切遲杜威 (CHD) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Church & Dwight fourth-quarter and year-end quarter 2016 earnings conference call.

Before we begin I've been asked to remind you that on this call the Company's management may make forward-looking statements regarding, among other things, the Company's financial objectives and forecasts. These statements are subject to risks and uncertainties and other factors that are described in detail in the Company's SEC filings.

I'd now like to introduce your host for today's call, Mr. Matt Farrell, Chief Executive Officer of Church & Dwight. Please go ahead, sir.

Okay. Thank you, operator. Welcome everybody, and everybody that's joining online. We have the whole management team here with us today. We appreciate the opportunity to tell the Church & Dwight story.

I'm going to provide some color on five of our categories. I'm going to talk about our 2017 innovation and the consumer insights that led to that innovation. If you read the press release, you know we closed a couple of bolt-on acquisitions recently, so I'll say a few words about that. Rick is going to get up and give us his thinking on 2017. Then we'll have Q&A with the whole management team. Here is the Safe Harbor statement, which I encourage everybody to read. Let's just jump right in.

So for those of us who know us, they know the story. But if you're new to the story, we started in 1846 with Arm & Hammer baking soda. Today we're a $3.5 billion diversified Company with dozens of brands. What are we doing on the slide? Too fast. There we go, okay. We have 10 brands -- we're a little bit out of sequence there.

We have 10 brands that represent 80% of our revenues and profits. We're a serial acquirer, so those who know us you know the only brand we had in the year 2000 was Arm & Hammer. Since then, 9 of our 10 brands have been acquired. So we have a long history of acquisitions. If you go back to 2004, you can see our sales were $1.5 billion and today we're a $3.5 billion Company.

We have a very specific acquisition criteria. Just to kind of roll through them, we buy number one or number two brands, high margin brands; we like asset-light businesses; and we're able to leverage our extensive supply chain, which I'll say a little bit more later on; and these brands always deliver a sustainable competitive advantage.

We regard ourselves as an acquisition platform. It's been part of our story over the past 15 years, that we acquire businesses but also on top of that we have organic growth. The businesses we acquire, we grow. We get operational efficiencies, and we have a stellar acquisition track record. We have a fabulous balance sheet, which [is BBB-plus] rated.

We're primarily a US Company, so there's two good things about that. We have less exposure than others to currencies. And the other positive is that we have the opportunity to grow internationally. You could see over the past couple years we've had stellar results internationally.

We're pretty balanced, so we're split household and personal care pretty much 50/50, and then we have a Specialty Products business which is primarily bulk sodium bicarbonate. We have a animal nutrition business as well. We've delivered stellar results to our shareholders over time, as you can see on this slide. I'm going to talk about five categories now. I want -- it's instructional, so we are trying to see what's going on, we're showcase our 2017 innovation.

I'm going to start with laundry. Laundry has been a growing category, and the growth has been driven by unit dose over time. If you go from left to right on this slide, left side of the slide is a four-year look. You can see 2013 and 2014 the category was down and then started to grow in 2015 and 2016.

Let's take a closer look at 2016 and look at the quarters. Q1 you had an unsustainable organic growth of plus 6%, what does that mean? It means it's going to be a tough comp for the first quarter of 2017. Q4 you see there's a slowdown. This is the first quarter, by the way, in two years that have negative price in this category. It's concentrated in the liquid part of the category, so let's take a look at that.

Here is liquid. Again left to right, similar trend. Down in 2013 and 2014, up 2015 and 2016. And a similar trend for 2016 quarters if you go left to right. Let's look at the fourth quarter of 2016 for liquid. You have negative price mix of almost 3%. What is driving that?

Let's take a closer look. Let's look at the competitor activity in the fourth quarter. You have elevated levels of promotion in Q4, with the category sold on deal is normally mid-30%s. Simply Tide dialed it up to 60% in the fourth quarter. Sun also took it up to 43%. Arm & Hammer and Xtra, both in the 30%s. So we didn't promote nearly as much as our competitors in the fourth quarter.

Despite this level of spend, Arm & Hammer laundry continued to grow share in the fourth quarter. Xtra is where we have the share issue. Two brands up, this is full year now, Arm & Hammer and Oxiclean up in 2016, Xtra down. The good news on Xtra is that we grew net sales and gross profit in 2016.

Now let's look at the share story. Xtra has been the drag on share. Arm & Hammer and Oxiclean up. Remember this is only measured channels too. Arm & Hammer laundry had a very strong year in non-measured channels, especially in club, and that's not reflected in Nielsen.

Let's talk about unit dose. Unit dose in 2015 was 14% of the category. In 2016 it's 16% of the category. Here is the unit dose category trend. You can see 2013, 2014, 2015, 2016 we'll have small numbers initially, so big growth in 2013 but it sort of leveled out into low 20%s growth as a category. You can see the quarters on the right-hand side of the slide for 2016. This is our history now, so you can see we have bumbled along here for a couple of years. In 2016 we finally got some traction.

In late 2015 we introduced bilayered powder and we also introduced a two-chamber pod. We got traction and now it's starting to show up in our shares. From a share perspective we're making progress. It's up 30 bps in 2016, [3.7%] going to [4%]. So the winners were Church & Dwight and Sun, and losers were Procter and Henklel in pods in 2016. We expect to make much more progress in pods in 2017 with our new triple-chamber pod. Its multiple chambers communicate multiple benefits to consumers.

Now let's move onto litter. Litter, again, a growing category historically. Here's the last four years, 2013 through 2016. Volume was most of the category growth, by the way, in 2016, 4.4%.

We have a long history of innovation, so we have a 12% CAGR. This is at retail sales, but in Arm & Hammer litter grew approximately 3% at retail in 2016. Consumer insights drive our innovation, the original Clump & Seal was driven by the desire for odor control. This has been a huge winner for us.

