in the fourth quarter. But was there anything, you know, from your perspective that shifted significantly? that marketing support from 3Q to 4Q, or is it just more of an anomaly versus how we all on the outside modeled it?

Yeah, I think it is more of an anomaly. I mean, we're getting very specific, but we were up 80 basis points in Q3, which is a significant increase. We had told everybody that we were going to be down a few hundred in Q4 because we were spreading that spend that was maybe a little higher in Q4 of last year over to Q1, Q2, and Q3 to better support innovation. And I would even call it timing. It was probably just a disconnect between the outside models and what we were going to do.

Okay, cool. And I guess more of an overarching question. You've kind of touched upon some of this, some of what I think is going to be in your answer. But the perception among many investors of late is that Church and Dwight's in a relatively fragile position navigating this second half and heading into next year, just given that So much growth has been driven by TheraBreath and Hero, whereas investors view the core legacy business as being a bit more choppy, probably with added focus there on categories like vitamins and litter of late. But how do you respond to that, either with respect to reasons to believe in the resilience of TheraBreath and Hero, or conversely, reasons for more holistic confidence in that legacy core business?

Yeah, I'll take a swing at that. Rick can kind of pile on. And look, we manage a portfolio. We're in lots of different categories. And yeah, it's true that Thoroughbreath and Hero have been delivering outsized performance over the past year. But this ebbs and flows over the years. If you look back over many years, there's different times where different businesses pull the train. So I think the new products that we have in those similar categories that you may be referring to, like laundry and litter, are going to be a big part of our growth in the future. That will be sheets and that will be hardball. And also the innovation in other categories outside of patches as well. But if you look long-term, the thoroughbreath is not done. And when we bought this business, we said, hey, this can be a half a billion dollar business over time. So whereas you'd say, yeah, the distribution for that business has probably been achieved as far as number of doors, what we haven't done is spread out on shelf with other variants. So I think there's still significant growth ahead of us for TheraBreath. And as far as Hero goes, we don't want to get distracted by moving into other categories We want to make sure we nailed and grew patches and created more awareness around that and more household penetration. But the Hero brand has the opportunity to spread into adjacent categories going forward. So I think the investors should be confident that those two brands will continue to grow in the future. And because of the innovation we have in laundry and litter products, dry shampoo, et cetera, we have differentiated products that will drive growth in the future as well.

Yeah, and I would just echo a few of those comments. I think TheraBreath and Hero have years of runway. You know, TDPs in some cases, but just, you know, household penetration. Like, you know, mouthwash is an example of 65% household penetration, and TheraBreath is around nine. It's now the number two mouthwash. So there's lots of runway for those fields. But really, the crux of your question is, well, what about your base business? And so I would say a lot of optimism on how to put our base business. Litter, for example, is kind of messy right now as you look at year-over-year comps because some competitor was out of stock for such a long period of time. But if you look back before the outage that they had at our share and at our share today, we've maintained about 40% of those share gains. And so I don't really look at the week-over-week or month-over-month numbers are kind of meaningless right now, but if we look at baselines, that's what I look at. And so I feel like litter is strong and getting stronger. Innovation, as Matt said. Laundry. Laundry, we're still at all-time high shares. We feel like over a long period of time, we have the same stair-step-up that we've experienced before. We're entering the mid-tier with deep clean. It's doing well. It's driving incremental category growth for retailers. Unit dose is hitting all-time share highs, and we're going into sheets, and sheets is a category that's growing 30%. So a lot of optimism.

Great. Thank you very much.

Thank you. We'll take our next question from Dara Masadian with Morgan Stanley. Your line is now open.

Hey, good morning, guys. So first, just to follow up on category growth, Matt, you didn't sound particularly excited about the pickup in category growth in September, October. Is that just because you think a lot of it was driven by hurricane volume? And as you parse the underlying data, you didn't necessarily see as much of a pickup? Is it just a short enough period of time that you're not much more enthusiastic around category growth? And I know you touched on it a bit, but just trying to get a sense as we look beyond Q4, if we're in this more muted category growth environment, given a lack of pricing, or if you think you're starting to see some green shoots from a category perspective. Thanks.

