Good morning, everyone. I'm Dara Mohsenian, Morgan Stanley's household products and beverage analyst. Just before we begin, a quick disclosure. Please see the Morgan Stanley Research website at www.morganstanley.com for our research disclosures, and contact your Morgan Stanley representative with any questions. With that, I'm very pleased to welcome Church & Dwight here to this fireside chat today, including Matthew Farrell, Chairman and CEO, and Rick Dierker, CFO. Church has a fabulous track record of driving shareholder value really over the last 10 years and beyond. It's certainly experienced some of the CPG industry volatility we've seen recently, and has had some different performance by the product category. It's a great time to have the team here with us today to get an update. Thanks for being here, guys. I thought first we'd start with some of those different pieces of the portfolio. Obviously, the majority of the portfolio has remained strong recently, but there are a few places where you've had some challenges more recently. First, maybe on Waterpik and Flawless, can you detail how much of the weakness has been driven more by underlying consumer demand versus retailer inventory cuts? How you think about that going forward? I would assume maybe the inventory piece of it isn't as bad as we move into next year versus the back half of this year. Just give us an update on what's occurring there. On the vitamin side, a bit of a different situation where there's been a drop-off in category growth post-COVID. You've had some supply constraints. It does look like trends are getting better in the scanner data. You know, a bit of an update on the vitamin side also would be helpful. Okay. That's plenty. All right. All right. Way to think about it is, 80% of our business is doing extremely well. We have the 20% is our problem. The 20% we're referring to is Waterpik, Flawless, and vitamins. That's why Dara's bringing those three up. Certainly Waterpik and Flawless, we did have issues with respect to retailer adjustments to inventory particularly in the third quarter. Those adjustments, both Q2 and Q3, are largely behind us for those two brands. The issue with Waterpik and Flawless is that they're devices. Waterpik is something you'll buy every 3-5 years. 60% of the purchases are based on a recommendation of a dentist or hygienist. Long term, it's a great business to be in. We bought it in 2017. Every year since 2017 up until 2022, the business grew high single digits. We got really slammed this past year. We do attribute it to the fact that it's a discretionary purchase, and that's true for both Waterpik and Flawless. What we have found for Waterpik year-to-date is that our units actually are kind of flat year-over-year. That's 'cause within the brand, people are trading down from the high-priced items, which can be anywhere from, you know, $100-$150 to the lower priced items, which would be, say, $50. Lower sales, lower profits, but flattish units year-over-year. Do think we have a few more quarters of year-over-year negative growth. We don't think that's gonna start recovering until the second half of next year for Waterpik. I think the same is true for Flawless. As far as vitamins go, vitamin is not a device. When you think about that 20%, about 10% is gonna be Waterpik and Flawless. The other 10% is gonna be vitamins. The issue with vitamins is, like, you have a lot of people exiting the category. If you look at the third quarter of this past year, consumption of gummy vitamins was down 8%, but it's getting better. In October, it was down 4%. In November, the gummy category is flat, year-over-year. That's a good thing. We that's good with one exception, is that we have lost share in the category for a couple of reasons. One is our fill rates. We've had difficulty with fill rates all year long and even today. That is a big one. The second is the promotional activity by a lot of the our competitors in the category. We gotta get our fill rates right in the vitamin category, and then we gotta deal with the promotional activity. You know, just kinda sum up here. Vitamins and Waterpik Water Flossers are good businesses, gonna be long term. Flawless is, you know, if you think of all the acquisitions that we've done, I think that's the one this would give us a black eye, 'cause it hasn't really grown, since we acquired it. We do have plans to turn that around in the next year to 18 months. Okay. Just one quick follow-up on Waterpik and Flawless. Yeah. Is it reasonable to think some of the retailer inventory cuts dissipate as we move into the first half next year? Maybe sequentially, trends are a little bit better, understanding it's really the back half when you see a big recovery. On the other eighty percent of the portfolio that's doing well, you mentioned the fill rates and vitamins. There have been issues in other pieces of the portfolio. It looks like next year should be a pretty robust year on that other eighty percent when you consider net your portfolio benefits from trade down, you're back in supply. How do you sorta think through that other eighty percent conceptually as you look out a bit, particularly keeping in mind some of the supply constraints this