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

All right. Good afternoon, everybody, and welcome back. Our next presenters, Church & Dwight, have been longtime supporters of CAGNY and our conference. And today, we are fortunate to have with us Chairman, President and Chief Executive Officer, Matt Farrell; and Chief Financial Officer and Head of Business Operations, Rick Dierker. Matt and Rick come to us having just seen Church & Dwight cap off a very successful 2023, during which the company posted strong revenue growth and gross margin expansion and delivered ahead of targeted EPS while returning marketing spending to full and historical levels. Key brands such as ARM & HAMMER, BATISTE, THERABREATH and HERO achieved all-time high market shares, and capability investments were made to support growth into the future. To that end, the company's 2024 outlook calls for return to high single-digit EPS growth, consistent with an updated evergreen model that now targets 4% organic growth annually, up from 3% in the past, given anticipated new contributions from recent acquisitions and a doubling down on the company's international opportunities. To put some more detail around all that, I'm going to turn it over to Matt.

Okay. Thank you, Steve, for that wonderful introduction. It's always a privilege to present Church & Dwight at the CAGNY conference. We've been around since 1846, so Church & Dwight is a very durable and adaptable company. And there's really four things that I think that we're known for. And I think the first that we have great brands in great categories. And there are a lot of companies presenting here this week. What categories you are in really matters to your prospects for the future. The second thing is we have a competency for acquiring, integrating and growing brands. And one of the reasons we're able to grow brands is it because we're innovative. The brands we bring in-house, we're able to grow with new products and new innovation. The third is we have an evergreen business model. I think all of our shareholders are pretty familiar with this. And the magic of an evergreen business model is really two things. One is it promotes financial literacy within the company. And of course, the second thing is it sets expectations, both internally and externally. And finally, I would say that we have a unique culture of execution at Church & Dwight. And what that means is we do what we say we're going to do. Now 2023 was a great year for us, and that's after 2022, which was just an abysmal year, when we canonball-ed into the shallow end of the pool. 2023 was a terrific year, and we're expecting 2024 to be as good, if not better. So our purpose here today is really to tell our story about Church & Dwight. And also, you should be able to leave this room knowing why we're optimistic about the future. Here's a safe harbor statement. You should take a look at that after class. Just a quick look back at 2023. So we have really strong reported and organic growth, and Rick will take you through that in a couple of minutes, as well as gross margin expansion. A lot of our big brands grew share in 2023. In fact, we measure how much -- how quickly our brands are growing. So we grew share on brands to represent 60% of our sales. We got marketing back to historical levels. Now, what does that mean? In 2022, our marketing spend as a percentage of sales was 10%, and our model calls for 11%. We were able to get all the way back to 10.9% in 2023, and that's a $60 million investment. Next one up is $1 billion in cash from operations. And if you are a shareholder, you know that our #1 destination for cash is TSR-accretive acquisitions. And then finally, we've been investing in capacity and capabilities over the past year. Okay. So here's our report card. 2023, we had almost [ 19% ] TSR. The reasons why we're confident in the future -- definitely have steady U.S. growth ahead of us. Our international business has been a juggernaut for many years. We're expecting [ 8% ] growth there. We have consistent innovation. What does that mean? Generally, 1% to 1.5% of our organic growth is driven by innovation, and we expect to exceed that in 2024. Digitally savvy, you're going to see a chart that shows that 20% of our sales is online today. I think we're probably the highest of any CPG company presenting here this week. We have a new evergreen model, Rick's going to take you through, and strong 2024 fundamentals that I'll get to. So we are almost a $6 billion company, largely U.S., you see 78% of the sales in the U.S., 17% international. So a lot of opportunity to grow internationally. We have 14 power brands, and those power brands make up 85% of our revenues and profits. But recently, when we gave our outlook for 2024, we said, in the future, we're going to reduce our external communications from 14 brands to 7 brands. It just makes the story and the communication a lot more simple. And the reason we took those 7 is because they compete in large brands, large categories and they also have the opportunity to grow internationally. So those are the magnificent 7 THERABREATH, VITAFUSION, HERO, ARM & HAMMER, WATERPIK, BATISTE and OXICLEAN. And those 7 account for 70% of our revenues and profits. So here's our winning formula, I'm going to run through each of these. Balanced and diversified portfolio, we have low private label exposure in our categories, consistent innovation, and we're an acquisitive company. So what -- so balanced and diversified portfolio. We got half of our consumer business as household, and half of it is personal care. Then if you look at value versus premium, 37% value, 63% premium, this comes in pretty handy when you run into difficult economic times. We have little private label exposure. So the weighted average private label share of our categories is around 12% and has been for a number of years. And I'm going to take you through later some of the innovation we have in a number of categories. So we have a long history of growth through acquisitions. The only brand that we had in year 2000 was ARM & HAMMER. So all the brands that we're known for were acquired over the last 23 years. So back in 2004, we had $1.5 billion in sales. At the time, we had a market cap of $2 billion. 2023 with [ $5.9 billion ] in sales, and we have a market cap of $24 billion. If you run your eyes around the bottom, you'll see that almost every year, we've acquired a business. We did not acquire a business in 2023. We do look at a lot of deals, but we're pretty fussy about what we'll acquire. So here's the criteria. You got to be a #1 or #2 brand, got to have high growth and high margins in fast-moving consumable categories. Asset-light, means we don't want to buy businesses that have [ plants ]. We'd much prefer to buy a business that's made by a third party. And we want to find something that where we can leverage our supply chain. We have a very sophisticated supply chain at Church & Dwight. So consequently, we're able to take out costs and expand gross margin. And finally, whatever we buy has to have a clear sustainable competitive advantage. So the 7 -- the magnificent 7 and in the years we acquired them, and we say 7 power brands today, more tomorrow. I'm sure you all noticed Buzz Lightyear, lower right, I think we'll probably have to a royalty for that. Get the whole idea, right, infinity and beyond. All right. I'm going to bring up Rick now to talk about our financials.

