Church & Dwight Co., Inc. (CHD) Earnings Call Transcript & Summary

Welcome back. Before I introduce the next company, I mentioned this yesterday morning. I just wanted to give everyone a reminder that this evening after the Altria dinner, we'll be hosting the President's party on the top floor of the tower, the 27th floor hit restaurant in the elevator, and hopefully, we'll all see you there. With that, for our next session, it's my pleasure to welcome back Church & Dwight to the conference. With us today are Chairman and CEO, Matt Farrell; and CFO and Head of Business Operations, Rick Dierker. Together, Matt and Rick will take us on a look back through the ups and downs, highs and lows of 2022 and also underscore why their confident as they look forward to the future. If history is a guide, they'll run us through about 200 slides in about 35 minutes, and we'll take some Q&A. I expect we'll hear about free cash flow, the Evergreen model, this year's new Give it the Hammer campaign, but also just stay tuned for the Hardball video. It's a really good one. Matt, Rick, thanks for joining us. Thanks also for sponsoring tomorrow morning's break. And with that, over to you, Matt.

Great to be back. I see a lot of old friends, investors, analysts. So let's begin. Here's a safe harbor statement. I encourage everybody to take a look at that after class today. I'm going to start with a look back at 2022. So we had $250 million of increases in cost of goods sold in '22 versus '21. That put quite a crimp in our gross margin expansion in 2022. We raised prices for the second time in 2022 in a couple of categories, laundry and litter. We had raised prices already in '21. We priced up 80% of our portfolio. Even with that, we had gross margin contraction of 170 basis points in 2022. Many of our brands had a good year. So ARM & HAMMER Litter, ARM & HAMMER liquid laundry detergent, all had record high shares in '22. Three other brands, ZICAM, THERABREATH and Hero, these are acquisitions in '20, '21 and '22, all had double-digit consumption and market share gains. And finally, we made a lot of investments in supply chain resilience. We learned a lot during the COVID, the great pandemic and put a lot of money into our supply chain footprint, and we're ready for the next black swan event. One other thing I want to note, too, we had a few businesses that went backwards this past year. That's WATERPIK, FLAWLESS and our vitamin business. That represents 20% of Church & Dwight's portfolio. The 80% of the business grew 4%. The 20% went completely backwards, resulting in organic growth of 1.4%. And as many of you know, our organic growth target is 3%. And also hurt us on the bottom line as well. Our evergreen target closed for 8% EPS growth, and we actually went backwards this past year with minus 2% EPS. So all that resulted in negative shareholder return. Now I've been with this company for 16 years. And for the first 15 years, every year, we had positive total shareholder return, oftentimes double digit. So this is an anomaly for Church & Dwight. It's a big disappointment to me, it's a disappointment to our management team, our employees, our shareholders, in particular. And so the point right now is we've got to dust ourselves off and now size forward to 2023. All right. Now why do we have confidence in the future? I've mentioned we have an evergreen model of 3% top line, 8% bottom line. We have a terrific portfolio of brands in the U.S. International has been a juggernaut for us for many years up until 2022. We're going to restart that engine in 2023. We have a fabulous innovation pipeline for the company. Year-after-year, our new products account for 1% to 1.5% of our organic growth. We're becoming more and more digitally savvy as a company. I'm going to tell you later on that 16% of our sales are ordered by consumers online. So we think our long-term evergreen model is healthy. As far as 2023 goes, we have good fundamentals. Our reported sales growth is expected to be 6% on the top line, organic 3% growth. Our gross margin is expected to expand 100 to 120 basis points. And our EPS will grow 0% to 4%. Why? Because we're going to be investing more in marketing and we have normalized incentive comp in 2023. So now who we are? We're a $5.4 billion company, largely U.S. Consequently, we have lots of runway internationally, 70% international, and our original business, Specialty Products, is 6% of company. We have 14 well-known power brands, and those 14 brands account for 85% of our revenues and profits. And here's our winning formula, and this hasn't changed for a long time. We have a balanced and diversified portfolio. We have low exposure to private label, I'll show you some numbers in a minute. We have terrific innovation and we're an acquisitive company. Let's start with the diversified portfolio. So we're 40% value and 60% premium. That split has been like that for my entire time with the company, Going back to 2008, you'll still see 40% value, 60% premium. We have a nice balance between household and personal care, almost evenly split, 46% household, 48% personal care. And here's our weighted average private label share exposure, it's 12%. And it's been like that for many, many years. Now here are the brands that have private label exposure, meaningful private label exposure. And if you look at the lines on this graph, you'll see that they're pretty stable over time. And here's an array of many of the products we're launching in 2023. I'll talk about more of those later on. We have a long history of growth through acquisitions. In the far left part of this slide, you'll see in 2004, the company completed the Carter-Wallace acquisition. That was the first big acquisition by the company. And then we ended the year with $1.5 billion of sales, we're $5.4 billion today. And virtually every year we've made an acquisition along the way. 2000 -- in the year 2000, the only major brand we had was ARM & HAMMER. 13 of those 14 brands have been acquired since the year 2000, and they're all #1 or #2 in their categories. And we have very clear acquisition criteria. As I said, #1 or #2 in their categories, high growth, high margin. You'll notice that we have a different color there for fast-moving consumables. We bought a business a few years ago called FLAWLESS that went sideways and then declined for us. So we learned a lesson. It was a device and you won't be seeing us buying devices in the future. We're asset light, prefer to buy businesses that are manufactured by co-mans. And also, we get a lot of synergies from our manufacturing, logistics and purchasing infrastructure. And finally, these brands need to have a long-term competitive advantage. We like to say 14 brands today, 20 tomorrow. So that's our formula. Balanced and diversified portfolio, low private label exposure, strong innovation, and we're an acquisitive company. And next is going to bring up Rick to take us through the financials.

