Q3 2021 Church & Dwight Co Inc Earnings Call

October 29, 2021

Smith 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 Companys SEC filing.

I would now like to introduce your host for today's call Mr. Matt Farrell, Chief Executive Officer of Church <unk> Dwight. Please go ahead Sir.

Okay. Thanks, good morning, everyone. Thanks for joining us today.

I'll begin with a review of the Q3 results and then I'll turn the call over to Rick Dierker, our CFO and when Rick is done we will open up the call for questions, but before we begin we'd like to recognize all church and Dwight employees around the world for their continued dedication to keeping our company go and especially our supply chain and R&D teams is during this quarter the <unk>.

Company faced the complexities of widespread raw material and labor shortages at our suppliers and in our third party manufacturers now lets talk about the results Q3 was a solid quarter reported sales growth was 5.7% organic sales growth grew three 7% and exceeded our one.

5% Q3 outlook.

The three 7% organic growth rate in the quarter is impressive.

Considering the prior year Q3, 'twenty 'twenty organic sales growth was nine 9%. So that's growth on top of growth. The adjusted EPS was <unk> 80 cents and its 10 cents better than our outlook. We grew consumption in 12 of the 16 categories in which we compete and in some cases on top of a big consumption gains last.

Year.

Guarding brand performance five of our brands saw a double digit consumption growth and I'll name them for you vitamins.

And hammer cat litter scent boosters batiste and Zicam.

Although many of our brands experienced double digit consumption growth, it's not all reflected in our three 7% organic sales growth of shipments were constrained by supply issues in Q3 online sales as a percentage of total sales was 14, 3% our online sales increased by 2% year over year now keep.

In mind. This is on top of 100% growth in E. Commerce that we experienced in Q3, 'twenty 'twenty versus 2019, and we continue to expect online sales for the full year to be about 15% as a percentage of total sales.

That was described in the release Hurricane Ids impact was substantial which resulted in limited availability of raw materials and caused our fill levels to continue to be below normal.

Labor shortages at suppliers and third party manufacturers have constrained their ability to produce.

Which provides of course, both short term and long term benefits and then a few minutes Rick will tell you about our plans to expand capacity in 2022 with a significant increase in Capex next year to support our growth plans.

I'll do a little lower than normal case fill rate, we pulled back on Q3 marketing compared to the prior year and we expect the supply issues to begin to abate in the first half of 2022.

Our biggest issue is widespread rights widespread inflation, we're dealing with significant inflation of raw and packaging materials labor transportation and component costs, which is compressing. Our gross margin. These conditions are expected to continue well into 2022 and Rick will cover gross margin.

In his remarks in a few minutes.

On past earnings calls, we described how we expected categories to perform in 2021.

Overall, our full year thinking is generally consistent.

To name a few categories demand for vitamins laundry additives and cat litter has remained elevated in 2020 one.

The condoms dry shampoo and waterflood or categories have recovered and are experiencing year over year growth of society opens up and consumers have greater mobility.

<unk> soda and oral analgesics have declined from Covid highs as expected. So now I'm going to talk about each business first up as consumer domestic so the consumer domestic business grew organic sales to 8% and this is on top of 10, 7% organic growth in Q3 2020 looking at market shares in Q3.

Six of our 13 power brands gained share and our share results are clearly impacted by our supply issues.

We don't comment on a few of the brands right now.

By diffusion gummy vitamins saw huge consumption growth in Q3 up 24% consumers have made health and wellness a priority. It appears that the new consumers that came into the category or staying because we look at if we look at the last year via diffusion household penetration is up almost 10%.

Batiste dry shampoo grew consumption, 36% in the quarter and grew share to over 40% first time that's happened.

Dry shampoo is recovering as stores have reopened and consumers are becoming more mobile.

Next up is Waterpick waterpick consumption declined in the quarter due to the year over year timing of a major online retailer sales event with the good news is that water Pik continues to have strong consumption year to date and continues to benefit from the heightened consumer focus on health and wellness and household products arm <unk> hammer liquid laundry held share despite.

Leading with price arm <unk> hammer scent boosters continued to gain share.

Going the other way with unit dose share, which declined due to supply issues. The good news in unit doses that we are now self reliant with reliable in house production and also in household products arm <unk> Hammer cat litter grew consumption, 11%, while gaining 50 basis points of market share.

Next up is international despite disruptions due to Covid, our international business came through with two 3% organic growth primarily driven by strong growth in the global markets group.

Asia continues to be a strong growth engine for us.

Furthermore, them fresh via diffusion and little Critters led the growth for the international business.

Now as the next one is specialty products, our specialty products business delivered a very strong quarter with $18, 5% organic growth, but this was an easy comp the prior year quarterly organic growth for specialty products was actually down three 4%. So 18, 5% is a really nice rebound and this was driven by.