Buzz Lightyear was a late addition to the presentation. So I'm going to go through the actuals for 2023 and how we ended, which was great. I'll talk about our outlook and the evolved evergreen model and then end with capital allocation in the same way we always do. So I won't go through every bit of this slide, but the message is we have green arrows across the board. We beat the outlook across the board. Net sales, organic sales, gross margin expansion of 220 basis points, EPS which was about 7% growth year-over-year. If you remember, our outlook at the beginning of the year was 0% to 4%. So just growth on top of growth while reinvesting back into the business. And then cash from operations of $1 billion plus. So just 2023 was a great year. A few weeks ago, we talked about how we're evolving the evergreen model. And if you're a long-term investor with Church & Dwight, you've heard us talk about our evergreen model and probably add [ nausea ] over the last couple of decades. And it was 3% top line. It was 25 basis points on gross margin. We would leverage SG&A and get to 50 bps of operating margin expansion, and then we would have about [ 8% ] EPS growth. Now we're saying, and for a variety of reasons, which we'll walk through, 4% on the top line, 25 to 50 basis points on gross margin expansion. We're going to leverage SG&A still while making investment, and we get the [ 8% ] EPS growth. So what's the backdrop behind that? Well, for the last 10 years, we've been growing 4% organically. But this is really looking forward. We feel like we're accelerating as we look ahead. We have -- we're in great categories. As Matt said, categories matter. Our categories are growing. We typically take share because of innovation, because of our marketing spend. We're accelerating our international footprint and business, and that's going to be a tailwind as we look forward. And then on gross margin, our productivity program had the best year it's ever had in 2023. We feel like that's a sustainable competency. And in the previous years, inflation was outweighing, it was masking the productivity that we had. We think, on a go-forward basis, it will outpace inflation. From a marketing perspective, we're getting more and more efficient every day. But as we grow the top line at a certain rate, we're growing marketing dollars right behind that. And our ultimate scorecard on marketing is how our shares are doing. And then SG&A, we're making some investments. We don't call out investments. It's all within our guidance. We're putting investments in China ERP system and European ERP system for our GMG business. We're investing in regulatory and back office to accelerate that business even further. And then, of course, to build capabilities like e-comm and analytics. Okay, moving to the 2024 outlook. So I just walked through the evergreen model, how does 2024 compare? Well, I'll tell you, it's even better than what our evergreen model is. So 4% to 5% on the top line, both reported and organically. Domestics 3% to 4%, international's 8% and SPD's 5%. Gross margin accelerates further 50 to 75 basis points and that we leverage SG&A, flat percentage on marketing, higher dollars, and that leads to OP expansion of 60 to 80 basis points, which is even better than our evergreen model. And that leads to [ 7% to 9% ] and $1 billion plus in cash flow. The way to think about our earnings per share outlook in 2024 is we're [ 7 to 9 ]. But embedded within that is a shutdown of our MEGALAC business, which is a small animal nutrition business within our SPD. So if you exclude that, we're really closer to 8% to 10%, for context. Okay. Again, track record is credibility. So at 10-year history of net sales growth, we've averaged 6%, so if you look at the page, 8%, 9%, 12.3%, 9.2%, one of our best years last year in the last 10 years, and we have growth on top of growth. Organically, similar story, a 10-year track record of 4.2%, evergreen model now at 4%, and we're a little bit higher than that in 2024, 4% to 5%. Many companies have talked about volume and how important volume is. For decades, our growth organically has been 100% volume growth. And then, of course, during this hyperinflation time, all of that has been priced. But for us, we've had 2 sequential quarters, 2 consecutive quarters of volume-driven growth. So we've already gotten back to volume-driven growth. In 2024, we expect our organic growth to be primarily volume-driven as well. Now here's a slide to spend some time on. Gross margin is super important for the company. Why? Gross margin drives EBITDA expansion, drive cash flow, it drives the ability to invest back into the top line, it gives you optionality. And we've been chasing our pre-COVID -- pre-pandemic levels of [ 45.5 ]. We made great progress this year, 220 basis points improvement, '23 versus 2022. So that means we have 140 basis points lap to close that gap. Our outlook for this year, the midpoint is 60 basis points of expansion. So that means we have about 80 basis points to go. So over the next few years, we've called out 25 to 50 basis points. It's well within our sight. And then, of course, we have tailwinds, right? The mix of our recent acquisitions are additive to gross margin. Marketing, I already mentioned a little bit, but 11% of sales is our outlook. We're investing tens of millions of more dollars in marketing. We believe it's a virtuous cycle that drives the top line. And the ultimate scorecard here is how our shares do. And for our major categories, we're winning on shares. Adjusted SG&A, we're going to continue to leverage SG&A, but we're also getting investments where it matters, again, to be a virtuous cycle to help international propel faster, to build capabilities for e-comm and analytics. And then EPS growth has been high single or low double digit for many years, and 2024 is no different. Cash flow really matters to Church & Dwight. Cash flow drives value, drives valuation, drives our M&A and capital allocation priorities. So free cash flow conversion, we think, is one of the best -- single best metrics for the company and for the industry. We've averaged over the last 10 years, 119%, which is industry-leading. Many companies target 90%. We've dipped down the last couple of years as we invest for CapEx. So we said we were going to bump up for this incremental CapEx for 2 or 3 years. We have -- 2024 is the last year of elevating CapEx, and it returns to 2% of sales in 2025. Cash conversion cycle. So free cash flow conversion is driven from great cash earnings but also from working capital. And we've gone from [ 52 ] days of cash conversion all the way to 27 days. Now we [ haven't f*** ] it up a little bit because of acquisitions, but we have foresight into the future and we see that improving this year and year after. We have a really strong balance sheet, 1.8x, levered by the end of 2023, and we expect 1.6x by 2024. So a lot of optionality. And we do this slide, and we actually did this back in September at the Barclays Conference. And since then, it's been improved by about 20%. Why? Because of -- we generate so much cash. We're paying down debt. We're improving our cash earnings. And so that calculus gives you even more financial power for an acquisition. And just as a reminder, if you're not familiar with Church & Dwight and you didn't see the slide Matt did, but year after year after year, the #1 destination for cash flow is M&A. And we spent a lot of time as a management team looking at the right deal. And it's not if, it's just when we find the right deal. Number 2 is CapEx for organic growth. Number 3 is NPD. Number 4 is debt reduction. And number 5 is return cash to shareholders. We're not a capital-intensive company. Here is the visual of the spike-up in CapEx for the last 2 or 3 years because of capacity-driven investments, and then a stair step back down in 2025 to 2% of sales is our expectation. And then finally, I'll end with the dividend, a 4% increase in the dividend in 2024, and we've had 123 years of consecutive payments of dividends. And with that, I will go back over to Matt for the U.S. story.