Yeah. I guess I must have curbed my enthusiasm. So I would say that, Dara, that, you know, if you look at the first couple of weeks of October, you'd feel like double-digit consumption growth in some categories. We said, well, that's not sustainable, and it was so different from what we saw in any week in September or since then. We would say the hurricane and the port strike no doubt influenced the results. So consequently, if there's some pantry loading that went on in the first couple weeks, that's just pulling forward from somewhere else in Q4. So we would say, hey, I'm going to kind of look at that as October as maybe an anomaly. And maybe the quarter is more like September, where we inflected from June, July, August being our categories up 2.5% versus 3% in September. But, you know, it's not, you know, our remarks are not necessarily a broad category, broad commentary on the U.S. economy. We're commenting on our categories. So we look at our categories. That is what we're commenting on. I think 3%, to me, is pretty healthy.

Yeah, if you look back at history, if we were growing 4% as a company, many times the categories would be growing 2% or 3% would be taking share, and that's how we got to the 4%. So I'd say it's kind of in line with history.

Great. That's helpful. And then on Hero and Thoroughbred, can you give us an update on how much of the business is international today for each of those brands and how much incrementality you see looking out to 2025 in terms of expansion potential?

Yeah, what I can tell you without quoting numbers for sales is that we've been running really hard to get Thoroughbred and Hero registered in other countries. And our goal was to have Hero registered in 40 countries by the end of 2024. And we're there. So we feel good about that. And the impediment, of course, is regulatory bodies in a very firm country to country. But we're pleasantly surprised that both brands do travel well, even TheraBreath. Now, TheraBreath is the highest-priced mouthwash market today in the U.S. Naturally, when you go to international markets, there's a raised eyebrow about, geez, how are you going to be successful with such an expensive mouthwash? But yet, it has been. So we'll keep that in mind for maybe end of January when we talk to you guys, have an analyst day, and we'll frame out a little bit better hero and thoroughbred percentage U.S. versus international, how many countries we're registered in, and what our what our expectations are.

Great. Thanks. I'll pass it on.

Thank you. We'll take our next question from Peter Grum with UBS. Your line is now open.

Thanks, operator. Good morning, everyone. I just wanted to follow up on Dara's question there. I mean, maybe just to be clear, can you just help us understand what you are assuming for category growth in 4Q? Matt, I think you just said you're kind of assuming the September trends for the quarter rather than the stronger October or the weaker July and August. So I just wanted to clarify that. And then I guess if that is the case, if you are assuming slightly stronger category growth this quarter, and I apologize if I did miss this, but can you maybe help us understand what's driving the sequential slowdown in the 4Q organic sales? Thanks.

Well, look, let's go to your first question with respect to categories. It was four and a half for the first five months of the year. The next three months were two and a half. And then we'd say, hey, September was three and October was a really big number. We'd say Q4, on average, would be two and a half. And we'll say, hey, the month of October is an anomaly and that November, December will be a lot like June, July, and August. And that's no different than what we thought in July. So consequently, yeah, we had a really good third quarter, but we beat our number organically. But we're saying, yeah, for second half, we still feel good about 3% in total for the second half. And that's why we said two to three is fine as a call for Q4. Got it.

I'll pass it on. Thank you.

Thank you. We'll take our next question from Anna Lizelle with Bank of America. Your line is open.

Hi, good morning. Thanks so much for the question. I wanted to touch on gross margin, which outperformed this quarter. The guidance for the full year seems a bit conservative. So I was just wondering if you could talk about your outlook on commodity costs and manufacturing. I think you noted in Q3 that manufacturing costs were a bit higher. Is that also expected to impact Q4? Thank you.