year? Yeah. Look, the other 80% is doing extremely well. Just from a consumption standpoint and a share standpoint. You know, notably some of the businesses that are really rocking are Batiste with the dry shampoo. We just can't make it fast enough. I would say that if you think about because probably what you're trying to get at is what's 2023 gonna look like. We think that 80% of the business is gonna do extremely well. Waterpik is probably gonna need to stabilize in the first half of the year, Waterpik and Floss. We do think that it's gonna be a good year from an organic standpoint. If you, if you wanna talk about the entire P&L, which I'm sure you wanna get to at some point, there's pluses and minuses for next year. We're not gonna call a number today with respect to organic or EPS. You know, the pluses for next year are certainly trade down. You know, we've been hitting all-time highs with ARM & HAMMER liquid laundry detergent, and also been doing well in cat litter. Many of you may know we have both a premium cat litter and a value cat litter, which is the Orange Box. The Orange Box is growing far faster than the category right now. Trade down is gonna be a real plus for us next year. We do think that those businesses that I mentioned before are gonna stabilize. The 80% of the business is certainly going to continue to carry on. We do think our share performance is going to improve as well next year. you know, I gave you some of the pluses. What are some minuses for next year ago? Currency is gonna be an issue for us as well as interest rates, you know, because a portion of our debt is variable. A couple other things that are gonna be headwinds for us is one is marketing. Marketing as a percentage of sales is gonna end this year around 10% of sales. Historically, you know, we're 11% or better. We do think we're going to be making a step change next year to have higher marketing percentage of sales. We won't get all the way to 11%, but it will be a meaningful move up from 10%. The other headwind for next year is incentive comp. Many of you know, we have 4 metrics. We have sales, gross margin, EPS, and cash flow. We're all in a donut on 2 of those. That's for cash flow and EPS, and not hitting the numbers for sales and for gross margin. That's about a $30 million headwind next year for normalized incentive comp in 2023 versus 2022. You know, there's definitely a bunch of pluses, including fill rate getting better, but we have the minuses as well. I'm sure that's what's on most people's minds today, so I think that's the best way to frame it. Okay, that's very helpful. As you think about gross margins, you know, obviously some pretty big pullbacks in spot commodities here that takes some time to flow through. You know, I plan to ask some questions on pricing going forward. Just given all the volatility we've seen, in the last few years, and maybe volatility would have been a good thing. The downside in the last few years with the cost structure being so much higher, how do you think about the gross margin side, going forward from here? How do you think about the timing of when costs flow through, and that gap in terms of gross margin realization from pricing versus cost? Just conceptually, how should we think about it? Yes, I could take a swing at that or have my finance guy here get that. Yeah, I'll take a swing at it. Okay. Look, gross margin, we said in the last call for 2023 that we also think is gonna be a tailwind next year. you know, basically, we've had, I know, half a billion dollars of inflation over the last two years. Do we think we're gonna have deflation next year? No. Do we think we're gonna have inflation? Yeah, we do. not to the same extent that we've seen over these last couple of years. you know, we'll have carryover pricing, we'll have, you know, pack size changes, we'll have fill rates, especially for our personal care business, that are kind of back to normal, which always helps from a mix perspective. For the first time in three years, we believe we'll have productivity outrunning inflation, which is a great thing and kind of back to normal. I mean, those are some of the reasons we believe that we're gonna have gross margin expansion. I think as we exit even Q4, you know, previously we had thought we were gonna inflect positively. That's what we had said maybe two quarters ago. You know, it's, I think we're still gonna be down in Q4, but we're starting to see the step changes happen. You know, from a commodity perspective, usually we're 65%-70% hedged in any given year as we go into the next year, and we're probably closer to the, you know, 20s, 30s these days because we still believe that there's more room for commodities to come down. It does take a while for that to go through the supply chain. Okay. Is there a pretty big difference in terms of cost year-over-year, first half versus second half? How do you think about that just from a timing standpoint? Obviously, things can, you know, change in the spot market here. When should we think about some of the more moderate costs starting to flow through or less pressure at least? Yeah, I'll probably defer that question to February when we give our outlook and some of that detail on quarters