Okay. Thanks, Rick. I'm going to run through each of the businesses. I'm going to talk a little bit about our innovation, some of the dynamics in our major categories, and I'm going to end with how we run the company. So first off, our U.S. business, our evergreen model now calls for 3% growth in the U.S. It's a track record, if you look back over the last 10 years. You can see we can -- we got a lot of confidence we can sustain that 3%, going forward. And what are the reasons to believe? Well, we're leaders in growing categories. And we say over and over again, the categories you're in really have a great impact on your destiny. The second thing is we thrive in difficult environments. And finally, acquisitions have room to run. I'm going to explain that to you in a minute. So what are the categories that we're in? So if you're a [ client ], you're an analyst, you're a portfolio manager, your eyes go to the red. So if you look at 2020, so you see power flossers and dry shampoo, so that's when COVID started. You go to '22 and '23, you have the COVID hangover, so power flossers in 2022, a big contraction. And then 2023, a little bit more delayed, but Gummy Vitamins also pulled back in 2023. As far as thriving in difficult environment, you can see we got value, and we got premium, so it's just a wonderful combination, and low exposure to private label meetings, it's not going to be a big competitor to you. Now I want to talk about why we think our most recent acquisitions have so much room to run. On the left-hand side, we're going to talk about the mouthwash category. So we bought THERABREATH in 2021. And so '22, '23 is the second year of ownership. You can see -- take your eyes on the bottom of the slide, so we had almost 60% growth in points of distribution. And we're still 2.6x to 2.8x lower than the big dogs in the category. You go over to HERO, HERO was acquired in 2022. So this is the first year of ownership. So you can be at a 200% increase in TDPs, and you can see it's almost still at 4x less distribution than the biggest player in the category. Here's another way to look at it. So this is household penetration. So this is how many households have a mouthwash. It's kind of surprising that 1/3 of America doesn't have a mouthwash. But you can see it's pretty steady Eddie, right, 63% for 5 years running. But THERABREATH has been steadily increasing. It's a household penetration. And of course, that reflects itself in our shares. Now take a look at the acne treatment category. There's a big change going on there. So it's not steady Eddie. It was 16% of households in 2019. It's almost 22% today. Why is that? It's because it's a new form. If you go back to 2019, most of the products in the category were lotions and potions and whatnot. So it's -- that is when a patch has really hit the market. And HERO is what's driving the growth in the household penetration. So going from pretty much zero in 2019 to a 6%. So between the distribution and household penetration, we think both of these products, both of these brands have a lot of room to run. So now I'm going to talk about market shares and innovation in some of our major categories. So the first one I want to talk about is fabric care. So this is just a look at 2023. So the category grew 3.3% and ARM & HAMMER liquid laundry [ grew at 4.8 ]. And most of that growth in the category -- actually, all the growth in the category was driven by price. Now look at our history, if you go back to 2006, we had a 5 share in liquid laundry. And today, we have a 14.4 share. And remember, we're a value laundry detergent. And one of the things we have going for us is we spent so much money on ARM & HAMMER. And ARM & HAMMER is not all in laundry, it's in laundry, litter, baking soda, underarm deodorant, et cetera. So we're a recognizable brand within value. So that's sort of an unfair competitive advantage, but we're happy about it. Now what's happening going forward this year, we're introducing a new product called DEEP CLEAN. So now we're moving to the mid-tier, and mid-tier is 27% of liquid laundry category. So we're moving from -- we're going to stay where we are -- we have a good product and better product, this is going to be our best product. So launching nationally right now. So here's a good, better, best. So good is this traditional ARM & HAMMER, the middle at ARM & HAMMER with OXICLEAN is better and best is going to be DEEP CLEAN. So we think this is going to help us continue to grow our share and our sales and profit for years to come. Here's the spot for our DEEP CLEAN. [Presentation]