Then certain consumers told us they were concerned about bacterial odors, so that was the origin of Clump & Seal MicroGuard. The latest, which Lou took take you through before we started this presentation and we'll do some more now, cleaning the litter box is a nightmare for consumers. Today we're introducing Arm & Hammer Clump & Seal Slide. Cat owners love this product, The three great benefits. The litter slides right out of the box, there's no scrubbing, and it doesn't stick to the pan. We have a few commercials to run for you now.

(Video playing)

This is going to be a big winner for us in 2017.

Vitamins. Another growth area for us, so Here is the adult vitamin category over the last four years. I can see that also was a big grower initially, but slowed down as the category has gotten bigger but an 18%, 19% grower in the past year. If you look at the form, how is the transition from pills and capsules going to gummies these days? In 2012 it was 3% of the category, 2016 it's 11% of the category.

There's some factoids here. Almost 70% of US adults take a dietary supplement, of those 75% take a multi-vitamin. We are the number one gummy vitamin, both in adult and in children's vitamins. A new innovation for us, we're enter the energy category. Lots of people say they need more energy. One of our new product launches in 2017 is an energy gummy. We're entering the energy space with an energy gummy sourced from green tea. Our new gummy has a great taste, consistent with the Vitafusion line.

Okay, condoms. The condom category is beginning to shift to online, and I'll show you some stats on this now for a second. Here is the measured channel story over the last few years. You can see down 2013, flat 2014, down 2015, down 2016. Yet Trojan sales and gross profit are up single digits in 2016.

There's a shift to digital going on right now, and the shift to digital is becoming increasingly part of the story for many CPG companies. 2017 we are introducing a condom aimed at the female buyer, the one out of three condoms are purchased by women. Today we're launching Trojan XOXO, three features there. Soft touch, aloe-based lubricant, a unique carrying case, and we have more great news, Trojan XOXO will be advertised on network television in 2017. Let's hope this will roll well now. You can roll the commercial.

(Video playing)

Look for that on network television in 2017.

Next, dry shampoo. Dry shampoo is a super fast growing segment of the hair care category, but this is all of shampoo now. If you look at 2012 versus 2016, dry shampoo is only 1% of total shampoo, in 2016 it's 4%. You've heard us talk about this before, as it's a fabulous category to be in. In 2012 at retail in the US was $32 million. 2016, $115 million. So the question is, where can this go? This will give you some sense for how fast it's growing. This thing is going to double again.

A little bit of context. In the UK, this is a $63 million category and the population of the UK is 60 million. We have 5 times the population in the United States, so this has the potential of being a $300 million category. Today only a $150 million category.

There's a big household penetration story here. Look at some of these statistics. There are 125 million in the US over the age of 18, and two-thirds don't wash their hair every day. Only 13% of that crowd uses dry shampoo, so a lot of runway ahead of us here. We have the number one brand and we have been growing share as the category's been growing. Just a fabulous story there. And again, two more variants keep expanding the line. We have new Batiste Bare, which is a light scent so it doesn't conflict with your perfume, and then we have a fun one on the right-hand side of the slide, Vibrant and Fruity Neon.

How we deliver as a Company. If you're a shareholder you're familiar with all of these things I'm going to run through right now. I'm not going to list them, but I'm going to bomb through them one by one.

Very diversified product portfolio. You know the split, right? 60% premium, 40% value.

How do we build our shares? Pretty simple formula. We have great innovation, we have super marketing, and we have a great sales team to increase our distribution and that results in share growth.

Innovation I ran through already. We have the triple-chamber pod in 2017, we have Slide, we have the energy gummy, we have XOXO, and Batiste. We have lots of other innovation in other categories which I'm not going to run through right now, but some of them are depicted on the screen.

Marketing spending. We are the 18th largest advertiser in the United States, that comes as a surprise to some people. Our sweet spot is anywhere from 12% to 13% marketing as a percentage of sales. You can see the history here, 2013 through 2016. There's continually a shift to digital. We talked about -- I'm going to talk about litter in a second, but 2011 it was 13% and in 2016 it's 28% of our spend.

Here is a good illustration, it's the best illustration for us of the efficiency of digital. One-third of US households own a cat, so those are the people we want to target. What digital enables you to do is to segment, target, educate and then engage in conversation on relevant websites, like for example, Pet360, and then to drive sales online. Not only online but also at retail.

Distribution. Again, we're a pretty transparent Company. This is 2013 index versus 2016, How do we [look] distribution for some of our major brands. If it's plus or minus 10% we have it in gray, we call it a wash, and the rest are green.

Finally, share. So I talk about transparency as a Company, you won't find this scorecard in many CPG presentations. Let's roll down the page here. We have 4 out of our 10 power brands grew share in 2016. These are measured channels only, and as you know the non-measured channel is increasingly part of the story but this is the information available to everybody through Nielsen.

Arm & Hammer, the only Arm & Hammer variant that declined in 2016 was litter. The winner in the litter category was Nestle with Tidy Cat, Clorox being flat with their two brands, so we lost some share. The total brand for Arm & Hammer grew sales and profits in 2016.

Oxiclean, second one on the list, we had a record share in the fourth quarter. Trojan, again net sales and profits were up, non-measured channels are becoming a factor. Vitamins, very good story for us. First Response, we were hurt by some discounting and private label, but we are turning that around. The fourth quarter for First Response we had our highest quarterly share ever.

Nair, did we doing really well there for many years. We have wax-ready strips that are growing in the category. Xtra, we talked about a bit. Skip down to Orajel. The private label's been hurting us there. Batiste has been a big winner. So 4 out of 10, we hope to turn some of these around in 2017 with our innovation.

International growth, fabulous story for us. Here's the picture. See eight flags up here, but we're only in six countries. We have two new regional centers, one in Asia and one in Central America. You may have heard us talk about this on previous calls, that international is an area of investment for us for the past two years, and for obvious reasons.