All right. Thank you, Matt. We're going to go through the 2022 outlook -- our actual 2023 outlook, capital allocation. But Steve, we're going to start with the evergreen model. So this is what we do. Organically, we want to grow 3% every year. Gross margin will expand 25 basis points every year. Marketing is typically flat on a percent of sales but higher on dollars. SG&A, we leverage as the top line grows typically twice the rate of SG&A dollars. And then operating margin is about 50 basis points of expansion, and that with the 8% EPS growth. In 2022, how we do? Our outlook was around 3% for reported sales growth. We came in about 3.5%. Organically, we said about 1%. We came in at 1.5%. Gross margin, we contracted. You heard from Matt, 250 basis -- $250 million of inflation in 2022. Adjusted EPS, we were at the high end of our range of $297 million and reported, we were down 49% because we had a noncash impairment charge for FLAWLESS. But from a cash -- from operations perspective, we beat our outlook, $885 million of inventory and working capital improved through the end of 2022. Okay. 2023. So this is a chance to simplify what our outlook is. And Matt alluded to a few of these, but our range is 0% to 4% EPS growth, the midpoint is 2%. If you take a step back for a second, our core adjusted EPS growth is about 10%. We're investing in brands and people. So our incremental marketing spend is moving to 10.5% now that our fill levels are back to normal. We're also getting back to par from an incentive comp perspective, so that's about $30 million or a 3% drag. And then we have higher interest for our Hero acquisition, higher taxes and just floating rate debt. So all in all, we're about 2% midpoint, but making those specific investments purposeful. Here's the detail of the outlook, 5% to 7% reported sales growth, 2% to 4% domestic -- organic sales growth with domestic being 2% to 3%, international 3% to 5% and SPD 5% to 6%. Gross margin for the first time in a long time expands 100 to 120 basis points. Marketing, I just talked about that, up to 10.5%, so investing behind our brands. SG&A is higher as we have higher incentive comp. Operating margin is flattish. And other expense is a drag of $110 million, which is $35 million higher on interest expense year-over-year. EPS is 0% to 4% and then cash grows about 5% to $925 million. So let's look at our track record. Over the last 10 years, we usually show this just organically, but we decided to show reported as well. We have a track record of 6% over the last 10 years, average net sales growth. Our outlook is 5% to 7% in 2023. 2% to 4% is the outlook in 2023. Evergreen model is 3%. Our average has been 4% over the last 10 years. And here is an important part of the volume of the revenue story. So typically, if we think of our evergreen model, 3% organic net sales growth, it's been over a long period of time, 3% volume and largely flat on price. That story returns in the second half of 2023. And you can see the progress we're making in Q3 of 2022 because of all the pricing that we've taken, as the industry has dealt with all the commodity inflation, we had negative volumes. That improved in Q4. It improved -- we expect it to improve again in Q1 and Q2 and inflect positively in the back half of 2023. Strong focus on gross margin this year, 100 to 120 basis points. So that's 110 basis points at the midpoint. So that means we're expecting around 43% in 2023. Our high watermark was 2019 at 45.5%, a lot of confidence that we're going to have that expansion. So inflation moderates, productivity programs, all that work and effort isn't being masked anymore with inflation. Margin accretive acquisitions are a tailwind. And as our case fill improves, it means our logistics costs improve and our fines go down. In 2023, our marketing spend, we expect to be 10.5%. And really, that's the $30 million that we talked about before. We really wanted to inflect positively on marketing spend as our fill rates have recovered. And then SG&A is higher. We've talked to that a bit about Hero, our recent acquisition, which we're really enthusiastic about has stand-alone SG&A. We have $30 million more for normalized incentive comp, but don't worry, our long-term evergreen leverage targets are still in place. And then we have a great track record of EPS growth, high single digit, low double digit for many years. Matt talked about the step backwards in 2022. I've talked about the investments we're making in 2023, but a lot of confidence in the evergreen model as we move forward. And we have a first half, second half story for EPS. First half, we have choppiness from those discretionary businesses that Matt talked about, WATERPIK and FLAWLESS. And then international supply challenges as we've added new capacity comes online by April, May this year and higher marketing dollars year-over-year. Second half, we have volume growth that I just talked about. We have productivity outpacing inflation and we have improved global supply. Moving on to cash flow. So the last 10 years, we've averaged 119% free cash flow conversion. In 2022, we expect -- we ended at 97%. Why is that? Well, we have higher CapEx. We're investing in capacity, and I'll get into in a minute, but for laundry, litter, vitamins, and we're going to have a stair step back down in the future. Cash conversion cycle. We've gone from 52 days cash conversion cycle to about 19 days. We've made some great improvements along the way. We have more room to run there. We had a step-up in 2022 because of those discretionary businesses, and they had elevated inventories. But as you heard me say on the very first page, a lot of that working capital cash flow beat was because inventories are starting to come back in line. And we have a strong balance sheet. 1.7x levered is our expectation by the end of 2023 which means we could do up to a $3.2 billion deal and still maintain our credit rating at investment grade. And then capital allocation. Number one, far and away is our TSR accretive M&A. Matt's slide shown for 14 power brands going to 20. That is the #1 direction for capital for the company. Number two, CapEx for organic growth, really capacity in G2G, our productivity program. Number three, new product development. Number four, debt reduction. And number five, return cash to shareholders, and I'll talk about the dividend in a minute. So this is all about capacity, ensuring a steady supply for our categories, laundry, litter, baking soda vitamins, sustainability efforts as we embrace science-based targets, all those things require capital. And here's the outlook for capital. So you can look, we're not a capital-intensive company. We've been around 2% of sales for a very long time. We had a step-up back in 2009 when we added a plant. We also had one in 2011. But in 2022 and 2023, we're adding capacity for those businesses. We expect it to stair step back down over the next 2 years. And then finally, our dividend increase. Our outlook for EPS was 0% to 4%, and we raised our dividend 4% at the high end of the range. That's 122 years of consecutive dividends. And with that, I'll turn it back to Matt.