With higher pricing and volume milk prices remain stable and demand is high for our nutritional supplements.

Now, let's talk about pricing.

In response to the rising costs, we have already taken pricing actions and 50% of our portfolio effective July one and October one the volume elasticities have been slightly better than expected since the July price increases we will be announcing pricing actions effective June its Q1 2022.

On an additional 30% of the portfolio that means that as of Q1 'twenty 'twenty. Two we expect to have raised price on approximately 80% of our global portfolio of brands do.

Due to our expectation of incremental cost increases we continue to analyze additional pricing actions that can be put in place next year in 2022.

Now, let's turn to the outlook.

<unk> inflation of material and component costs and co packer costs impacted our gross margin in Q3 looking forward, we expect input costs and transportation costs to remain elevated in Q4, and we expect significant incremental cost increases in 2022.

Our EPS expectations are unchanged, we expect adjusted EPS growth of 6%. This year, it's important to remember that we are comping, 15% EPS growth in 2020.

We expect full year reported sales growth of five 5% with 4% full year organic sales growth.

It's also important to call out that we are committed to maintaining the long term health of our brands by ensuring a healthy level of marketing investment in Q4 and in 2022.

As many of you know, we typically target 11% to 12% marketing spend Q3 was 12, 3% and we expect Q4 to be approximately 13%.

Just to wrap things up.

October consumption continues to be strong, we're navigating through significant supply challenges and cost inflation.

We expect our portfolio of brands to do well both in good and bad times and in uncertain economic times such as now.

You have a strong balance sheet and we continue to hunt for Tsi accretive businesses and next up is Rick to give you more details on Q3.

Thank you, Matt and good morning, everybody, we'll start with EPS third quarter, adjusted EPS, which excludes the positive earn out adjustments was <unk> 87 up 14, 3% to prior year, we've done a <unk>.

Any further adjustments to the earn out.

Any sense was better than our 17 outlook, primarily due to continued strong consumer demand and higher than expected sales.

Well as lower incentive comp and lower marketing spend as supply chain shortages were impacting customer fill rates. We also overcame a higher tax rate year over year.

Reported revenue was up five 7% and organic sales were up three 7%.

Matt covered the details of the top line I'll jump right into gross margin.

Our third quarter gross margin was 44, 2% a 130 basis point decrease from a year ago. This was below our previous outlook of expansion as we faced incremental pressure from the effects of hurricane either a material cost and distribution.

Margin was impacted by 500 basis points of higher manufacturing costs, primarily related to commodities distribution and labor.

Tariff costs negatively impacted gross margin by an additional 40 basis points. These costs were partially offset by a positive 250 basis point impact from price volume mix and a positive 120 basis point impact from productivity.

Moving to marketing marketing was down $10 million year over year, as we lowered spend to reduce demand until fill rates could recover marketing expense as a percentage of net sales was healthy at 12, 3%.

For SG&A Q3, adjusted SG&A decreased 180 basis points year over year, with lower legal costs and lower incentive comp.

Other expense all in was $12 1 million a slight decline due to lower interest expense from lower interest rates.

And for income tax our effective rate for the quarter was 24% compared to 17, 3% in 2020, an increase of 310 basis points, primarily driven by lower stock option exercises. We continue to expect the full year rate to be 23% and.

And now to cash for the first nine months of 2021 cash from operating activities decreased 18% to $653 million.

Due to higher cash earnings being offset by an increase in working capital. We continue to expect cash from operations to be approximately $950 million for the full year.

As of September 30th cash on hand was $180 million, our full year Capex plan is now a $120 million down from the original $180 million in the outlook due to project timing. This capex moves out a year and we now expect capex in 2022 to exceed $200 million Future's bright as we continue to expand manufacturing and distribution capacity.

Primarily focused on laundry litter and vitamins.

Number 28, the board of directors authorized a new stock repurchase program up to $1 billion as you read in the release. This is a sign of our confidence in the company's future performance and the expectations of our robust cash flow generation, our number one priority for capital allocation remains acquisitions and given our low leverage ratios, we have confidence to do both.

Through October we purchased approximately $130 million worth of shares in Q4, we will likely get ahead of our 2022 planned purchases as well.

And now for the full year outlook.

We now expect the full year 2021 reported sales growth to be approximately five 5% and organic sales growth to be approximately 4%. Our consumption is strong and outpacing shipments, we expect our customer fill levels to improve throughout Q4.

Turning to gross margin, we now expect full year gross margin to be down 170 basis points previously down 75 basis points. This represents an incremental impact from our last guidance due to broad based inflation on raws and transportation costs that was exacerbated by hurricane Ida.