and stuff like that. Okay. Okay. Fair enough. Just on supply chain and the lower fill rates this year, any repercussions in terms of shelf space, retailer relationships as you look at the business? It sounds like a pretty big marketing increase next year is gonna drive some enthusiasm, I'm sure, externally as well as internally. Any thoughts on that front? As you've sort of reoriented the supply chain a bit, any longer-term costs that you'll now have to accrue in the business, or is it more just sort of reworking contracts in terms with third parties, as opposed to, you know, significantly higher spending in supply chain? Yeah, no. Look, the relationship with the retailers is good. You know, one thing we've learned over the past year or 2 years is that transparency with respect to your difficulties, fill rates are so important. Also your forecasting process, you know, and working with the retailer. I think, oddly, that our relationships with many retailers has improved because we've had to work more closely with them about what we can and cannot ship next year. Is that where you're going? Yes. I would probably just add to that, you know, our ACV numbers are at or above, you know, where we were pre-pandemic. In some cases, like TheraBreath and some of those newer acquisitions are just growing by leaps and bounds. No, no issues in terms of shelf stats or SKU facings or anything like that. Yeah. The issue with fill rates is retailer fines. You know, just to dimensionalize that for everybody, you know, our fill rates in the third quarter finally got to 90%-91%. You might think that's pretty good, but it's, it's lousy. Normally, it's 98.5%-99%. When your, when your fill rates are 90%, 91%, you leave money on the table, and you're also, you know, experiencing fines, not only in the US, but also internationally. That also is a, is a real benefit going forward to the extent we can get the fill rates back up to the high 90s. Yeah. Your second question was really on the supply chain, like, do we have a systemic issue now that we have, you know, a different supply chain, you know, higher cost perhaps? I would say it's, we don't look at it like that. We've added more resiliency to the supply chain. Now we have a backup to the backup supplier in some cases. We've moved some volume to other suppliers so that we have more flexibility in-house, outside. We've added, you know, probably almost 100, you know, additional suppliers or third-party manufacturers, and that's gonna be fantastic on a go-forward basis. What that also does over time, as you're doing your RFPs, now that you have all these people qualified, because that's what takes a long time, especially in regulated personal care areas, is to get it qualified, you know, regulated, is all of a sudden we have more competition there to produce. That will help, I think, over time as we have an RFP process. Great. We had a lot of, suppliers who were sole suppliers, you know, going into COVID. We've been scrambling for the last couple of years to stand up a lot of suppliers in co-mans. That's largely complete right now. Ready for the next black swan. Right. Okay. Maybe we can turn to pricing. It's been such an important part of driving top-line growth in the industry the last year and a half here. A, you know, as you look out going forward, is most of the pricing in place that you have planned, a lot of what's to come is more sort of carryover pricing from what's been implemented, or is there a lot more pricing going in? How do you think about the consumer demand elasticity of the pricing? Has that changed at all? Are you comfortable with price gaps out there? And, you know, there have been some press around greater retailer pushback recently. Have you seen any of that? You know, is there more pricing. Yeah. competitive retailer reaction to pricing? Well, as many of you know, we priced up 80% of our portfolio over the last couple of years. In some cases, we priced up twice, like in laundry and litter. You know, if you look at the price gaps for most of the categories right now, because the, you know, the whole category was moving up, they're pretty much similar to where they were pre-COVID. That's a good thing. As far as going forward goes, yeah, we are looking at pricing in some much smaller categories, both US and international. The reception on the part of retailers is gonna be very chilly as far as raising prices, you know, going forward. I think that'll be tough sledding. you know, that's ahead of us, but I wouldn't say that's really a needle mover for us in 2023. It's more lots of cleanup. you know, the consumer is squeezed right now. if you look at, like, what's working on shelf, it's really two things. It's the best price per ounce, whatever the product happens to be, so that's often gonna be the larger sizes or extra large sizes. then the absolute price point, the smaller bottles or cartons, whatever you happen to be selling, are popular right now. the other looking forward beyond absolute list price changes, the other avenue is, of course, the pack size changes. Obviously, you have to be very careful with pack size changes as far as your shelf impression. That's the other area that you can push through a price increase. It