We have a fabulous track record in growing our top line in International. You can see, and this is broad-based, so you go from left to right you can see the CAGRs country by country and all are positive. The way we run the businesses, by the way, is in Europe, UK, and France are combined, so we really have five business units within International.

Gross margin. Rick is going to talk about this a little bit later on, but gross margin is a big focus within our Company and we continue to grow year over year 2014, 2015 and 2016. What are the drivers for that? Number one is our continuous improvement program we call Good to Great. Second is supply chain optimization. What does that mean? Those are the plants that we've opened over the past couple years. We have a new vitamin plant, we had a new West Coast plant that we opened up.

New products obviously is a driver because a lot of the new products that we launch have higher gross margins than the products they are replacing. And finally, acquisitions. We try to buy businesses that have higher than corporate gross margins.

Here is another secret weapon, is that gross margin is 25% of all employees' annual bonus. And that's one way we create alignment within the Company. People know what gross margin is.

Growth through acquisitions, I listed those earlier but I want to call one of them out. That's the fourth one on the page there. See, leverage CHD capital base? What does that mean? We can be agnostic about the businesses that we look at, and that's because we can put the liquid in a bottle, powder in a box, we can handle gels, lotions, aerosols, regulated businesses, and we have an extensive co-packer network. That gives us the confidence to look at a lot of acquisition candidates in various categories.

Some statistics then, what happens after you buy the brand? In every case we have higher shares, we grow share once we acquire a business. A couple of ones that you saw in our press release, we have Viviscal in the J&J brand. Viviscal is a brand that's been around since 1997. 80% of the sales are in the US. It's three-year sales CAGR is 30%. This is a complementary business to our growing hair business, which is our Batiste brand and the Toppik brand that we bought a year ago.

A couple brands we bought from J&J, this adds scale to our International business, that's Anusol and Rectinol. 90% of the business is in Canada, UK, Australia, it's a perfect fit for our International business where we can add some scale.

You saw this earlier, $1.4 billion Company going to $3.5 billion over time.

Free cash flow. Rick is going to talk about this a little bit later, but we have stellar free cash flow. This is one thing that I think a lot of our shareholders focus on, is that our cash earnings per share is significantly higher than our reported book EPS.

Overhead management. We run a really tight ship at Church & Dwight. The only CPG company that's better than us at managing SG&A is Reckitt. Rick's going to say more about this later on to give you insight into the components of SG&A, but for my part what I want to point out is that we've been investing in.

International -- I mentioned that earlier -- over the past couple of years. We're going to continue to invest in International. Second thing is thinking IT investments. We're no different than any other company, but we have an extremely productive employee base that can become even more productive if you make these investments. And R&D, is a natural. This is where you want to continue to invest and drive your innovation.

We have a very simple incentive compensation plan, and this is the secret sauce. We have a financially literate Company. We have four measures. We have sales, gross margin, cash from operations, and EPS. Our long-term incentives are aligned with shareholders (technical difficulties) it's only options.

How we run the Company. You know we focus on number one brands, we like to be asset-light, and we have a super workforce. If you had these three, which we do, you would have really good results. But when you put on top of that the competency we have as a Company to acquire businesses, integrate them and create more value, you get fabulous shareholder returns.

Here is our evergreen model, this is unchanged. 3% top line, 8% bottom line and 50% operating margin expansion. Rick is going to spend a little bit of time on that.

A few other things. We talked about the evergreen model. Our geographic focus, we're mostly US but we're investing more Internationally.

Our acquisition criteria, we've reviewed. The allocation of capital, this is very deliberate. Rick's going to run through this, but from top to bottom those are in order where we direct our cash flow. Okay, Rick. You're up.

Great. Thank you, Matt. I'll go through thee things with you guys. First the quarter, then the full year 2016 results, and then we'll go through -- spend some time on the 2017 outlook.

First off is the quarter, 2.7% organic sales growth. Remember our outlook was 1% to 2%, so we over delivered on all three of the divisions, so that was a great result.

Consumer, organic which is the International and the Domestic division added together, that was 3.5% for the quarter. Our organic growth, like many quarters, was largely volume driven at 3.2%. Gross margin was up 60 basis points. I have a separate slide on the gross margin bridge that we'll talk through that. Then operating margin was up 50 basis points. EPS was up 7% to $0.44, and remember our outlook was around $0.42, so really pleased with that result.

You saw some late breaking news in the release this morning. We announced that we are selling our Brazilian chemical business. Now there's a small charge in 2016 of $0.02, small charge in 2017 of $0.02, but at the end of the day it's a good thing for the Company, just allows us to be focused even more on our consumer business in Brazil, small business but growing.

From a phasing perspective organically, you can see the stair-step was going down through the quarters, but it's up in Q4. Remember Domestic organically we were 0.8% in the third quarter, we were 2.7% in the fourth quarter. So again, going in the right direction.

We had solid growth throughout the year. This is a two-year stack of the consumer business, so Domestic plus International. 8% for the two-year number, 4% in 2015, 4% in 2016. You can see the second half is 6% to 7%, which is solid growth as well. That stair-step down is really probably the most pertinent item is the laundry category. Laundry category you averaged about 4% category growth, in the first half, about 2% which is probably more of a sustainable number in the back half.

Turning to the full year. 3.2% organic, which is fantastic. Domestic was 3.1%, International was 10%. That's a high watermark for that division; Steve and his team do a great job. SPD was a 7% drag. We've been upfront on that all year long as milk pricing has been going down. But the good news is from Q3 to Q4 sequentially milk pricing has gone up about 6%. You'll hear in our outlook that we expect growth out of that division in 2017.

Again, I'm going to defer the gross margin story for another slide or two. We have a bridge on the full year.

Marketing was essentially flat at 12.2%. SG&A was up 50 basis points for all of the reasons Matt laid out and also incentive comp, as we had really strong cash flow, really strong margin and results overall. EPS was up 9% to $1.77. Cash was a little over $600 million, and that's adjusted free cash flow of 131%. Matt talked to you about the six- or seven-year average of 120%, 130%'s just phenomenal.