Okay. Next step is another innovation. So in August of 2023, we launched ARM & HAMMER Power Sheets, these are laundry sheets. We launched some on Amazon. And right now, we have 7,000 reviews and a 4.5 rating that people who try this product, love it. And by the way, it's going to be outside after class, if you want to pick it up and take it home and try. But we think this is a wonderful product because it comes in a cardboard box, it's sustainable and it's effective. So by the way, when you're coming out with something a new form like that, sheets, it takes an effort to change consumer behavior. So we got an army of influencers helping us do that. So here's a spot from one of them. [Presentation]

All right. Tell all your friends. This is a good one. Alright, I'm going to move the cat litter now. So cat litter grew -- the category was 11.7% in 2023. We grew a little bit faster. Again, most of that growth in 2023 is driven by price. Here's the share story. So we had an all-time high share at the end of 2023. And this time last year, we were talking about a new product called Hardball. So this is a cat litter that's made from sorghum, so it's plant-based. And you may remember, it seizes up into rock-hard clumps, so -- and it's -- again, it's an entry into lightweight litter. And why is that important? It's because we really nowhere, when it comes to our lightweight share. The regular weight, we have a 29% share in lightweight, we have a 4% share. So -- and we launched this in one major retailer. We're going national in 2024, all retailers. So this is a $100 [ million ] opportunity if we get our fair share over time. All right. Next up is BATISTE. So here's the growth rates there of 15.6% in '23. We grew a little bit faster at 16%. And here's the share story. It's been one of our juggernauts. 37% share in 2019 and 46.3% in 2023, so on our way to 50%. And by the way, BATISTE is the #1 dry shampoo on the planet. So it's -- and it originated outside the U.S. and Europe. So here's our next new innovation. So we have a dry shampoo that is sweat activated and touch activated. So if you touch your hair, you get a burst of fragrance or if you're working out, again, sweat is going to, again, create a burst of fragrance. And we have a 4.5 average star rating at Ulta already. Okay, here's a spot for BATISTE. [Presentation]