is still a price increase, and the retailers know it when you do a pack size change. Great. It'd be helpful to get an update on what you're seeing in terms of the U.S. consumer. You're fairly unique in that you have more of a value orientation than most public companies, but you also have the premium end of the business, too. What are you seeing in terms of trade down in your portfolio? When you look at the consumer, it'd be helpful to hear about any differences in the lower income versus higher income consumer. We just talked about package shift a bit, but channel shift. All those dynamics, it'd be helpful to get an update on what you guys are seeing in the U.S. Yeah, I'm sure we don't have anything original to say here. Everybody knows what's going on with inflation and particularly on the food side. You know, gasoline prices have come down, but energy is high and expected to be high this winter. We do think that the European consumer is gonna be really squeezed because of energy in the next, you know, 3 to 6 months. I would say, you know, as far as the consumer goes, what you would expect to happen is happening, and it's happened during the last great recession, and that is, you know, trade down to value. You know, 40% of our portfolio is value. We stand to benefit, and we are benefiting. It is masked by the fact that we've got Waterpik and Flawless and vitamins going the other way. It is, it's a big tailwind for us today and going into next year. I wouldn't say there's any unique behavior on the part of the consumer. I mean, you think about what's the median household income in the United States, it's like a high of $68,000. So that's the consumer that we're marketing to. There are higher end consumers, you know, the club shopper is generally a higher end consumer, but that's just a small part of our total portfolio. Okay, great. Can you help us understand the promotional environment? Seems like things are moving back towards normal, but maybe not all the way there yet. Obviously, it'll be different category by category. Yeah. As you think about the overall promotional environment in the U.S., where do things stand today using your crystal ball? You know, where do you see them moving going forward? Yeah. Well, look, the promotion When people talk about promotional environment, you know, for a CPG company, you're generally focused on household products. Because household products is where you have a lot of trade promotion, less so on the personal care side. Household for us is laundry and litter. If you look at what the sold on deal percentages are for laundry and litter, they are low in comparison to historical levels. I mean, the levels for litter are around 11%, and normally they're high teens. In the third quarter, the sold on deal for liquid laundry detergent was around 30%-31%. It's normally mid-30s. It's not where it has been historically. What typically happens in a recession is that you do have an increase in promotional spend. That would be a kind of a logical expectation over time, but I don't expect that it's gonna be a light switch that's, you know, suddenly there's gonna be a, you know, a ton of spend. It could start to creep up over the next, you know, 4 or 5 quarters. Okay. Has the build back up been slower than you expected? How would you sort of... Yeah, it's been- characterize that? Yeah, it's been- What's driving it? It's been low for a while. It's not just a recent phenomena for 2022. You saw it was true in 2020 and 2021. That was largely because of difficulty in you don't wanna be promoting to empty shelves, and lots of people in CPG had difficulties with out of stocks. That's largely behind everyone right now. I said even our fill rate is in the low 90s. I, you know, I do think that it potentially could get back to where it was pre-COVID. May be getting there faster than we would've expected because of the recession. You know, when you have that, behavior for, almost, you know, two or three years with lower sold on deal, that could become permanent. That's like the new normal. Because of the, we expect this to be a coming recession, we do think that it could heat up in next year. We have to watch. Right? Okay. Then I'd love to spend a little time on marketing and your thought process going forward. You mentioned earlier that you'll look to rebuild marketing levels as a% of sales. Just conceptually, how important is that as an organization? If we look at your track record over the last decade, Church has been a company that sort of delivered algorithm year after year after year. Obviously, with some of the industry pressures and some of the isolated businesses this year, hasn't happened. Is the mindset sort of, look, this year's an aberration and, you know, we look to sort of return going forward? Or is it more, hey, we've got some ability to really drive the top line next year through all the pieces we talked about, and we've got a heavy emphasis on marketing as an organization? Just sort of conceptually, how do you think through that when you think about resource allocation and the external environment we're in? Yeah. Once you look at, look at the trend in marketing as percentage of sales, it was unusually low for us in Q1 and Q2 2022. We'll use round numbers, 8%. 