Here is the gross margin detail. If you look at Q4, commodities is flat. That kind of marks an inflection point for us. The whole year, commodities have been a bit of a tailwind, and you see that in the full-year section. Commodities are starting to turn a little bit, and you're going to hear in 2017 we expect there to be moderate inflation.

Productivity in manufacturing, that's the G&G program that Matt referenced, 100 basis points from there, plus margin accretive acquisitions offset by higher promotional volume and mix. That's how you get 60 basis points for the quarter. For the full year the 60 basis points from commodities and the productivity gains of 70 basis points essentially gave 120 basis points for the full year. This is the biggest increase we've had in gross margin for a few years, so very happy about that.

Free cash flow conversion, we talk about this all the time, talk about cash all the time. And 120% is top of the consumer sector. Our peers average in general about 100%. Some peers target about 90%. So to have 120% year in year out and 130% this year is a good result.

Now, how can we do that? Probably one of the biggest reasons we can do that is the way we manage the balance sheet, so our cash conversion cycle. That's inventory plus receivables minus payables. We've gone from 52 days over the last seven years to 21 days. That's hundreds of millions of dollars out of the balance sheet we can put to use. We have aspirational goals of getting down to 0. We do have some peers that have done that, actually gone negative. We try to look at that all the time.

So I said we had a strong balance sheet. We're 1.4 times levered. We have a lot of capacity to do a lot of deals and to use our balance sheet in a good way. As an example we could do a $2.8 billion deal, and we believe maintain our credit rating of BBB-plus which would be really important to us.

I'm going to spend about five minutes on this slide. This is the 2017 outlook. A lot of moving pieces, so I want to make sure we're all grounded.

first off, 3% for organic growth. That's right in line with our evergreen model. That breaks up 2.5% to 3% for the domestic business, 4% to 5% International and 2% to 3% for the SPD business. Again, they return to growth in 2017. The backdrop for the Domestic business is we're assuming a little bit slower growth in categories, probably around 2%. To the extent categories do better, we'll do better and vice-a-versa.

Gross margin is up 50 basis points despite moderate inflation, despite higher promotional spending expectations. These are when I think about that, is 40 basis points from the acquisitions, these gross margin accretive acquisitions, offset by 40 basis points of higher commodity costs, higher promotional spending, FX drag. That gets you back to 0, and then plus 60 basis points from productivity and just leveraging our volume. That's kind of the detail behind the gross margin outlook.

Marketing is up. We're spending back a little bit more money in marketing to help drive those new products and help drive the brands. SG&A is actually up 10 basis points, but you can be assured that we haven't lost our way there. Our TSR model, evergreen model, says we typically leverage that 20, 25 basis points. I'm going to walk you through what's going on behind the numbers there.

Other income and expense is a drag of $14 million, and behind that number is about $20 million of interest expense. Half of that is because of interest rates are going up and half of that is just having the debt, our debt expectations for the new deals. The tax rate -- all of the adjusted items exclude the three adjustments we've talked about before, the pension, the Brazil, and the stock accounting FASB change.

So we're up 7%, and that includes the higher marketing, that includes a slight drag from acquisitions, and you might ask why do we have a drag from acquisitions? Well, these small deals are very global in nature so there's lots of countries involved. So we have transition services agreements all over the world as we integrate these things. That's really why we have a drag.

On a reported basis we're at $1.73 midpoint, and that includes the Brazil charge and includes the UK pension contribution. We're out of the pension business. That's a great fact. Then, of course, the new stock option accounting.

I just want to draw your attention to, we said in the release as well, the timing of EPS. We said roughly all of our EPS growth will come in the second half of the year. We're moving marketing dollars out of the second half and back into the first half. Over time those numbers have creeped up over time, and we want to reallocate and do what's right for the business.

I'll just flip through some of the key metrics really quick. Our track record on organic sales, solid track record from 2012 to 2017, and we've been between 3% and 4% over that time frame. And again, in 2017 we're calling 3%.

Gross margin is a hallmark of this Company, and it drives a lot of value. It drives a lot of cash earnings for the Company. You can see the stair-step up to 46.3%, so great progress.

Marketing spend has been pretty consistent, and Matt alluded to that, between 12% and 13%. We think that's the right number, and again it's another year of increased marketing.

Now in SG&A, I'll just take a minute to discuss this. You can see on a reported basis that SG&A is up 60 basis points from 2014 to 2017. But I want to show you what it is on a cash basis. On a cash basis we're pretty much flat. If you look at 2014 to 2017, 11% to 11.1%, and if you just take a second and look at the change of 2016 versus 2017, we're up 10 basis points on a reported basis but we're down 20 basis points on a cash basis.

So we haven't lost our way. We have a mind set in this Company, we have been doing zero-based planning for many, many years and so we have such a good hold over what our SG&A dollars are doing.

On operating margin, this is a great result, 21.3%. A lot of personal care type companies are trying to get to the low 20%s, so we feel good about that number.

EBITDA margin is a good surrogate for cash and cash earnings. This drives a lot of value. We've gone from the low 20%s over time to the mid-20%s. This is fantastic.

EPS growth. Everything that came before is what leads to EPS growth, and so we've had a few years of high single-digit EPS growth, 9% this year. 7% is the call for next year, $1.89.

Allocation of capital. This is one of the most important things we discuss. This hasn't changed, though.

Number one, far and away is accretive M&A. That's where we spend a lot of time, this management team spends a lot of time looking at deals. Number two is new product development. Matt walked you through a lot of those. Number three is CapEx for organic growth. Number four is return of cash to shareholders through dividends or through buybacks. Number five is debt reduction. Of course, if we did do a big deal, number five would move to number one.