Okay. Next up is VITAFUSION. This is one of the categories we've been struggling in. One of the things that I think is one of the hallmarks of Church & Dwight. It is that we're always transparent with our investors. So let's kind of have kind of a look back. We've owned this business for 10 years. And when we bought it, it was a unique form, great taste and a wide assortment. And what's happened over the past 10 years or so is it's been -- become a very crowded category. And you see that takeaway on the bottom, it's gone from 6 to 60 competitors. And if you add it in the online-only competitors, you'd have 100 brands out there. So here's what's -- this is kind of a busy chart, but those gray bars are the size of the category quarterly over the past 6 years, starting in 2018 over on the far left. So just kind of -- if you just look at it quickly with your eyes, you can see the category has doubled in size since 2018 up to 2023. Now at the same time, our share has declined from 24% to 12%. So obviously, you can sustain your sales as long as your -- as the category is growing, but we're not real happy about that share loss. So what's the good news? So if you look at a lot of major retailers, we're still the #1 gummy brand. You can see them arrayed on the left-hand side of that slide. And then if you look at household penetration, still got 11% household penetration, which is significantly higher than some of our competitors. So what are we doing about it? So over the past 12 to 18 months, we've been working on upgrading our formulas, change in texture, the flavor. We got new packaging coming, so it pops on shelf; spending a lot of dough on new displays, new advertising. And also, we're going at the new forms, and it's soft chewables in 2024. So the whole idea is to get this business stabilize and grow in 2025. And this is a big business for us. So can you imagine what our numbers would have been at '23, if this thing was rocking. Okay. Here's THERABREATH. So this is a cool story. Remember, we bought this business in 2021. The category grew 13% in 2023, and THERABREATH grew 86%. Here's the share story. We bought this business in 2021, middle of the page. And at the time, it was a 6.2% share, so we've doubled the share in 2 years to 13.3%. So we're now the #1 non-alcohol mouthwash, and we're the #3 branded mouthwash and still growing. So now, why are we so optimistic about the future? Well, besides the story about greater distribution, greater household penetration, we're also now entering antiseptic. Antiseptic represents 30% of the category, and we're not there. So we're launching this in 2024. And here's the THERABREATH spot. [Presentation]