Yeah. Hey, Anna. It's Rick. I think from a gross margin perspective, you're right. It's a little bit more conservative if you say the full year is at 110. It means Q4 is up slightly. I would just remind everyone that Q4 a year ago was our high watermark at 44.6. That's part of it. Some of the commodities were flat in the first half, like ethylene. They're up in the back half around 9%. Same for liner board. We have investments in our warehouse that we talked about at Analyst Day and kind of our network and that built throughout the year. So, yeah, could that be a little conservative? Maybe. I think also we have, as we look forward, we still are seeing inflation. That's what we're seeing, and our job is to offset that with productivity. That's what we're focused on. And then the other thing on gross margin is as we make investments to support these new products, like in trade or couponing, that also impacts gross margin. So that's kind of an eclectic and wide-ranging view, but those are the details.

All right. Thank you. That's helpful. And just as a follow-up on the category discussion here, are you seeing any difference in customer purchasing habits between retail channels or on quantities here? Thanks.

No, I would say, remember, we've been growing volume for five quarters in a row, and we continue to see most of the categories are volume-driven growth. Our categories and purchasing patterns are the same.

Okay, great. Thank you so much.

Thank you. We'll take our next question from Lauren Lieberman with Barclays. Your line is now open.

Great. Thanks. Good morning. Just want to talk a little bit about promotional environment in laundry in particular. In last year's fourth quarter, you talked about pulling some of the unprofitable promotional activity and scanner sales were down. So just want to think about 4Q, is it kind of like an easy comp as you get into fourth quarter or is it where like the right base now and last year was the adjustment period? And anything else you'd add on kind of promo environment in laundry? Thanks.

Yeah. You're right about that, Lauren. We did eliminate some what we thought were just not profitable or uneconomical investments. What's different this year is we're having such a great year in new products, particularly in household with litter with hardball and deep cleaning in large detergents. There will be places we'll be investing in Q4 in trade promotion. One of the things that Rick called out in his response to gross margin.

Yeah. Okay.

Yeah.

One thing I noticed also, I know DeepClean has been really successful, and this may be me being too picky, but it was interesting to me that in some of the Q&A thus far when you've been talking about laundry innovation, you're putting it seems like a bit more emphasis on SheetSource's DeepClean. Can you maybe talk about the direction of travel you see for category development? How significant do you think sheets can be? Because Proctor, of course, has been doing a trial of this, and as they go, it probably really helps to amplify awareness in the category of this form. So just curious, your thoughts on the relevance of sheets as a new form, and then the profitability of that versus the traditional liquid business, even the higher price point deep clean?

Yeah, you're right. It is a good question, and it's true. We're very excited about sheets. But let me go back to deep clean. So the whole idea around deep clean was to have a good, better, best strategy. So the good is the orange bottle. It's the base Arm & Hammer. The better is Arm & Hammer with OxyClean. And the best is DeepClean. And DeepClean is mid-tier. It's our highest-priced laundry detergent. Just to give you some sense, it's got a 90% premium to the yellow box. Not the yellow box, but yellow bottle. And it's got like a 40% premium to the Arm & Hammer with OxiClean. But we're still, you know, 15-plus percent discount to premium. And if you look at the trends, it's mid-tier that's been growing. So we feel kind of good about the timing of our launch. It's important that that sticks so we have good, better bets going forward long-term. And we think that deep clean can be a source of growth for us in the future. And, you know, that's – I would say if you go back to Steve Power's question about why you feel good going forward about your big businesses like laundry and litter, laundry in particular, it's reasons like that. And then sheets. Sheets is in its brand new form. And it's efficacious. There's no plastic. It's, you know, yeah, could it cannibalize some of your existing business? Yeah. That's true, but we're the first major brand to launch in this form. It's good to be first. So we think that'll be a bigger emphasis for us going forward. Unit dose today is like 22%, 23% of the category. We have not had a big share in unit dose historically. We've just been bouncing around between 4% and 5%. of that very big subcategory. So sheets then, in addition to our existing pots, is the way home for us to grow and unit those. So I appreciate the question because this all fits together. And that's why we think we're in a good position going forward in detergent.

Great. OK. Thanks so much for all that. I really appreciate it.

Thank you. We'll take our next question from Kevin Grundy with BNP Paribas. Your line is open.