8% Q1, 8% Q2. Q3 is round number is 11%, Q4, 13%. You're averaging 12% in the second half. As I said earlier, what we wanna get back to is around 11% as percent of sales. We are committed to increasing it to be higher than 10% in 2022. The reason why it was low is obvious. You know, it was the fill rate issue, so it was lower in the first half of this year. It was also low in during the COVID period, but particularly the first 2 quarters of this year. It needs to normalize. We need to get back to, you know, we're a CPG company and marketing matters. We gotta get somewhere between 10 and 11% next year. Yeah. I would just add to that, like, we look at our track record over a long time and we're in great categories, right? Categories are growing 3% plus for a long time because we're picky about what categories we've got into. We've grown share more often than not. If you look at the scorecard, you know, 75% of the time over the last 5 or 6 years, we've gained share. Why have we gained share? Well, a big reason is because we typically over-invest versus, you know, the peer set on marketing spend. We do innovation, of course, and everything else, but really, marketing spend is important for the brands. Just to make sure that we are putting that investment first is critical. That's kind of the backdrop. Okay, that's helpful. Rick, we talked about the supply chain side. Just as you think about core SG&A, maybe ex that marketing, going forward, you guys are at a pretty efficient level relative to the peer set. Are there opportunities to improve that going forward? Is there inefficiencies that built up during COVID? How do you think about that? Is that a line item as a% of sales, non-marketing SG&A, where there's some room for further improvement, or are you pretty lean at this point already? Well, I mean, the comment that Matt made about restoring incentive comp, you know, to normalize levels is over here. Beyond that, our evergreen model is we wanna expand or leverage, you know, SG&A by 25 basis points a year, and we think we can do that. We can get halfway there just by growing the top line and then growing the dollars at half the rate. That typically happens day in and day out. We have a couple of things going for us. You know, unlike many of our larger competitors, you know, we are fortunate to have a North American instance of SAP as an example, right? We can really leverage systems more than most because of our footprint and how we're organized. So leveraging systems, you know, we have a big focus internally on analytics and robotic process automation, which just takes thousands of hours out of the network. So, you know, those things are always helpful in SG&A. The good news is, internationally, I think we said this publicly maybe 2 years ago, we had finally reached critical mass, right? We're $800 million on the way to $1 billion for our international subs. Those operating margins each and every year are now expanding because we actually have the footprint, and we don't have to add all the infrastructure as we grow those businesses. Okay, great. Can we talk a little bit about the innovation pipeline going forward? Obviously, COVID's caused a lot of volatility. Just sort of checking in on your perspective for forward contribution from innovation over the next couple of years relative to the last couple of years when you consider all that volatility and how you think about that. Yeah. Generally, if you think about our evergreen model, we're at 3% organic growth. You look back historically, generally 1%-1.5% of our, of our top line growth is driven by new products. That's been consistent. Even in 2022, like it's 1.3%. I looked at that a few days ago. Yeah, we're still delivering on as far as what the new products go. Of course, that's been masked by all our problems with, you know, fill rates and our discretionary products is overwhelming that, which, you know, is fine. I wouldn't comment yet on what we're launching in 2023, but I would expect that the contribution of our new products in 2023 is just as robust as it was in 2022. Okay. Another area maybe that's harder for us to have insight in externally is the specialty business. You know, macros are potentially a bigger impact on that business. Just how do you think about it going forward? Obviously, the nutrition and the chemical side of it, but how do you think about that business over the next, you know, 18 months here? That's a business that doesn't get a lot of ink or a lot of interest, but it's the original business of Church & Dwight, which is bulk sodium bicarbonate. We also have an animal productivity business. Think of it as a $300 million business. $100 million is bulk sodium bicarbonate. The other $200 million is the animal productivity business. Historically, the way that business performed was it would be up 1 year, and it would be down year 2 and 3, up year 4, down year 5 and 6. Why is that? It's because the business was largely a dairy business. That's changed over the past few years. We've made some acquisitions, and we've grown those a bit, so we don't have that same cyclicality. In fact, 2022 is the third year in a row now where that business actually has delivered