In our prior outlook, we had discussed the $125 million of higher cost versus our plan that number today is $170 million and the majority of that increase in the last 90 days relate to transportation labor and other increases as a reminder, we price to protect gross profit dollars not necessarily margin the 45 million dollar movement versus.

Our previous outlook.

Is primarily non commodity related.

Commodity spot pricing today is elevated compared to spot pricing just three months ago and after the full year.

We expect adjusted EPS to be 6% our brands continue to go from strength to strength, a strong consumption and organic sales growth lapped almost 10% organic growth a year ago.

And while inflation is broad based we have taken pricing actions to mitigate which gives us confidence over the long term.

For our Q4 outlook, we expect reported sales growth of approximately 3%, we expect organic sales growth of approximately 2% to the supply chain constraints and our SPD business to return to a more normal growth rate.

Adjusted EPS is expected to be 61 per share up 15% from last year's adjusted EPS and with that Matt and I would be happy to take any questions.

Ladies and gentlemen, if you have a question at this time please press the star and the number one key on your Touchtone telephone.

Question has been answered or you wish to remove yourself from the queue. Please press the pound key.

Your first question comes from the line of rubbish.

With Oppenheimer.

Good morning, Thanks for taking my question.

So I guess, firstly I just want the supply chain headwinds is there a way to frame like house you know how significant the impact was on your topline in Q3, and Q4 and just any initial thoughts in terms of the magnitude of impact early next year.

Yeah, let.

Let me direct repurchase I'll just take them.

From a.

Topline perspective organic for the domestic division was I think two 8%.

We look at what consumption was remember R.

Our fill levels at retail are pretty good are and shelf in stock levels are in the mid nineties, we want to be in the high ninety's, but they're in the mid nineties.

But consumption was closer to 6%. So that just means retailer inventories are depleted to some degree. So you can do the math between.

The $2 seven and really the 6% consumption.

Okay, Great. That's helpful and then on the cost side. So you guys mentioned that you expect to see significant incremental increases next year is there any way to quantify like you know if you look at your current spot prices and cost pressures what significant could mean as of today for next year.

Yeah, Hey repairs.

Would imagine it'll be a lot of questions on a on a 2022 and want us to quantify that.

Here's here's what I would say.

Our goal is to offset cost increases a dollar for dollar.

With our with our price increases.

The 2022 plan you know at this time of year is a work in process and we have we expect to have like I said significant incremental cost increases year over year 22 versus 21.

If you look at what's happened so far.

April we priced up 30% and that was primarily laundry and that was high single digits.

And in July and another 20% just litter.

Additives baking soda philosophers and Showerheads and that was mid to high single digits and today, we're saying another 30%, but that's largely personal care now that it'll be mid to high single digits as well.

But one of my friends likes to say is everyone is chasing a ball downhill and so costs have continued to escalate.

She even since the April and announcements in the July announcements.

So we're gonna be revisiting all of the 'twenty, one 2021 pricing decisions next year and.

Rick can probably give you a little bit of color on maybe a couple of things that are causing the incremental cost increases, but that's probably as far as we would go on 'twenty two but Rick do you want to add it up yeah.

Just to kind of triangulate what we're seeing.

I would tell you that.

And our July outlook, if we looked at our Q4 forecast for example, and.

When you look at the gross margin bridge or even the dollars. We were seeing that inflation was largely going to be offset by price fast forward three months.

And the gap is a couple of hundred basis points and so that's why we're as Matt said revisiting pricing. That's why we're doing more pricing for other other parts of the portfolio.

We are going to.

It's a no brainer at this point in time, we are going to assume spot pricing as we move into 2022 for a large part of that we're at right now we're gonna assumed transportation tightness.

Good thing for Us though is.

As our fill levels improve that tightness.

The efficiency improves right, there's still macro tightness, but the efficiency of our trucks improve and we're going to assume labor still elevated but we're going to do as best we can to mitigate as much as that and we will give you our outlook in January.

Great. Thank you I'll pass it along.

Okay.

Your next question comes from Nik Modi with RBC capital markets.

Hey, Nick.

How are you.

<unk>.

So I wanted to kind of get into obviously the supply chain issues are causing.

So I'll make a pretty weak retailers are obviously looking for more efficient assortment I wanted to get your thoughts around that especially as it relates to innovation because you've got such a critical part of the algorithm.

As you think about that now and kind of going forward and continue to 'twenty. Two maybe you could just provide some context on kind of how you think that's going to play out.

Yep.

We always have a robust lineup for new products. We did in 'twenty. One we have them ready to go in 'twenty, two and we got great ideas for 'twenty three.

No.

Retailers that are interested in innovation attracts consumers to the stores increases footfall. So I think we're in good shape for 2022 to quite you know the question is.

Or are consumers, we do think that the balance sheet for consumers.

Is healthy right now.