Great. Thanks. Morning, everyone. Question on litter and the promotional environment there and how you potentially intend to respond. Matt, as you mentioned, Clorox has stepped up promotion levels to remarkably high levels. Most of the regained share that you're seeing with Fresh Step is coming at the expense of Arm & Hammer. So a couple questions. Have you been surprised by the magnitude of the spend here on trade support from Clorox. It's taken dollars out of the category. It doesn't do anything to impact consumption. Seems like you're trying to get the share back in sort of one quick swing. And then how do you intend to respond? It kind of feels like it has year markings of a potential price war, like we saw on laundry like over a decade ago. But Rick, if I'm interpreting your tone correctly, it seems like you're generally okay relinquishing the share gains over the past year. So your thoughts there would be appreciated. And then I have an unrelated follow-up. Thanks.

Yeah, I'll give you a couple comments, and then Matt will chime in, I'm sure. My comments, we're really happy with where we are at litter. This year-over-year, as Clorox comes back in stock, is what it is. Our baseline volumes are higher than they were. Our shares are higher than they were. We are really happy with a 40% or so share gain, if you look back when this whole stuff started. We're not going to go chase share on a race to the bottom to go promote. If we promote, it's going to be behind our innovation to go drive a fair share in lightweight litter because we think that's where the opportunity is. So that's what we're doing. I'm optimistic that we're going to retain share because that, over time, it's difficult for cats to switch litters. It just is. And after they've been out for a while, and they have one product, that's what they get used to. And that's also why maybe the effectiveness of some of the competitor promotions aren't as high as they used to be because it's hard to switch litters or harder. So anyway, that's some context. Matt, anything you'd like to add?

Yeah, no. When you see numbers like in a 40% to 45% sold on deal, we're not going to chase that, Kevin. To the extent we promote, it's going to be behind Hardball, which is our new product. And, yeah, obviously, you know, when you're hit with a cyber event, you know, obviously the expectation was that, yeah, of course, the competitor is going to spend back to try to win back consumers. But, yeah, we're going to be on the sidelines as far as spend a lot of money to chase that number.

Okay. Quick follow-up, and then I'll pass it on. Just on portfolio pruning. So, Rick, I think you've expressed an openness here, which has generally not been part of the company strategy for a very long time. We naturally had the CEO transition, which is going to be occurring in March. You need to bring a CFO on board. If you could just give us an update on potential parameters, scope, timing of what seems like it will be a potentially newer sort of leg to the stool, if you will, of the company's strategy. And then I'll pass it on. Thank you.

Yeah, I mean, as a backdrop, we've got to remember a lot of stuff that we do, we're going to keep doing. The company's performing extremely well. The strategy is sound. We're leaders in e-comm growth, as an example. M&A is best in class. We can identify, acquire, integrate, and grow acquisitions. You know, we do a few things uniquely in the company. Every year we go value every brand that we have, and we know what brands or businesses are creating value or destroying value. And we take that back, and we usually have internal teams that go turn that around or address root causes. And to the extent that we don't, then that's when more strategic conversations are had. Now, I'm not going to front-run any of that. you know, maybe in, you know, early to mid next year, we'll talk more about that. But it's really, we've been doing it for a long time. It's what we do internally. And we got a whole kind of mirror up to all of our brands, just like we do when we do acquisitions. So, but remember, we have a great portfolio of brands. We have a high performing company. We're getting share in most of our businesses. So we're coming from a position of strength. Yeah.

Hey, Cameron. want to remind everybody to you know, if I think back to when I got the job in January of 16. And within within a couple of years, I had a new hit of marketing, supply chain, R&D, sales, three of those four came from the outside. So we we've been here before. We just got such a rock solid core of the company. There's just a lot of talent here. There's no way we could get the numbers that we get here or there would have a lot of talent up and down the line. So, yeah, I think we're all excited about a couple of searches and get some new people in the company, new ideas, new energy. So I think we're in a real good place.

Okay. Very good. I appreciate it. Thank you both.

Thank you. We'll take our next question from Andrea Teixeira with JP Morgan. Your line is now open.