Okay. I'm going to take it the rest of the way. I want to start with the U.S. business. As I said earlier, the outlook for our U.S. business is really bright. So we're leaders in growing categories. We thrive in tough environments and our acquisitions have room to run. So let's look at all 3 of those. So we're in 17 categories, green means that the category is growing. You look at the bottom of the slide, you see that 2018 grew 4%; '19, 4.5%; and then with COVID, '20 and '21, almost 10% both years. Floated back down to 6% in 2022. But so far, in 2023, we're seeing a similar number around 6%. As far as the growing share goes, we have 14 brands. Our goal is to maintain or expand share in 2/3 of those brands that will be 9 out of 14. We only got 7 out of 14 in 2022. We definitely got hurt in 3 categories because of our supply chain issues. So those would be pregnancy test kits there and vitamins. And you can see on this slide, we had really a dismal fill rates early in 2022 80%, typically 98% fill rates. We got to 90% by the end of the year, we're going to climb the rest of the way in 2022 -- 2023. And we do think that as a result, we'll be hitting at least 9 out of 14 brands maintained or gained share in '23. Now driving a difficult economy. You saw earlier that we have a balanced portfolio. We have low exposure to private label. Now let's look at a few categories where we can -- that comes to life. First, Fabric Care. Check out these numbers. So liquid laundry detergent in the left-hand side of the slide, here is the quarterly growth rates for liquid laundry category. You see it was up around 7% in Q1, Q2, then with $5 gasoline inflation, et cetera, the category pulled back in Q3 and Q4, not so for ARM & HAMMER liquid laundry detergent. Just look at those numbers, Q1, 2, 3 and 4, 15% year-over-year growth rate for liquid laundry detergent. So what's happening is you have a trade down. Trade down from premium laundry detergent to value detergent. We've seen this movie before back in the Great Recession back in 2008. And as a result, you see that ARM & HAMMER liquid laundry detergent is achieving all-time highs in market share, almost 15% in Q4. Now let's look at Litter, another big category for us. So the Litter category had huge consumption growth in 2022 as well. You can see a double digit in every quarter, largely driven by price. Now if you look at share over the last few years, you see ARM & HAMMER is really the only brand that's grown share since 2019. And if you say what's driving that, it's the Orange Box. We have a Black Box, which is our premium cat litter, and we have the Orange Box, which is a 30% discount. There's what's going on with Orange box. You can see the spike there in the second half of 2022, reaching 11.6% share. So once again, the value portfolio is coming through for us. Now number three, so we have -- our recent acquisitions have room to run. The most recent ones being THERABREATH and Hero, and I want to go through some stats with you in a moment. First up, is going to be THERABREATH. So here we're talking about the mouthwash category, which is about a $1.8 billion category. It split between alcohol and nonalcohol about 50%-50% for each. But if you just look at the total mouthwash category, look at the share of THERABREATH on the right-hand side, 2.6%, 3.9%, 5.6%, 8.1% share. We actually have a 20% share if you just look at the non-alcohol segment of mouthwash. So we're the #2 alcohol-free mouthwash today. And there's lots of room to run. Just focus on the total points of distribution. All the big brands in the category, LISTERINE and Crest got way more SKUs than THERABREATH. We're only just getting started there. Now we're going to run a quick TikTok spot just so this would be more memorable for you. [Presentation]