That was Dr. Katz. He's the guy who invented the THERABREATH. All right. Here is next. So now we're talking about the acne treatment category. So the category grew 20% last year, and HERO grew 73%. And HERO is the reason why the category is growing. So go back to 2019, the share was 0.2%. And we bought this business in 2022, and now it's 18.4%. And this is not just acne patches. This is acne treatment categories. It's a $1.2 billion category. By the way, if you went back a few years, around 2018, it was a $0.5 billion category. So the form is driving the growth in the category. Here's a fun fact. So going to a large mass retailer, you say, what are their top turning SKUs? Number 1 is paper towel. Number 2 is baby formula. Number 3 is Mighty Patch. Number 4 is water. So this is a hot cake, and we're -- it's just killing it. All right. So one more thing I want to point out is that Mighty Patch, yes, Patch is the bread and butter for the business. We've got so much runway still with respect to that form. But we also are moving into products for acne-prone skin. So this one, for example, the Dissolve Away, is a cleaning balm to remove makeup if you're a person who is acne prone. All right. So we've got great momentum. We've got great new products coming this year, so we're betting big in 2024. So we had a lot of confidence in the U.S. business. I just want to spend a minute on digital for a second. I'm sure everybody's heard this noise in this week. But we all know that 70% of purchases are influenced by digital channels. What that means is it influences your purchases not only online but also in bricks and mortar. So consequently, 80% of our spend today is digital. It's only 20% now is TV, radio, print, et cetera. And here's the story. We were 1% in 2015. Just to give you a number, in 2015, our online sales were $35 million. And in 2023, it's over $1 billion. So we have made this a big priority within the company because we believe that by the end of the decade that, that number is going to be 30%. So you got to get really good at this. And just proof's in the pudding, right? There -- our online shares for [ 6 out of ] those 7 brands grew in 2023. And if you said, let's look at it more broadly with our 14 power brands, in the fourth quarter, 13 out of 14 those brands grew share online. When we say online, we're not just talking about Amazon. It's Amazon, walmart.com, target.com, retailer.com, the home [ ball of X ]. It's just a great story. All right. I'm going to move to international now? Okay. So international, the expectation there is 8% growth that's part of our evergreen model. And here with $1 billion business, we have 6 subsidiaries, on the right hand side of the slide there. Canada being the largest. But our Global Markets Group is more than 1/3 of the business, and that's been the fastest-growing part of the business for a number of years. And why are we so excited about international? Well, if you look at the top 10 CPG companies, you'll see that almost 60% of their sales is outside the U.S. So they've done decades ago what we've only started to do in the last couple of years. So only [ 17% ] of our sales is outside the U.S. Now if you look at international, look back and say what kind of growth have you had over the last few years, you can see that we've hit 8% or better in most of those years and not in '21 or '22. That's because of COVID and hangover from COVID. Now why are we confident about the future? There's three things: Our brands travel well. We've got great brands. The second thing is we're investing in our GMG infrastructure, that's Global Markets Group. And the third is we have our recent acquisitions that we were going to run to launch in other countries. Now, what are the brands we think that can travel? The U.S. brands are ARM & HAMMER, OXICLEAN and VITAFUSION. Outside the U.S., our most global brands are BATISTE, STERIMAR, which is a nasal hygiene product; and FEMFRESH, which is a feminine hygiene product. And then finally, WATERPIK, THERABREATH and HERO are largely U.S. businesses, with a lot of opportunity to grow internationally. As far as the Global Markets Group goes, we have teams in Panama, London, India, Shanghai and China and finally, in Singapore. And Rick mentioned that one of our priorities is investing in international, going forward. The second priority is investing in e-commerce. So we're investing in people, systems, offices, regulatory people, quality people, back office. So we still we have the infrastructure to grow. So just to wrap it up. Our brands travel well. We're investing in the infrastructure, and THERABREATH and HERO are going to be also a tailwind for the business. By the way, we're launching HERO in 40 countries in 2024. All right, Specialty Products. This is our underachiever. So Specialty Products has got a goal of 5% growth annually. The business is a small business, $300 million, but this is our legacy business. This is the original business that -- under which Church & Dwight was founded. So that's what -- we call it specialty chemicals. It's bulk sodium bicarbonate. So that's 1/3 of the business. Back in the '70s, the company got into animal nutrition. The way it got into animal nutrition is that we learned that the people we were selling baking soda to were reselling it to dairies, and they were putting it in the feed. So that was back in the '70s. I guess it was a Alka-Seltzer for cows. So that was the start. And since then, we've gotten into prebiotics, probiotics and nutritional supplements. So if you look at how was the performance in '23, not good. We're down 8%, largely driven by the product that Rick mentioned, which is MEGALAC, which is just a feed additive for dairy cows. It has really suffered from a lot of low-cost imports over the last couple of years. So we're bailing out of that business in Q1. So if you pull that out last year's numbers, we have 2.5% growth, still not where we want to be. But we think this is a business that has a lot of potential. We just haven't gotten the genie out of the bottle just yet. By the way, those prebiotics, probiotics and nutritional supplements, lots of different brand names you see on the page there that would be known to people who grow cattle, swine and poultry, but they all are sold under the ARM & HAMMER banner, which we all know is a trusted brand. This is another business that's got international opportunities. 17% shows up again. So 17% of our animal nutrition business is international, and it should be in excess of 50%. So just to wrap up, SPD, still got a lot of faith in that business. The population of the planet is going to go from 8 billion today to 9.5 billion by mid-century. So a big demand for protein. So we've got a trusted brand. We're definitely aligned with consumer trends moving away from antibiotics. We've got lots of different species we can serve, and we got a lot of global opportunity. All right. I'm going to wrap up with how we run the company. So here's the 5 operating principles at Church & Dwight. [ Though surely ], you probably know all these by heart. So leverage brands we've talked about, we're a friend of the environment, leverage people, leverage assets, leverage acquisitions. So we've talked about the brands enough already. And now we'll just talk about the environment. So this is just kind of a fun fact, if you don't know it. So back in the 19th century, Church & Dwight was putting trading cards in our boxes of baking soda. And if you look at the bottom of that slide, maybe hard to read from the back, it says for the good of all, do not destroy the birds. Now if you pull out your phones right now and we're on Amazon, you can actually still find these bird cards being resold, so in this morning from 1938. So it wasn't just in the late 19th centuries, but it's going on for decades. So we're -- we've been a friend of environment for a long, long time. And we've run through this slide with you before, we used recycled paperboard in the early 20th century, first corporate sponsor birthday, which was in 1970. 20 years later, 1990, still the only corporate sponsor. And more recently, in 2017, we started planting trees through Arbor Day. We planted millions of trees. In fact, this year, we will have planted enough trees to offset all the CO2 we put into the atmosphere. Now that's great. But then you say, well, how are you going to reduce the CO2 you put into the atmosphere? That's what science-based targets is all about. So we have some projects in place right now to take 50,000 tons of CO2 out of our system because we use a lot of CO2 to make baking soda. All right. Why is that all important? Well, it's definitely important to us at Church & Dwight, it's important to our employees, our families, but it's also good for business and that as the slide says, it's very relevant to young consumers. And if you look at our ESG scores, we've certainly been recognized for that. There's lots of rating agencies out there, but this is one of them. So we've done a good job over time. And that's reflected in our numbers. All right, leveraging people. This is a very, really, underappreciated metric, and this is sales per employee. So we've been a leader for as long as I've been coming to this conference, in sales per employee. So we've got over $1 billion -- excuse me, $1 million. Wouldn't that be nice? $1 million sales per employee. And that's illogical because you would think the larger companies, the bigger you are, the more scale you have, but not the case. And here is our compensation structure. So we have net revenue, just if you want to go clockwise, gross margin, cash, EPS and strategic initiatives. Strategic initiatives are there because we want to make sure we have an eye on some long-term goals as well. Gross margin, now many companies have gross margin in their incentive comp. And the good news there is that when you have gross margin in there, your employees want to know "Well, what is that? And how do I get it? Because it influences my [ pocket ] book." So it's 20% of everybody's bonus on an annual basis. So how do you get gross margin? Well, we have a Good to Great program. That's the name we've given to our continuous improvement program. Supply chain optimization, that's investment in automation, et cetera, new products. We want to launch new products that have a higher gross margin than the ones they're replacing. And finally, acquisition synergies. We like to -- they'll expand the gross margin of businesses that we acquire through our supply chain. All right. Number 4 is leverage assets. So we are an asset-light company. And we -- our target spend is 2% at sales. If you went back to 2009, you'll see that we have a big number there. That's when we built our York, Pennsylvania laundry plant. That plant today not only has laundry, but also has litter as well as -- and vitamins. And we've got a bubble here in the last few years, '22, '23, '24, where we've been adding capacity for laundry, litter and vitamins. But 2025, we're going to get back to 2% of sales for the next several years. Now if you do the first 4 really well, you get really good returns. And if you do -- if you can do acquisitions well, which as -- one of my opening remarks was that is the competency of this company. We all know that 7 out of 10 acquisitions fail. Why is that? [ Because ] your overpay, you don't hang on to people, you overestimate your cost takeout. So a whole laundry list of things that can go wrong. Yes, we've had a couple of black eyes but very few over my 17 years with the company. All right. Here's the long history, $1.5 billion to $5.9 billion in top line today, a deal in almost every year. And as I said earlier, we're pretty fussy. That's our criteria. I won't run through that again. But I'm going to end on this note. So we're really optimistic about 2024. We had strong organic growth that we're calling for 4% to 5%; meaningful gross margin expansion, 50 to 75 bps. We got a great new product pipeline. And you didn't see them all today, but you saw some of the highlights. And we're putting our money into international and e-commerce. So although we're growing the top line faster, our evergreen model went from 3 to 4, any profit that's going on for a while are going to be plowing back into international. In e-commerce. So if your long-term shareholder, you probably got a smile on your face. And then finally, free cash flow. We've got $1 billion in cash flow we generate annually, and the #1 destination is TSR-accretive acquisitions.