We're not a capital intensive Company. We have walked through this many times, but our outlook for 2017 is around $55 million. If you take out the one-timers like capacity, installations we bump around between $50 million and $60 million. Our outlook is right in line with our past practice.

We announced this morning that we are increasing the dividend by 7%, high single-digit increase, which is great. 40% payout, we are still right at that type number. This is 116 consecutive years of dividends.

And I would be remiss if I didn't give you a comment or two on the proposed tax reform. I would say you guys know 80% of our sales are in the US, about 90% of our pretax income is in the US. 95% of our products sold in the US market are sourced and produced domestically. So about 5% are imports. Net/net imports and exports largely wash, and it's kind of a neutral. The best thing that could happen far and away for Church & Dwight is the general corporate tax rate being lowered.

That's a quick perspective. We get that question a lot so wanted I to give context. And with that, I think we'll invite the management team up and we'll take any of the sell-side questions we have.

Okay, Bill. Two Bills there. Bill Schmitz.

Can you guys bridge the organic growth from that negative 1% Nielsen to the roughly 3% in the Consumer Domestic business you did?

Yes, I used to masquerade as a finance guy, so I'm going to (multiple speakers) let the finance guy do that.

Yes. I think I might (inaudible) other problem. You'll see in the Nielsen data, for example, the four-week data has been relatively weak, and that's really tracked channels. So we were slightly negative in tracked channels.

We said in the release, though, about if you think we're slightly negative in track channels but we're 2.8% organic in the Consumer Domestic division. We said that entire delta could be really explained by two things, about 300 basis points in total, about half in club and about half from the online channel.

I'd say that trend's probably going to continue. It's not going to get better over time, so that disconnect is going to be there.

Okay. Why is it going into the first quarter? Do you know what I mean, because those trends, it seems like the club stuff is distribution more than growth, yes? Or is it growth within club?

Obviously the e-commerce piece also should continue to grow. But I know the comp is a lot harder in the first quarter, but you'd think those trends would -- .

I think you hit it on the head, Bill. If anything the comp trend -- the comp is overwhelming any trends that we're going to see in Q1. To be comping a 5% organic or a 6% -- even household business growth in Q1's gong to be very difficult.

With all that said, we are going to have better growth than is in track channels, but the comp in Q1 is very high. So our outlook is 1% to 2% in Q1.

And what percentage of sales is e-commerce now?

We've just said in the past we're right in line with the 1% to 3%. It's growing very quickly, but that's probably the extent (multiple speakers).

We're right in the middle, around 2%.

Okay. And do you have a big (multiple speakers).

We have a field of people. You're on number four. Let's get the other Bill.

Yes, just on the laundry section. Can you maybe now over four or five months since the Henkel/Sun merger, thoughts of is this going to be good for the category in 2017? Do you think it's good for the category in the long run? Do you not have an idea at this point?

That's a crystal ball question. So it's fair to say that when a large company buys another pretty good-sized company, a lot of their plans are already in place. So whatever Sun had in place for Q3, Q4, maybe even for 2017 is already in place. So we don't really know, there's no evidence that says there's some obvious change in tactics, because we only own it for a few months.

You have a wait and see. There's one camp that says, okay people could get very promotional. The other camp that says, people are going to be rational and be it'll great for the category.

We need a few quarters to figure that out. I'm sure it's going to be a question from everybody in Q1 and Q2 about what's going on in the laundry.

But as Rick points out, the comps, back to Bill's question, we have a one to two number in Q1 because our biggest quarter last year, we posted over a 5% organic number last year Q1. So that's a tough one to comp.

Just related to that, I may have missed the thoughts of how you turn around Xtra, it didn't seem like there's any innovation. It's a price/value type position, and that seems to be the one that's probably hit most by Sun. Are you optimistic you can turn it around this year, and how do we do that?

You're absolutely right. Xtra has lost share for three years in a row. As I pointed out, in 2016 Xtra grew our profits, and we haven't spent. If you look at what we spent on a full-year basis for Xtra we were around 37%, 38% sold on deal.

Where was Simply Tide and Sun? 40%-plus. The question is, okay you've got to get in the game to try to offset that, because in deep value it's not really an innovation story, it's more of a price story. Kevin? How many Kevins do we have?

Thanks. Two questions, if I may. Matt, can you comment on balancing a bit the market share performance? You guys lost market share within six of your largest 10 brands.

In measured channels.

I'm sorry? In measured channels, with the advertising marketing relatively flat. I know that's consistent with your evergreen target. Does that lend itself, the market share dynamic, to the argument that maybe advertising marketing needs to step up a bit to stem some of these losses, if not gain share? And then I have a follow-up question.

Yes, well I'm going to give you a couple opening remarks and then I'm going to ask our CMO to comment. I may say what she's going to say. When marketing is 12%-plus of your revenue, it's a pot, you have to decide how you're going to deploy it.

So you're going to move things around from one brand to the other. Some brands have tremendous equity and they can withstand having less spend on them in a given year, and you move the chips over to another brand. We have to deploy it smartly so that we are going to get the right effects.

Some of that measured channel versus non-measured channel stuff we're pretty relaxed about, because we know we see the numbers and everybody can't see it. It's going to create greater unease going forward I think if you're an investor or an analyst to try to see what's going on in non-measured channels. I'll let Britta comment on that.

Sure. Building on what Matt said, I think we have different reactions in different categories to advertising. What you'd see Slide is very obvious, great innovation, you can see its advertising would drive a change very quickly.

There's other categories where advertising is constant, you can't see that change as quickly. I think we're very confident that the advertising we have or the communication we have is driving different categories.

If you look at the overall there's many, how would I say, noise overlaying it. We talked about laundry and the promotional effect overlaying the noise, or we talk about Trojan that the shift in channels is actually overlaying the true brand performance. So we look at it holistically across all the channels we have.