No features and benefits, no pricing, no talking. It's a new world, but it sells. That's TikTok. Okay, now Mighty Patch. All right. Check out these numbers. So the acne treatment category was a very sleepy category for a long time. Look on the left-hand side of the slide, you see around $600 million in '18, '19, '20 until patches arrived as treatment. And so this is the insight that the Hero people had. So you look at those numbers on the far right to see huge growth year-over-year. And the fascinating thing about this is they've only been in Target and Amazon. So it's also infinitesimal as far as the bricks-and-mortar distribution. That's all ahead of us in '23 and '24. Lots of room to grow here for this brand. And we've got another TikTok spot for you for Hero, you roll it. [Presentation]

All right. Can you tell us what the marketers did that one? I'll take that, a little bit different, but still very effective. All right. So in summary, with respect to the U.S., we're leaders in growing categories. We thrive in tough economies and the acquisitions have room to run. So next up is going to be innovation in our pipeline. We have a fantastic group of people in our new product development group and in R&D. And they are able to innovate across all of our categories. Here's the breadth of the -- of the new products that we're launching in 2023. I'm going to talk about a number of them, and then I want to end on Hardball, which, as Steve pointed out, is our new innovation in the litter category. So here is a Hero Mighty Patch or Micropoint XL. So this is for early-stage blemishes, the contours around your face, jaw line, cheeks and chin. THERABREATH is moving from adult into kids. So we're going to have THERABREATH for kids, ages 6 to 12. TROJAN is already the thinnest latex condom in the U.S. Now we have the thinnest non-latex condom in the U.S. And now VITAFUSION PMS daily support. I was expecting thunderous applause for this one. It's -- this is going to expand VITAFUSION'S women's health portfolio. Now WATERPIK, we have a cordless slide. So this collapses to 50% of its size, put it in your pocket. It comes in different colors. BATISTE, we all know is a dry shampoo. This is used for overnight use so that you don't have oil buildup overnight, you wake up to fresh your hair. And then finally, near prep and smooth face. So this preps your skin on your face exfoliates, makes it easier to put on makeup. And now we come to Hardball. This is our new Litter offering. We've been an innovator in the category for many, many years. We entered the Litter category in 1998, and we've had 12% CAGR since then year after year after year, largely driven by our innovation. You go back to 2010, when of our innovations was double duty. I think this was the first packaged good in America had the word urine and feces on it. Now that's TMI, but they address both urine odors and feces. In 2014, CLUMP & SEAL came out. That's our premium cat litter, which is -- it's a high premium to our Yellow Box. And then finally, Hardball, which is our latest innovation. Now why does this matter? If you look at the Litter category today, we have a brand number of 25% share of total clumping litter. Within clumping litter, you have regular weight and you have lightweight. If you pull lightweight out, which is about 16% of the category, we're a peanut with 5% share. So this is meant to get our fair share of lightweight. So Hardball is not clay based, it's not mined, it's organ-based. So it's a plant-based litter. So it's sustainable and it's lightweight. And the amazing thing about it is that the clumps are virtually indestructible. So I want to -- this is -- before you run this, I want to give you a little background. So this is not a commercial. This is a video that we created in-house because we're having some fun with the product. So you can roll it now. [Presentation]

Look how serious they are. I think [ Lederman ] would have had some fun with this back in the day, we used to throw pumpkins off of balcony, some on that. So maybe you'll see this on some late-night show some day. All right. Hardball. So 3 things that surprisingly lightweight, it's virtually indestructible and is sustainable. It's not mined. So we're going to be putting a lot of money behind that. All right. Next up is Give it the HAMMER is the new campaign that we're rolling out. Remember, Church & Dwight is a $5 billion company. $2 billion is a branded ARM & HAMMER. So we're in a lot of categories. We're in laundry, we're in litter, we're in toothpaste, underarm deodorant, baking soda. And if you look at what's going on right now, the recession is looming, yes, it's true, the unemployment is still pretty low. But if you look at what the American household is dealing with today, they're paying $400 more per month for the same goods that were purchased a year ago. So they feel powerless. And this is something we pulled off the Internet. I'm going to read this to you. When you work hard, they get a good job, but it doesn't even feel like it matters. When gas is $5, rent increases by hundreds of dollars, frozen chicken is $25. It's impossible by home and inflation is so high that the Dollar Tree is now the $1.25 tree. They feel powerless. So what's happening as a result. You can see some of the stats on this slide, but people are shopping different stores. They're shopping in different brands, and they plan to add those new brands into their permanent lineup. So we believe that ARM & HAMMER has really made for this moment. This is a hard-working brand, and it's well suited for working class consumers. So I'm going to roll the spot. [Presentation]