We've got a few minutes left. So we can have some fun. Okay. We'll go left to right. Olivia, I think I called on you last at the stock exchange, so you're first today.

Why thank you. I appreciate that. Maybe where you ended around M&A, if we could talk a little bit about that. And whether -- as you look at the recent deals that you've done and done, you've done the diagnostic on it, what have you learned from HERO and THERABREATH that have influenced your decision-making, going forward? And what processes have you put in place to ensure better shots on goal with respect to M&A versus some of the things that happened in the past?

Yes. Well, we recently doubled the size of our M&A department. As you know, we had one person for 16 years. So we added one. And actually, we just -- another one is going to start in a month or 2. So we're hiring someone in Europe and someone in Asia, so just so we can get into deal flow outside the U.S. because it's part of our ambition to take that 70% of sales and make it a much, much bigger number. And that's only going to happen if we could find more deals outside the U.S. It will happen faster that way. But we haven't made any real changes. I mean the whole point of -- or how we look at M&A is that you can only buy what's for sale. So we don't spend any time studying categories or businesses and said, "Wouldn't it be wonderful we could own that company?" Well, yes, it's not for sale. It may never be for sale. So our focus is we want to make sure we're in deal flow. We don't want to wake up in the morning and pick up the [ pad ] and go, "Oh, I didn't know that was for sale." And I think that doesn't happen in the U.S., but outside the U.S. is something we're trying to remedy.

And Chris, you're up. We can go left to right, just keep passing it.

Just a follow-up on the M&A question. So we talked about this at the stock exchange, 2023 deals. So what about the deal environment right now is preventing you from doing a deal? Is it the lack of off of potential acquisitions? Is it deal price or looking back to some of the deals that didn't go as well, and you're a bit more conservative now than you were? Or do you have to do bigger deals now to make an impact? Maybe just contextualize why there's a longer time frame to [ form ] a deal? And then just maybe remind us again if you don't do a deal, what you're planning to do with all that cash?