Okay. Another one? Sorry, Matt. Just the follow-up is just to stick with online a second. Maybe talk about some of the opportunities and maybe some of the risks you've seen in other categories, whether it's blades, wet shave, some personal care categories like beauty where it's been demonstrated that the e-barriers to entry are a bit lower and there's been some risk to the incumbent. Talk about how you are looking at that, Britta, if you chime in too, particularly like in contraceptives, as an example, to some of these categories that lend themselves a bit more to online. Thanks.

Sure. I would say categories are very, very different. So low barriers to entry in beauty, for example, is in cosmetics or in skincare. If you look at our categories like condoms needs trust.

We've seen across the world plenty of small condom pop-ups. None of them have stuck really anywhere in the world, because this is a category where long-term trust in the brand is absolutely essential.

Other categories I'd talk about, it's a huge opportunity for us actually online because they are categories where you don't really feel comfortable if you go in store and purchase them. We have a brand, for example, Replens RepHresh. You don't really want to be seen with a basket and saying, I have personal odor.

These categories we're doing extremely well online. I think the hard one is you have to differentiate on online very closely, think about what the consumer wants and what they are looking for. I personally see it as a huge opportunity for us I'm not really worried. I don't see it as a threat for disruptive.

Joe?

Thanks. First question, I guess, in terms of this move from track to non-track channels. What's the margin delta between your businesses in those two different channels?

And then secondly, on the acquisitions it looks like you're paying roughly four times trailing revenue, call it 14 times EBITDA for businesses that are better in smaller categories. What's the goal there? Is it geographic expansion for those two acquisitions you announced this morning?

When we look at online contribution versus bricks-and-mortar contribution, we look at it as a basket because some are actually going to have better margins online and some are going to have worse. But in total [or fully], they are about equivalent. We aren't seeing erosion from our online business. Your other question was on multiples?

It looks like you paid a pretty hefty multiple for some of these acquisitions. I'm curious what the growth opportunity is.

So we spent $290 million on those two. I'll tell you what we paid was a little sub-12, and we think synergize is sub-10. We think it's still a great deal, whether it's international, domestic, wherever it would be. By the way, we also get more scale for some key countries internationally, but I'd say it met all of our financial criteria.

Jason?

Okay, two questions. One just on international. Obviously years ago really didn't get that much of a discussion. Now we talk more about it.

You're talking about some of the investments you're making there. Maybe just to dovetail on Joe's question about the acquisitions there, how should we be thinking, what percentage of sales if you think five, 10 years down the road will international be part of the story?

The second question, really want to talk about the gross margin guidance, and the promotional and the commodity, maybe if you could flush that out a little bit? The comfort level that you have in case the promotional environment does get worse. 60 basis points does seem a lot for a CPG company in this environment. I know you lean on the productivity, but can you maybe put a little more color behind that?

Okay. Well, we have the good fortune of having the Head of our International Business with us here today. I'm going to let Steve take a swing at your questions.

With Church & Dwight we really haven't focused that intently in international expansion. Several years ago when Matt asked me to come in, I really viewed international as a wonderful opportunity to be a growth engine, just another piece of our growth strategy long term. We do feel that international represents a significant growth opportunity for us.

We're making investments that Matt alluded to, two new sales and marketing offices that we just opened this year, one in Panama to service Latin America, and one in Singapore to service Southeast Asia, both of which are very dramatic growth opportunities for the Company. We'll continue to make acquisitions and investments in terms of driving growth behind the brands that we exist, both domestically and internationally. We see this continuing to play out as a source of growth, incremental growth for the Company.

Where do we see it going long term? You want my answer or Matt's answer? But I would say that we think that as you look at CPG across the world that we would see this playing out to be a much more significant part of our overall portfolio than it has in the past.

When we had that earlier slide on international, you may remember me saying that we're doing what a lot of other CPG companies did decades ago. During the last couple years we said, we have to get after international.

We have really good brands, we have some brands that can travel. Not all, but some can, as Steve and his squad were doing a great job. We're going to have above average, thinking about our model, 3% organic growth, above average organic growth from international for years to come because that's going to helps us, total Company.

The ambition, we're over $500 million business today, what's our ambition? Our ambition is to be $1 billion business.

Will I be in a nursing home when that happens? Maybe not. But that's organic and acquisitions, so we've done acquisitions in the past.

We did Batiste a few years ago in 2011, just did these J&J brands. We're always on the hunt for other brands. We are not slaves to a number.

I'm not going to say we want to be $1 billion by this year, not going to happen. We do have high expectations of the business.

Then on the gross margin question, I'll just reiterate what I said. We're getting 40 basis points from acquisitions, great. It's been offset by commodities and promotional spending and FX.

Then we're getting the balance of it through (inaudible) volume and productivity. You're really asked about that 40 basis points, are we comfortable with that 40 basis points? I'm not going to break out the 40 basis points in any more detail, I'll tell you it assumes double-digit increases in our (inaudible), it assumes a mid-single-digit increase in our resin.

We have commodity inflation built in. It assumes 20%-plus increases on diesel. So we have expectations, and if it's more than that we'll do what we need to do to help offset that, whether it's productivity program stepping on that or whether SG&A, whatever it is. We always have a whole array of levers that we pull if things don't go as expected.

Okay. Caroline?

Thank you. I have to follow tradition and ask two questions. Could you dive into the learnings on online margins, because I thought it was fascinating. Most companies are out there saying they make more online and -- .

In some categories.

But you start to wonder if you factor in all the investments in digital and the human resources you have to apply to them. I just want to understand a little bit more about that.

There's some truth to the fact that digital advertising is more efficient. We went threw that example with litter. Instead of bombing away with TV advertising to reach everybody, you're only going after the cat owners. There are efficiencies in the advertisement side of the house, remember that's 12% of your sales.

If you can be more efficient there, it's obviously going to improve your margins. Heavy things don't travel well. So when you think about online, heavy things like laundry detergent, litter, those are categories where you're going to be more challenged to have the same margins as you have in store. But then are some personal care brands on the other side you're going to make more money than you are doing on (technical difficulties). It is a balance.