Okay. You're going to be seeing a lot of this national TV, video, influence retail, et cetera. So we've put a lot of money behind this. We think this is a great moment for the brand. Now I want to just talk about digital just for a couple of minutes. If we went back to 2015, only 1% of our sales were online. Today, it's 16%. At Asterix, you see up there says that we're excluding the last mile, so things like Instacart, click-and-collect, we included that would probably be closer to 18%. We think that in the future, that's going to grow to 20%, 25%, 30% over the next 5 to 10 years. We got to get ready for that. So we need to have a digital-first mindset. And it's 3 things: how you approach commerce? How -- what kind of an expert you are in digital marketing? And then finally, what kind of talent you have in-house? Okay. So as far as the mindset across all channels, 80% of consumers shop omnichannel. They're not committed to one aspect of the channel. So we got to be good in-store and online. As far as marketing goes, 70% of our media today is digital. And there's a lot of outlets, video, social influencers, retail media, et cetera. So we have to have the right content for the right vehicles. But the most important thing is people. We have a fabulous e-commerce team in-house. We recruited a terrific leader, Chief Digital Growth Officer in 2022. We're focusing on upskilling our people. We have a digital IQ certification program. It's open not just to sales and marketing people, to people in any function in the company. We've made a lot of changes to our partners over the past 18 months. So now we're working with best-of-breed partners, lots of new ideas, very contemporary, and we're focused on analytics. We have a center of excellence for analytics. We've made some recent acquisitions of digitally native brands, notably Hero and THERABREATH. There's lots of learnings from those brands so we can transfer over to our iconic brands like ARM & HAMMER, OXICLEAN, TROJAN. And finally, the commercial team, sales and marketing is one face for the customer supported by a center of excellence for digital. Now I want to move on to international. As Rick pointed out earlier, we have a 3% goal. That's our organic growth target, 2% U.S., 6% international and 5% Specialty Products. Here's how international looks. It's a $900 million business. On the right-hand side, you're going to see the subsidiaries of Canada, Europe, Australia and Mexico that makes up 2/3 of the business. The other 1/3 is made up for our global markets group that takes our brands to 80 countries around the world. We have -- our evergreen target for international is 6%. And I mentioned earlier, it has been a juggernaut. So if you go from 2015 to 2020, you had significant growth year after year, pull back a little bit in '21 during the pandemic. And then '22, we went backwards for a few reasons: one, supply chain problems, Russia as well as China lockdown. Still, the 2.8% growth we thought was pretty good in 2022, considering what we're against the subsidiaries and the far left grew 4%. And then the Global Markets Group has 5 regions, 4 regions grew, many of them double digit, but China went completely backwards for us in 2022. Reason? We have so much confidence that we can grow internationally, and that's a big part of the future of the company is that we have our U.S. power brands that we can take global. These are terrific brands. We have brands in the middle of the slide that are native to the international business. BATISTE came to the U.S. from Europe. These brands are the cornerstones of the international business and lots of room to run through our global markets group. And then finally, more recent acquisitions, THERABREATH, Hero and also WATERPIK have lots of opportunity to grow internationally and our distributors are just dying to get these brands. Now if you look at -- if you contrast Church & Dwight with other CPG companies, you see, where our consumer business is 18% of -- international is 18% of our sales. Most of our competitors are 60%. So they took their brands worldwide decades ago. We're only getting started right now. So lots of opportunity for Church & Dwight. And we're making lots of investments. So in 2022, we stood up an ERP system in China so that we can now go direct in China. We're also adding to our -- not only our tools, but people who are experts in digital commerce in our subsidiaries. We've linked all our subsidiaries together with respect to pricing and revenue growth management so they can compare notes in different markets. We're finding local manufacturers to make our products in Asia that's going to cut down all transportation and logistics issues. And we're also adding a lot of people this year to our international infrastructure for Global Markets group, most notably in Singapore. And then finally, we opened an office in Mumbai in 2022. So just to wrap up international, lots of runway for us for years and years to come for our existing brands. We can leverage our newly acquired brands, THERABREATH as well as WATERPIK. The Global Markets group is focused on emerging markets, and we're making lots of investments here. So this is part of our future. Next up is Specialty Products. You see a 5% algorithm for Specialty Products, largely driven by the animal productivity business. this breaks down. It's a $350 million business. The 70% is animal nutrition. That's what I'm going to talk about. And 30% is Specialty Chemicals, that's essentially bulk sodium bicarbonate, which we've been making for 175 years. Now if you look at the animal business, the reason why that's on trend is because we make prebiotics and probiotics. And the trend is away from antibiotics when it comes to food production. All of these brands live under the banner of ARM & HAMMER. And just like the Consumer business, the Animal Productivity business also has opportunity to grow internationally. And the Specialty Products business once upon a time was very cyclical. We were up 1 year, down 2 years, up 1 year, down 2 years, why is that? Because we were beholden to the dairy industry and dairy pricing. That's no longer the case. We've diversified