As I said before, you have to be fussy about what you're going to acquire. And you mentioned we have to do bigger deals. I would say no, we only bought THERABREATH, it's probably $100 million a little bit more in sales. And we said, we're buying this business to be a $0.5 billion business. And it's not just U.S., but it's outside the U.S. So we really have to have an understanding of how big can this be. And that then informs how much you can pay as well. So I would say, no, we don't have to be swinging for the fences and do really, really big deals, but you have to find ones that can grow. And you have to win the auction as well. Now we were involved in 4 or 5 auctions in 2023. I can't name them because we sign NDAs, but none of them really met all of our criteria. So we just kind of [ walked ]. And so the next question is, well, what happens if you got a lot of buildup of cash on the balance sheet? That has happened in the past. I don't remember what year was, but I want to say it was maybe '17 or '16. And what we ended up doing was a buyback because we just had so much cash on the balance sheet. But that is not our preferred route here. We really want to find things to buy. But there's plenty -- anything to add, Rick, by the way?

I would probably just add, we've bringing so much value through M&A, and that's a capability we have. We also believe the #1 way to destroy value is to do a bad deal. And so we are very fussy on what deals do. We don't say no typically because of price. We say no through due diligence because of the category, because of private label, because of competitive threats, whatever that is, we. But we say no a lot. And because our base and core business is so well, we don't feel the pressure ever reach for a deal.

Yes. But the last 3 have been winners as I came in '20, both THERABREATH in '21, HERO in '22 and just didn't come up with one in '23. But we're looking now at a couple, but [ don't really want to ] run to the phones, you never know. You got to go through the process and see if they're going to be right for us.

Okay. Dara?

Dara Mohsenian, Morgan Stanley. So the shift in power brands from 14 to 7, you've talked about how you're going to communicate differently to us in terms of Wall Street. But can you talk about if you shifted at all internally the way you manage the business? Is there a different resource allocation in terms of marketing spending to some of the larger brands? Or organizationally, has anything changed? And how might that unlock higher growth, going forward?

Yes. No, that's a good question. No, Internally, we have 14 power brands. We're talking about 7 externally. But those other 7 are still with us. And then you might say, "Well, 7 of them account for 70%, the other 7 accounted for [ 15% ], so though they are smaller. What are some of the brands that are in there?" [indiscernible] high gross margin, TROJAN, high gross margins. Small categories, though, oral analgesics, condoms. So no, we're not going to underinvest in those. They still generate a lot of dough. It's just the categories that are not that big. These are like $300 million or $400 million categories, whereas THERABREATH is -- our mouthwash is a $1 billion category and HERO is $1.2 billion. So I'd say no. We were very careful about that, too. So we kind of went out and announce within the company and say, "Hey, if you're working on these other 7, you're not an orphan now." That's the last thing we want to have happen. It's just -- to talk about 14 brands, we had 15, 16, this is a lot to talk about externally. So we thought let's simplify the 7 that we think are on bigger categories or can be big categories and the ones that we could take globally. That's the logic.

Ready? Who's got the mic? Okay. Andrea, you're up.

Andrea Teixeira, JPMorgan. So the Mighty Patch is an amazing story, you take it from $0.5 billion, so in a few years, to $1.2 billion. How are you -- and then you're expanding to skincare, which is obviously a great expansion. How are you thinking of protecting now that your competitors are also -- some of them have notched even before, but now they're tweaking it and everyone is in the [ Mighty Patch ] now, in the patching? How do you protect that patents or how you protect that delivery, given that more entrants are coming? And how you're thinking of skincare as a whole? Like how you're going to be thinking of care strategy or more extensions besides the makeup remover? Anything that you can help us?

Yes. Well, let's take the second one first as far as skincare goes. Yes, we're focused on patch and then obviously, there are adjacencies to that. But we're not going to become a skincare company overnight. But we know that we've got a great brand, great brand recognition in HERO. So we want to take advantage of -- move beyond patches. But we're going to do it slowly because we think patches still have so much opportunity for the next couple of years, from a household penetration standpoint. So I would say, I think we're doing it in a judicious fashion. Now your other question is, "Hey, there are other competitors that are jumping into patches?" Yes, that's true. And there are a number of them, we know the names of them, and they've been around for a couple of years now. But it is Mighty Patch that has emerged. I think it's two things. One is it's the efficacy of the product, I think, is superior to other patches. And I do think that the digital marketing story is second to none. And that does matter, particularly in the day and age. And by the way, this is -- it's not just for teenagers. What we found is that if you did the profile, the ages of the consumers, you got people all the way to in the 50s, 60s. So you can have an issue with diet that's going to cause acne, menopause, pregnancy, lots of reasons. But yes, I think this business has got a lot of room to run. Switch over to this side. Do you want to ask a question?

Trains run on time here. So we're going to move on. Thank you to Church & Dwight. Thanks, Matt and Rick.

All right.