So net-net our online margins are at or above Company average because of the personal care mix. We've said that the last few quarters and that's still the truth.

And then the other one is, how do you get the operating leverage that you look for when you buy overseas? Because you just don't have the scale you have here, not that you're the biggest company here, but in a way opening the offices in Singapore and so on, how do you also get margin expansion while you're doing that?

When you acquire businesses?

Right.

The way to think about acquiring a business is you're buying marketing contribution. So essentially that's gross profit minus marketing. We don't add a whole lot of SG&A when you're buying a business.

Right off the bat if you can get a leverage on what you bought, you can improve the operating margins of the business. All this SG&A doesn't come with it when we acquire a business. We have to acquire smart, you have to buy where you have infrastructure in different countries, particularly internationally.

That limits us a little bit more. It's hard for us to buy a business in a country we're not in and not bring the SG&A. And then some of the math starts to fall back, because we're oriented towards cash, how much cash a business throws off. I don't know if that helps you.

The only thing is what Matt told you before, is that small Anusol deal, for example, 80%, 90% of those volumes are going through Canada, we have a sub, Europe and Australia. We feel like we do have a platform to leverage there. Those headquarters are really the jumping-off point for regions. That's just a few SG&A heads, and that's really the jumping-off point for future expansion.

Okay, how are you?

Just sticking with international. I was still curious about the portfolio cohesiveness question. You talked about the financial attributes, and I know that even domestically the business has its chunks of businesses that don't necessarily have the most traditional strategic cohesion across the board, and you've done wonderfully well with that.

But you did it in one country. So to try to build an international business which is whatever it is, six or seven countries, with a feeling a little bit scatter-shot brand portfolio. I'm just curious, if strategic fit is part of it beyond the financial attributes and the ability to leverage your infrastructure and so on? Thanks.

That sounds like an indictment. I think Steve is ready for that beach ball.

Sure, not a problem. It's a great question. Many of these international subsidiaries, the countries that Matt puts on the chart, were acquired when we did other acquisitions, Carter Wallace being the primary one. And it had some cats and dogs, for sure.

Three years ago what we decided to do is to make this an engine of growth, we had to have a strategy, both what markets, what brands, what capabilities and where from an acquisition standpoint, we would like to go. So what we did is we identified key brands that we knew we could grow in international markets, that's one.

Two is we have a North America focus. We take the capabilities that the US has and we extend them north, Canada; south into Mexico. You saw Mexico, fabulous performance. We expect that to continue to grow, the biggest brand growing the fastest is our Arm & Hammer franchise. We feel like we have a long runway and we can continue to extend that further south through Latin America, and the new sales and marketing offices will be a jumping-off point for that.

Around the world is mostly a personal care business. It's our personal care brands that we've been able to really ignite in many parts around the world. Batiste, fast growing in every market we launched in. Sterimar, we sell Sterimar in 87 countries around the world. It's a unique phenomenon that doesn't really exist in the United States, this concept of nasal hygiene.

We look at countries like China as a great opportunity to leverage our capability, all the clinicals that we do in this space into emerging markets, and they've really taken hold. One of our most successful markets for Sterimar is in Mexico City for those same reasons. We're exporting that same technology, talent and capability in markets where we believe we have a right to compete and win.

Femfresh is another category that is growing quite nicely for us. So we've really selected down for international markets, key brands that we know where we have a competitive advantage and the right to win. Then we're deploying our capabilities in markets.

Then we select countries that we want to win in. That's been the magic of success, really driving significant growth. Last year we did over 8% organic growth, this year we're doing 10%, really based on that very strategic model.

That's really helpful. Thank you.

Olivia?

Thank you. First question on laundry. We didn't really talk a lot about liquid laundry detergent and it's been awhile since we've seen something in terms of innovation there.

It's still a much larger category than unit dose, despite the growth there. Wondering if you could give a little bit more color on that.

Back to international, clearly the growth has been phenomenal there. But for 2017 you're looking for growth about half the level which you achieved in 2016. Can you bridge that gap a little bit, realizing that of course it's tough to expect double-digit growth in perpetuity? Thank you.

The liquid laundry category, you're right. There isn't a lot of innovation in liquid laundry. It's more of a brand story and brand equity. All the growth has been driven by unit dose over time.

I think that's going to continue in the future, so it's no expectation. There was an expectation actually at one point before the compaction in liquid laundry.

That clearly is not obvious today. Once upon a time it was believed that in 2017 liquid laundry would be compacted again because Wal-Mart announced that years ago. That is not on the radar screen right now.

With respect to liquid laundry, it's more of a brand story. I'll ask Britta or Lou if they want to add anything to that on liquid laundry detergent. Want to add to that?

The only thing that I would add to that would be that over the years we have launched a lot in the laundry detergent, and some of those sub-segments have done better than others. There's distribution opportunities on some of those that we still haven't capitalized on as we launched a different flavor, or in the free category, sensitive that's what I mean.

We have opportunity in the sensitive category, as an example. We are looking to expand our distribution in some of the great items that we've launched in the past that haven't capitalized on all of the distribution opportunities.

What was the second question you had? That was a two-parter?

Yes, I would love to commit to 10% or double-digit growth from here into infinity, but I think what we see is some of our core markets like developed markets in Europe which had a fabulous year last year, we don't expect that to continue long term. We expect that to moderate to the Company average growth.

Last year they really over-delivered. Same thing with Canada. We did great performance last year.

We don't expect that long term to continue, but we do expect the 4% to 5% at a minimum. We have higher expectations for ourself in international markets, but I think we do see developed markets slowing down from their high point last year.

Okay. Steve?

I'm actually going to build on both those questions. On the laundry side, your main competitors are -- speaking of branding and marketing, are branding a lot right now. Both of them on the Super Bowl with various properties. So it sounds like you're going to go to market in liquid with basically your current portfolio. Is that a big area of focus for stepped-up marketing next year, or what's the strategy in liquid, as your competitors do a lot?