Thank you. Good morning. So on the gross margin side, how should we be thinking about the puts and takes ahead of commodities and the timing of certain contracts influence your view, especially fiscal 2025? And a follow-up on the M&A, I think that's the only question we haven't asked yet in terms of how you're seeing the landscape. I know you're very purposeful and cautious about what your targets are, but just as a follow-up and an update on how you're thinking about organic growth. Thank you.

Yeah, I'll take the gross margin question. I would say I kind of commented already on we do see inflation. As we look forward, we see inflation. Our job is to offset that through productivity. As you take a big step back, though, the different macroeconomic indications like China demand and really the US economy, stable but not outsized growth, we have taken a position of not hedging as much as we usually do uh believing that some of those commodities would will come down over time so i i would tell you that's uh that's probably a good indication of our expectations for for as we look forward yeah andrew could you clarify your your other question about m a yeah no thank you thank you matt i was just like thinking more how

You know, it's been I know it's part of your algorithm long term, not necessarily, of course, what you give in the Evergreen model does not include that, but indirectly does, because whether you as you create as you buy this code, this brands and companies, you create future growth as part of your long term algorithm. So I was thinking like more. It's been a while since you and you're accumulating cash since you've done acquisitions. Of course, the last two were very good, very creative. So just thinking of how we should be approaching that, or we should be thinking you're focusing more in organic at this point.

We're always on the hunt because we generate so much cash. Of course, our criteria is pretty strict, so we're pretty fussy about the things that we'll buy. It is true that you can buy a couple of businesses that can be fast growing for a couple of years, but then they have to grow 3% to 4% or faster, depending on which categories are going forward. So I would say, no, we're not saying that we're focusing solely on the existing portfolio. But I'll remind everybody, if you go back in time, we've had periods where we've had droughts before. where we didn't buy a business. I think the longest one was probably between 08 and 11, when in 08 we bought Origel, and the next one was Batiste in 2011. But still, if you look at that three-year period, we had three great years. So our algorithm isn't dependent upon

Yeah, and the reason, as you look back, the reason we are more successful than most to identify, acquire, integrate, and grow acquisitions is because we're really fussy. And so that's part of the model, and that's what we're going to continue to be. We want to make sure we do the right deal when we do the deal.

Okay, thank you. Thank you. We'll take our next question from Filippo Ferrari with Citi. Your line is open.

Hey, good morning everyone. I wanted to ask you about innovation and maybe you can give us some context of the contribution from innovation this year in Laundrie and the rest of your business and just any plans for 2025 and like areas of potential further innovation. And then a quick follow up. So on the gross margin, As we think about elections and potential for tariffs, last time there was some implication on the water pig business from some portion that were imported from China. Maybe can you remind us of any potential exposure on China tariffs? Thank you.

Yeah, thanks for the question. On innovation, we're actually super excited about innovation. It's close to around 2% incremental net sales for us in 2021. So remember, we have a high bar. We don't call gross sales. We don't call gross new product contribution. It's incremental net sales. So about half of our growth is kind of coming from innovation, which is fantastic. That's been accelerated. It used to be one, one and a half percent. And so we've built that muscle. We have a lot of different inputs, you know, Carlos, our leader in R&D, Leslie, our leader in MPD, all across the commercial team, we are doing really well on innovation. I expect that to continue. I think as we look forward, we have great pipelines over the next two or three years. We're not really even talking about 2025 right now. We're talking about 2026 and even early conversations on 27. So that muscle is alive and well, and we're going to keep investing behind it and driving investment behind it. On China, Right, just like everybody. We're well aware of implications there. You know, I would say two things. One is we did reclass a lot of our SIC codes, import codes. And so that has helped. And as you draw a circle around what may or may not be impacted. The second thing is we have moved some production out outside of China. And So it's most material for the Waterpik business, but there are plans in place and actions that we've taken to mitigate that impact.

All right. Thank you.

Thank you. We'll take our next question from Bill Chappell with Truro Securities. Your line is now open.