away from dairy. If you look at '20, '21, '22, we had positive organic growth, and we're expecting the same in 2023 with 5% to 6% growth from SPD. All right. So just to wrap that one up. It's a trusted brand, ARM & HAMMER. We're aligned with consumer trends. Lots of room to grow internationally. We've diversified, which makes us less cyclical. And now I'm going to end with how we run the company. So we have a lot of brands in Church & Dwight, but they're very manageable because of the way we're structured. The dark blue ones here, these are the SBUs, the business units within the U.S. And we group all the brands naturally under each one of those headings. You see ARM & HAMMER appear in 3 places. That's simply because we have -- within Fabric Care, we have liquid laundry detergent. Home care, we have baking soda and litter. Over in personal care, we have toothpaste, for example. And over in international, you see we've listed all of our various brands. But this makes it not only easy to manage all the brands that we have, but also to slot in any of the new brands that we acquire. We have 5 operating principles. We have brands consumers love. We've been a friend of the environment for centuries. We leverage people, assets and acquisitions. I'm going to talk about each one of these. I already talked about leveraging brands quite a bit. I want to talk about being a friend of the environment. So you went back to 1888, Church & Dwight was putting pictures of birds in cartons of baking soda. And the cartons said save the birds, save the planet. So Church & Dwight was founded by people who really had an affinity for the environment. In 1907, we were using recycled paperboard in our packages. So this company was really focused on the environment well before anybody could spell sustainability. In 1970, we were the only sponsor of the first Earth Day. 20 years later, 1990, still the only corporate sponsor of Earth Day. We were the first to take phosphates out of laundry detergent in the 1970s. Starting -- in 2017, we started planting trees in the Mississippi River Valley. We all know from fifth grade science that trees takes CO2 out of the atmosphere. We put 350,000 tons of CO2 into the atmosphere annually, just our little company. So this is our way of offsetting that. In 2018, 100% of our electricity was offset by green energy. And finally, in 2021, we committed to science-based targets. Here are our goals. By 2025, we want to have -- be 100% carbon neutral via the offsets, planting trees I talked about. We're also committed to science-based targets. What that focuses on is reducing the amount of CO2 you put into the atmosphere by changing the equipment in your plants. We want to reduce our water usage by 10% annually, and we want to recycle 75% of our waste. We get lots of recognition for the things we're doing, FTSE4Good, EPA, Green Power Partner and Safer Choice. We've been a Safer Choice partner for 7 years. And we're all quants in the room. We're focused on numbers and ratings. So it's just one of our ESG scores. We've been making lots of progress. So BBB in 2020, A in '21, AA in 2022. So making lots of progress. Now I want to move to leveraging people. Church & Dwight is a terrific company. We've got great brands. We've got great people, and we have a great culture. And the way we describe our culture is as follows: We're a company that's a roll-up-your-sleeves company called Blue-collar. We've got a high aptitude people in the company, many of them who have come from larger CPG companies. So Blue-collar, high aptitude, underdog. A lot of the companies we compete with virtual all of them are way bigger than we are. The fourth thing is we've got the facts. We're focused on making decisions based on data. We're digitally savvy, we're becoming more digitally savvy every year. We're focused on diversity in the company. And also we like people who are risk takers, who challenge the status quo, that's us. Now here's a really underappreciated statistic, that's revenue per employee. So our revenue per employee is over $1 million, which is fantastic. And we have a very simple compensation structure, sales, gross margin, cash from operation and EPS. So all of our employees are focused on gross margin. Yes, we didn't really pull that off the last couple of years. But by having this in your incentive comp, it creates financial literacy. And here's the playbook, and it hasn't changed. Good to Great is the name of our continuous improvement program. Supply chain optimization is simply modernizing your equipment, investing in automation. When you launch new products, you want to have new products that have a higher gross margin than the products that you're replacing. And finally, acquisitions often, we're able to generate significant synergies as a result of putting them in our system. The next up is leverage assets, you heard Rick talk about this. I won't repeat it, but we're an asset-light company. And the 2 spikes that you see there, one was when we built our Europe plant in 2009 and looking ahead, '22, '23 and '24, significant investment in laundry, litter and vitamins. And we're going to grow into that in the future. So lots of growth ahead. So if you do the first 4 things really well, you get good returns. But if you can add on top of that, leveraging acquisitions, you get great returns. And that's what we've gotten for many, many years. So here's the track record, $1.5 billion in 2004, $5.4 billion in 2022. Done an acquisition almost every year. We have clear acquisition criteria. And I'm going to end with 2023, last slide. So we feel good about 2023. We're looking at 6% top line for reported, 3% organic. We're expecting 100 to 120 basis points of gross margin expansion. We have a terrific new product pipeline. You heard me talk about each and every one of them. We're taking up our advertising investment deliberately in 2023. We're making a lot of investments in capacity, as you saw on that last slide. And then finally, we have significant cash flow generation to fund future acquisitions. With that, I'm going to wrap it up, and it's time for questions from our friends in the audience. Bill Chappell?