There's no way we would go through our laundry strategy today for 2017. Is that what you're asking?

Well, I guess, yes. There's no real incremental news?

Maybe I can help a little bit. So first of all, Super Bowl. I think I want to be very clear. I think that it's a great PR for most of them.

But the value -- and we are value driven. We are very clear on our metrics, where we invest and where we don't invest. That's my number one to say about Super Bowl ads. We all enjoy watching them, but if you think about you want to reach consumers at an affordable cost, they're not the greatest.

Secondly, I want to say, laundry, strip out a little bit of the noise. How much innovation has really been in liquid laundry over the last couple of years? You get a new flavor, and the new flavor gets promoted and then it drops off again.

That's true for many of our competitors. I think we're making a decision to be much more clear that this is the area where consumers aren't looking for something new every single time. They want good, great performing products at a great value. And that's where we are driving what we have been driving.

Just to come back to our shares, I think that's the secret formula of Arm & Hammer. We've proven even in 2016 with all that laundry battle going on that Arm & Hammer was a big winner. Just put it in context and distract a little bit of the noise around.

Fair enough. And then on international, trying to get a sense of it feels like it's an increased priority. When it comes to M&A, is the financial bar higher or lower internationally versus domestic?

No. It's not lower. The financial bar is universal whether it's international or domestic. The businesses we just bought cleared those hurdles. There's no relaxation on our standards.

Okay, thanks.

Jason?

Thank you for the question, and congratulations again on a strong finish to the year. A couple of quick questions. First, housekeeping on the stock options accounting change. If we look at your 10=K filing for last year it would have been around a $0.14 benefit, the year before $0.06, the year before $0.07.

Why only $0.03 benefit as we look into next year? And I guess what I'm getting at, is there a degree of conservatism embedded in that?

I'd probably answer that a couple of different ways. Quantitatively, you're right, it's a bigger benefit if we take 2016. Our math says it's $0.10 if it was 2016.

if you take the five-year average, it's a $0.05. If we take Q4 annualized it's $0. So it all depends on how the stock price moves and it's a circular relationship.

You can't have a low target price and high expectation stock option exercises. It just doesn't work in the modeling. That's on the stock option exercises.

Net-net it was $0.03, about 1.8 million stock option exercises is our expectation. That could change. And we've seen our peer group -- a lot of volatility. You guys see even more than I do.

People have raised and lowered multiple times already on this new accounting standard. We're trying to take the noise out of it. And if it's more, we'll raise the number. We're going to be really clear about it.

I appreciate the visibility. Let's talk go back to a question where we don't have the visibility, and that's back to the unmeasured channel performance.

It's hard, it's difficult since we can't see it, feel it, touch it and we're used to seeing and feeling and touching the performance. It's also hard because if we look at your performance and we compare it to what we can see, the spread, the delta is quite volatile.

We have really wide gap this quarter, a pretty narrow gap the quarter before. Implicitly you're guiding to a fairly narrow gap in the next quarter. I guess we'll see how consumption comes out, but from what we are seeing so far it suggests a pretty narrow gap.

Can you give us a little more color in terms of what drives the volatility quarter to quarter? Why that isn't a steadier state magnitude of relative out-performance? And maybe if there was some real lumpy volatility from last year, you can give us color just so we hopefully can anticipate it coming.

Well, some of it can be distribution, the timing of distribution from year over year. But say you're right about online, it should be pretty steady.

If you have X sales online in one quarter it should be that or more the next quarter. But I think there's definitely going to be some distribution and portfolio mix year over year, but it's something we struggle with too. It's hard to forecast, actually.

I'd say the same thing. It's a little lumpy for us too. We try to give you the best all-in algorithm that we can. Sometimes we're under, sometimes we're over. But visibility is still tough.

Something else you should be aware of too is you can be online on, say, Amazon with one of your products this month and next month you're not. You can get in and out because of their algorithms and how much you're selling online, et cetera. That does create some wide fluctuations within a quarter, and sometimes quarter to quarter. I'm sure you've heard that.

Maybe I can help with one little one. How many of you took a New Years resolution?

We had a big campaign New Year, New Me on vitamins, which is -- we are the number one brand on Amazon online. These kinds of effects and how successful one of these campaigns is going to be, as we are all learning about online is hard to predict.

I would say that's also due in this invisible parts, there's accelerating factors which is certain categories perform well, certain timing of the year perform well. That's, for example, why the gap in Q4 where we shipped for that New Year, New Me was already not visible to you guys.

Thanks. I have a general question on pricing and your ability and willingness to pull the pricing lever in 2017, especially given the heightened competitive environment, that would be first. Second, your price mix internationally during the quarter deteriorated sequentially. If you could touch on that as well in terms of your ability to do it internationally, thinking about rising or increasing FX headwinds?

When you say the price lever in 2017, you're saying our ability to raise price? As far as raising prices goes, typically the categories you may be able to do that in our categories where you're the most dominant, say in baking soda you have 75%-plus share, condoms you have a 75%-plus share. If you don't have that kind of leverage it's more difficult, number one.

Number two is you need to have the support of the commodity costs rising. A lot of retailers, we will be able to pull that lever if you can support it with input costs, which of course we have but it remains to be seen if we can pass that on in 2017. A lot of retailers are reluctant to take price, as you probably know. What was the second part of you question?

Just the same concept internationally, because in the fourth quarter price mix deteriorated sequentially. Thinking about it internationally as well, as you think about your mix.

If anything it's mix related in terms of country. If Canada is doing better, it's more of a household type product, more than anything. I wouldn't read into it.

Anybody else before we wrap it up here? Okay. Well, thanks you all for coming today. Thanks for joining online. As I said, a super fourth quarter and optimistic about 2017. Thank you.