Good morning, and thanks for squeezing me in. Going back to vitamins. So I guess I'm having a tough time or they help me understand two things. One, just from a business standpoint, I mean, are you now thinking you need to spend more money behind it in 25 or is it because. With you being down 10% and the category being down basically flat, I'm not sure I understand the green shoots. It seems like things are getting worse. And so you can either step up and put a lot of money behind it, or you can kind of ease back and manage it more and more for cash. So are we at that point in a decision standpoint? And then second, kind of related, I also don't fully understand maybe the impairment charge. 10 years after acquiring the business. So maybe can help me understand why that was there and the timing and what that says, if anything. Thanks so much.

Yes, sure, Bill. I would say, let me take the second one first. When we do an impairment charge, all that is is just a looking forward of our model on what our growth rates are a growth rate assumption is, and that has, you know, what the category is growing at and what our expectations are, as well as our margin expectations. And they've come down since we originally put all those assets on the books. And so it's kind of a reconciling of that, right, the original expectations to what our current number is after we have amortization or And we evaluate that versus the intangible numbers and we say, oh, we have a gap and future growth and profits aren't as strong as they used to be. And so that's how you take the charge 10 years after. Your first question was on, oh, why do we think we're putting more money behind it? We're not going to go chase incremental spending on promotions and trade and advertising. That It was a few of the levers that we pulled this year, and you're right. Some of that is not working as we had hoped. Some of the things are working, and they do have green shoots. The biggest, most important single thing that we can do is make sure that our core products are delighting the consumer, and that's why we're so focused on the innovation piece. We think this is the first time in a few years that we've put the full strength of the company on reformulating vitamins so that we have our taste advantage back. We're hitting key marks in the market on sugar-free, on plussing up our vitamins. So all those things are, I think, putting us in a better position to compete. And they're way more important than spending more on trade or getting displays or doing other packaging stuff.

Yep. Okay, after that is, you know, when you buy a business, the excess of the purchase price over tangible assets is largely going to be goodwill. So that's always going to be a big part of any write off, and it's all dependent upon this DCF model. And as far as green shoots, though, that was not in our commentary, I think somebody offered up that they were asking about green shoots, we would say that we've done the things we can control. we have seen some benefit and some growth in Little Critters. It's not the lion's share of the business. This business really struggled through and post-COVID, and we got punished for that by the retailers. And in the meantime, we've been just working on improving our supply chain, which is now we have in a good place, and in doing the work on new products. The innovation is ahead of us and. We thought 2024 was going to be an inflection point. It was not that was dependent upon all the things we have talked about, meaning packaging and graphics and. Positioning and messaging advertising, but in the end it's going to be the innovation build and that went through the some of the things were changing. That's and that's ahead of us in 2025. So this time next year, Hopefully having a different conversation with you.

Got it, which leads me to this time next year. We won't be having a conversation, so congratulations on that. I know we will have you for a few more months, Matt on the retirement and Rick on the promotion. Thanks.

OK, Bill, I hope you make it to New York in January.

Wouldn't miss it.

Thanks, Bill.

We'll take our next question from Olivia Tong with Raymond James. Your line is now open.

Great. Thanks so much. And congrats on retirement and promotion to you guys as well. My question is primarily around some of the more recent premium price innovation that you've benefited from, particularly laundry with deep clean in the power sheets and then in litter as well. So as we go into a potentially more, or we are in a more challenging backdrop, does your trade-up opportunity become more challenging relative to your peers when macros get more challenging since your consumers obviously skew a little bit more towards value tier, therefore would imagine that they're a bit more pressured relative to consumer average. So just wondering about your ability there. And then the mixed implications, given that, you know, you obviously have been able to continue to eke out a bit of mixed benefit in the domestic business, despite obviously all the pricing lapping. Thank you.