Just a question on acquisitions. 15 years ago, I think you had said and prior to you have said we would look at small deals, $10 million, $15 million deals because it doesn't really move the needle and it takes a lot of time. Now you've gone from $1.5 billion of sales to $5 billion of sales. So why still look at $100 million in sales deals? Not to say that you can't be successful with them, but does it take -- you have this high revenue per employee. Does it take a stretch to the employees? Does it take a lot of time? Do you really get incremental shareholder value from searching small deals that, again, if they grow 50%, they still barely move to top line needle? And then second, kind of with that, how does your acquisition criteria change with higher interest rates? I mean, obviously, it's one thing when you're borrowing at 1% or less, and can get returns. How does it change in the current environment?

Yes. Okay. I think the way we look at acquisitions is what category are we entering. So we take the TROJAN category. We talk a lot about TROJAN in meetings like this. Condoms is a $400 million category. We bought THERABREATH because it's a $1.8 billion category. So the whole point there is you want to -- when you buy -- get an acquisition, it opens the door to a new category. So we're not looking for THERABREATH just to double in size. We're looking for that quadrupling size, quintupling size. That's the ambition for that business. It's not just, well, you get $100 million, it's going to become $200 million over time, no. That's a business we expect to be a $500 million business in the future. And a business also that can not only be successful in the U.S., but also internationally. So the way you look at a deal now is what category are you going through? And is it large enough to make a difference for the company. So that's what's changed. Your question with respect to interest rates. The way we look at acquisitions is how much cash earnings is it going to generate for the company. And we're less focused on EPS accretion because EPS is just masked by the amortization of intangibles. So obviously, with interest rates high, multiples will come down. We should be less expensive. But good brands always draw a crowd. So these are auctions. And obviously, we have a -- we're very disciplined about how much we're going to pay for a business and there are deals we walk away from in the last 12 months because we just thought they were too rich. But we do -- how we look at it, Bill, it hasn't changed. So interest is just part of the story. It's -- but it's temporary. Interest rates go up and down over time. So you've got to take the long view with respect to the business. That's a good question. The one we ask ourselves internally quite frequently. Kevin?

Kevin Grundy, Jefferies. Taking sort of the other side of the discussion, as you guys put in the Slide, 14 power brands today going to 20 tomorrow. The question is around sort of portfolio review and potential for divestiture. So I think sometimes what's interesting about platform companies, I think you guys are exceptional in that regard. But that being said, brands that you acquired 15, 20 years ago may not meet the criteria today. So how do you evaluate brands within the portfolio, ensure that they're meeting growth, margin, return hurdles, such that they still make sense and could potentially be entertained as a divestiture candidate and be accretive to shareholders?

Yes. Well, if we put a slide up with the annual sales for all the power brands, actually ARM & HAMMER would be the big block on the left-hand slide, and then they would go down from there. And over on the far right, you have lots of smaller brands that once upon a time, they were big when we were at $2 billion or $3 billion in sales, but now we're $5.5 billion going to $6 billion in sales. So it is fair to say that some of those brands could potentially be divestitures in the future. But it's something that we always have to assess what's the capital intensity of those brands as well. Now if you have a brand that's a small brand, it's not capital intensive. Let's say, it's a Steady-Eddie business, maybe it grows 1% a year grows with population, that throws off cash earnings. We would say, okay, now that's a business we're going to hang on to. But if a business is now challenged. It's a business we're not going to invest in that there's other competitors moving in bigger. That would be one that could potentially be divested. But our bigger brands right now would not be in that category, to be generally the smaller brands.