organic growth. I do expect that to continue in the future, you know, when four years in a row where especially products businesses is gonna grow. As far as the end markets go, they are healthy. You know, if you think on the dairy side, which is dairy, but also cattle, swine, and poultry. We've also started focusing more on international 'cause it's been largely a U.S. business, that business is expected to grow as well. I think that's where the future is for that business, is international. Maybe that's a good segue into broader international. You know, obviously a lot of volatility in terms of the consumer, right? There'll be some pricing that's necessitated by the FX pressures. An update on prospects for that business, particularly given the success you've had in the last few years and, you know, maybe a bit of insight into ability to supply internationally also would be helpful. Yeah. Well, the way to think about international is keep it simple. It's about a billion dollar business, and 2/3 of it is the subsidiaries that we have. We have subsidiaries in the UK, France, Germany, Canada, Mexico, and Australia. The subsidiaries have been performing well, particularly in 2022. Our issue in international is the Global Markets Group. That's the 1/3 that's remaining. The Global Markets Group ships our products to about 80 countries around the world. That business is gonna have zero organic growth in 2022. Now, if you went back, each of the last five years, it's averaged around 15% growth. That was a real problem for us in 2022. We have to get that going again. You say, "Well, why did that happen?" We had difficulty in filling orders for our Global Markets Group and also delivering orders to all those countries just from a transportation standpoint. We think we've got those behind us now. We think that is gonna return to growth next year. That is really the thing to watch for us is the Global Markets Group, because it's been such a catalyst for the international business growth for the past, you know, 5, 8 years. Yeah, and beyond supply, the other issue, the GNG group was really our, the Asia, you know, China lockdown. As we move through that will also be a tailwind on a go-forward basis. The lockdowns in China affect not only the, our shipments to consumers, but also sourcing, because we do source, from China as well. That's been some intermittent, you know, problems in some of the, some of the ingredients or, components or finished products that we get from China. Great. Great. That's helpful. Maybe we can touch on the M&A environment a bit. Obviously, in theory, prices have come down in the industry, and there might be more availability at reasonable prices. Maybe that sentiment hasn't changed as much from a seller standpoint. A, just thoughts on sort of the pipeline out there in general. B, how you think about how you think through M&A, in terms of maybe areas that could add value to your business. You've been very clear around the financial criteria historically, but a bit of an update on the strategic criteria and how you think about that in this environment. Yeah, we'll start with the strategic criteria. We've had a pretty strict criteria for many, many years. Number one or number two brands need to be able to grow at or above our 3% organic growth, target. Need to have gross margins at or above the company's gross margin level, and needs to be asset light. The last thing is it needs to have a sustainable, competitive advantage. Think about what we bought over the last couple of years. In December of 2020, we bought Zicam. December of 2022, we bought TheraBreath, which is the fastest growing mouthwash in the U.S. Most recently, we acquired Hero, which is a super fast-growing brand in acne category. Think about prices. Because of interest rates, certainly private equity won't be a factor in any auctions, you know, at least for the foreseeable future. Typically prices come down, you know, with higher interest rates. You know, the way we look at businesses too is we don't look at it from an EPS accretion standpoint. Our focus is on how much cash earnings it's gonna generate for the business. Obviously, the cash earnings then is burdened by a higher interest rate. That affects the thinking about the attractiveness of a business. You know, interest rates are also transitory. You know, so they're up right now, but will they stay up forever? If a business came for sale that we thought was in a good category and good prospects, we'd be interested in it, regardless of the interest rate environment today. Yeah, I think Hero is a good example of that. We're super excited about the growth profile of that business, about putting that into our international footprint, expanding that business. you know, the acne category was a sleepy category for a long time, and $200 million of growth was all because of the form. we think that's gonna replicate in a lot of different places. Yeah, and that's one we'll be able to take internationally as well. A lot of excitement around the Hero acquisition. Okay, great. Well, with that, we're exactly out of time. Look at that. Good timing. Okay. Okay, thanks, Dara. Thanks so much for being here. All right, thanks. Appreciate it. Thank you.