Okay. You got a lot in there. I think if I wanted to boil it down, you're wondering, because of our premium, offerings of the lake, would that disadvantage us? And I would say, if you just take them one at a time, as far as hardball goes, hardball has been contributing to our share growth, you know, quarter after quarter. And, you know, last year, our share was like 4.5% of the category, the lightweight category. And, you know, that's grown, you know, quite a bit. We'll update everybody in January about what our share gain was on the entire year. But we think that's going to continue to grow. And it's because of the performance of the product, which is it seizes up closer as hard as a rock. There's nothing in the category like it. Parasheets is laundry in a box. And I think given over time, maybe it's been a slow roll as far as the consumer willing to pay for sustainable products, but this one seems to be a winner for us. So we don't think that simply because our category historically or our portfolio historically has been focused on value, that because we now have products in laundry and litter where our products Our core products, our values, so the yellow box in litter and the yellow bottle in laundry detergent, those are value products. But over time, we've offered premium products, and our consumer has traded up to them, and we've had other consumers for other brands trade over to us. So, again, in the end, I think for most consumer product companies, Innovation is always going to be the story in any environment, in any economy. So we feel very positive about those two innovations in particular.

Yeah, and just an example, like for deep plants, mid-tier in the laundry category, that's still a value to the premium tier. So folks can still trade down to that. It's growing categories, though, because folks are trading down and trading up from value in other areas. net-net, we still think it's a positive in most any economic environment. And what was your gross margin question, Olivia?

It was just around mixed, more importantly, you know, and the impact of mixed as time progresses, but I think you answered that within the top-line question.

Okay. Thanks.

Thanks so much. Really appreciate it. I'll pass it along.

Thank you. We'll take our next question from Javier Escalin with Evercore. Your line is open.

Hi, good morning, everyone. I wonder whether you can expand on the international business in the context of increase in reinvestment in Q4, if you can flag geographies or brands that you are seeing more extraction, and also whether there is any measurable contribution of the business that you acquired in Japan or is just too early. And then I have a follow-up.

Yeah, I would say with respect to international, when we're doing well like this, considering we have so many countries and so many brands, including regional brands, and the call goes out to our general managers in our subsidiaries. And so consequently, where we think we can spend to drive growth or position ourselves well for next year is where we're going to go. But I wouldn't say there's any one particular in international, one particular category. or brand that we would be over-indexing on in Q4? It's this opportunistic spend.

I thought it was Japan. It's probably too early to talk about that, Javier. I mean, we're optimistic. It is a relatively small business, but we're excited about the opportunity to add a few of our global brands into Japan with a great team that is – doing a great job with OxiClean. We think they can also do a great job with a handful of other brands.

Thank you, guys. And the follow-up is on the legacy, let's call it that way, detergent business, DeepClean doing well. Do you try... This is kind of like the second iteration that you go into the tiers. You did the OxiClean detergent, I believe, and did in Panal. So what is driving the success this time around? Do you feel it's the consumer... something with the competition from our friends in Germany is that the retailers are more susceptible to this mid-tier. Anything that you can contrast relative to the OxiClean extension in detergent that didn't pan out as well as DeepClean, that would be very helpful. Thank you.

Yeah, it's a fair question. I think it's actually a simpler answer. OxiClean is a new brand. But it's an additive brand, and it was not. There was consumer confusion as we tried to go into laundry. It just didn't make the connection. Here, Arm & Hammer is well known for laundry, and just going up and down the tiers is a much easier proposition, and that's why I think we're finding early success.

Thank you. We'll take our next question from Corrine Wolfmeyer with Piper Sandler. Your line is open.

Hey, good morning. Thanks for taking the question. As we think about some of your innovations next year and particularly around the VMS business, how should we be thinking about this R&D spend and some of this extra innovation spend? Is there any risk to the SG&A as we head into next year due to these investments? And then anything else we should be considering I think you called out some IT spend. That was a bit of a headwind. Anything else to consider for SG&A as we head into Q4 next year? Thanks.

Yeah, we don't – I mean, over a long period of time, we spent around 2% of SG&A on R&D, and that's been a pretty good number for us. Next year, we're implementing an SAP project. We're doing our updating our ERP system. Just last time we did that was 2009. It's just time for an upgrade. But I wouldn't really qualify or call out anything at this point in time. We'll do that in January at our analyst day.

Great, thanks.

And that was our last question. I will turn the call back over to Matt for any additional or closing remarks.

No, I think that kind of wraps it up for today. We're looking forward to seeing everybody at our Analyst Day in New York City at the Exchange at the end of January. And until then, so long.

This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful day.