Peter Grom, UBS. So Rick, you showed the slide around marketing as a percentage of sales. It's moving up, I guess, 50 basis points or so, so step up versus '23. Is this the right pace for mental level moving forward? And I guess what I'm trying to understand is we've heard a lot about investments stepping up from a number of CPG peers. And I would just be curious if commodities are a bit more favorable or demand comes in better. How do you think about reinvestment versus letting some of that favorability drop to the bottom line?

Can you hear me?

Yes.

Thanks for the question, Peter. So on Analyst Day, we also said, if you do the math, effectively, our 10% of sales rate of spend is equivalent to about 11.7% as you take the price increases the last 2 or 3 years into effect, that should give us some confidence that, that is a good number, right? We're increasing that further. And so -- now historically, we've been between 11% and 12%. I think that's a good number. What's our report card for that? It's how our shares are doing, right? We publish -- not very many people do, but we publish every single year how our shares are doing. Now our categories are growing, great. That's one thing. How are our brands going? How are they taking share? We want to grow 9 of 14. That's the indicator whether or not we need to step it up or not. So that will drive the decision.

One actually about gross margin. You mentioned turning positive this year, but what's your view on longer term? Is it to get back to where it had historically been? Or are there impediments in place now that make that more challenging?

Yes. So thanks, Olivia. Again, similar to what I said at the Analyst Day, and when I said a few minutes ago, if you take the midpoint of our range, we're at 43% is our outlook for 2023. Our high watermark is 45%, 45.5%. Our productivity program is around 2% of sales, typically, right? A few years ago, we were -- we probably had a lower bar than that. But these last few years, we were trying to hit 2% of sales. That is being mapped by the inflationary pressures we've had, right, $250 million last year, $290 million a year before that. We're sitting at $125 million in 2023. Normally, that's about $50 million or $60 million of inflation. When things -- and things will eventually calm down, right? Inflation will get probably back to normalized levels eventually. And when that happens, we think our productivity programs outpace inflation. When that happens, that's going to be a good driver, good tailwind to gross margin expansion and a stair step back up to historical levels. It's not pricing, it's more about productivity.

And you can expand gross margin just by saving your way to prosperity. You also have to drive your high-margin brands and Hero, THERABREATH, for example. So that's also going to be a tailwind in the future years to expand gross margin.

Following up on M&A discussion. So what are your thoughts on protecting your flank for some new acquisitions or fast growth? Inevitably, that will bring in other competitors in the space. I think in Hero category, you have a very large competitor who has announced some innovation in that space as well. So perhaps, what have you learned from other small deals that you've done that have become great successes, BATISTE comes to mind? And it just come up that, hey, we went through this period of acquisitions, competition clearly weighed, that happen again with THERABREATH and with HERO? And I'm just curious how you respond to that.

Yes. Well, I would say BATISTE, we bought in 2011, it was a $20 million business at that time. Today, globally, it's over $200 million. It's attracted all the usual suspects into the category, beauty brands, yet the business continues to grow and grew significantly share in 2022. So obviously, you have -- you do have to worry about other people entering the category, but we have the most efficacious dry shampoo and we've been focused on our marketing and supporting that significantly. So I'm not worried about BATISTE. THERABREATH is a different story, where we acquired the disruptor. So if you look at the mouthwash category of $1.8 billion, we acquired. So you're worried about your flank. So you have Listerine, Crest and ACT. This is the brand that we're probably worried about, which we acquired. So I'm not worried about other entrants into the mouthwash category. THERABREATH has been around for almost 20 years. So they've been going at a hammer and tongs for a long time. They only just caught fire a few years ago. So consequently, it's now on the map. It is the most expensive mouthwash. It's almost twice the price of Listerine, and it ages younger. In fact, THERABREATH and Hero are 2 of the top 10 brands that are most loved by Gen Z. So we're the cool company now, Chris, put that in your note. But the point is, yes, you're right, you're always looking about new entrants into our categories. Oftentimes, they're going to be digitally native. So we got to be looking on Amazon and elsewhere to see where they're coming and what's making them successful. What are the attributes of the other brand and it's something we can copy.

The only thing I would add to that is even for Hero, for example, the form is what's driving the category growth. That category for long time is $500 million for the last 5 years -- last 2 years, now it's $700 million. So as new entrants come in that form, we think the category expands for all people.

Yes. And then with respect to Hero, the race right now is to be -- is to win in bricks-and-mortar. Remember, Hero was just in Target and Amazon. So the retailers are not going to have a half a dozen patch brands on shelf. It's just not in a big shelf space. So the next 12 to 18 months are critical for us to be established as the brand patches that retailers are going to cover in bricks-and-mortar, and we're well on our way there. So Walmart, CVS, Walgreens, food, drug, mass, all interested in taking the product in 2023.

And with that, I think we'll take it next door for any more questions. Thanks Matt, thanks Rick. Thanks Church & Dwight.

Steve, thanks for the invite. Thank you.

Thank you, everybody.