So disposable income is up.

Savings rates are up but going the other way as inflation right. So one headline is.

$4.

For a gallon of gasoline.

But as far as the willingness to buy new products and for demand to stay strong. The stimulus has ended do think household balance sheets are going to be strong are strong at the moment and likely we will sustain strong demand for a couple of quarters, although visibility is poor beyond.

A quarter or two as we all know.

But.

We got a good lineup for 2021 and we do think at least in the near term the consumer is seem somewhat flush and often.

Often influences so theyre buying intent.

And Matt if I could just follow up when it comes to during the pandemic.

Consumables are obviously migrating Paul well known brands exploration drop people wanted to get in and out of the store quickly.

And safety reasons have you seen export exploration actually pick back up you know consumer looking for some of those newer Nietzsche.

Concept oriented brands.

No I wouldn't say I wouldn't say, yes to that.

Nick.

Mike.

I still think that the larger brands are still are still winning.

Excellent Thanks, I'll pass it on.

Hey.

Your next question comes from Olivia Tong with Raymond James.

Thank you good morning.

A few questions on pricing not surprisingly first on the new pricing planning do you know what are your competition has also taken the same or similar pricing in personal care and then just a little bit more color on the pricing question, who are we talking talking you mentioned price elasticity that it was better than you had anticipated curious if you could give a little bit more color.

In terms of.

Once we had anticipated and what youre seeing with respect to impact of consumption.

Yeah, we are aware and and a couple of personal care categories, where our competitors have already already moved.

But we wouldn't call those competitors out on this call know normally cite the percentage increase that they had but.

There are a couple of categories and I expect they're going to be more Olivia where.

People already moving in personal care.

We moved early on on laundry and largely household products, our first two rounds.

The April announcement and also the July announcement, because laundry litter additives baking soda you remember so next up is going to be personal care, but that's as far as I can go with respect the competition and then on elasticity is I'd say, we're really happy where we're at that for many of the household products I think we moved first in laundry as an example.

But.

Competition is starting to move in Alaska elasticity as or better than we had expected which is good and then.

Litter when I originally.

Told you about the litter price increase.

Competition, we assume competition did not move when we did all of our math in our forecast and it's obvious that competition is competition has moved in litter as well.

Great and then in terms of the marketing spend.

Getting pulled back a little bit this quarter because of.

The in stock levels are you seeing are you expecting to reinstate that as time progresses, and then also given.

Pricing plan fairly decent consumption, obviously, hopefully by next year supply chain challenges do you get a little bit better should we expect fiscal 'twenty two to be a better growth year, given all those different factors.

And we take our marketing first yes, so marketing year over year is down, but it's up sequentially. Olivia. So you may remember in the.

First half of the year, we were like high single digits marketing as a percentage of sales. So we dialed it up in Q3, yeah. It is down less than in Q3 2020, but we went from 9% to 12% 12, 3% sequentially from Q2 to Q3, and we expect Q4 to be 13%. So.

As the in stock levels and stores have improved we've dialed up the marketing and your second question was.

Just around the fiscal 'twenty two.

If you're taking pricing our consumption is relatively solid.

It's the supply chain challenges that are constructing you and hopefully those do get a little bit better as time progressed.

Just wondering if you think fiscal 'twenty two there shouldn't be a better growth year, given some alleviation of challenges, but also pricing coming through yes.

Again, I'll jump in but we're not going to comment really on our outlook for 2020, yet we'll go through it in detail next quarter I'd say, yes, there is tailwind Matt talked about.

That shipments have been lagging consumption, we do well in any economic environment value and premium.

Macro economy also matters right and when we have a lot of stimulus in 2021.

That cannot repeat at that level in 2022. So those are the brief comments on the outlook.

But I would look at I would say just to echo what Matt said, we were at almost 14% market in Q3, a year ago and almost two 5% marketing in Q4, a year ago those are well in excess what we would normally spend.

And marketing so those aren't really the right comparable the right comparable as our evergreen model between 11% 12%.

Alright, thank you.

Hey.

Your next question comes from Dara <unk> with Morgan Stanley.

Hey, guys.

Sure So a.

A couple of things.

Just one you mentioned capacity expansion in the release in 2022 and 2023.

And I think you used the word significant so can you just help give us a sense for the level of spending you're expecting there or what percent of volume you are hoping to unlock is that.

Is that more something thats typical where you're building more capacity each year or is it really an outsized level of spend versus history.

And is that just capacity or are there potential other areas of increased investment also as you look out over the next couple of years.

Yes, maybe I'll start and that has something to add there.

This is a new new news at Cagny. This year, we kind of alluded to that we have significant capacity investments for laundry litter and vitamins. We also said it I think at our analyst day.

Typically we are 2% or lower on capex spend as a percent of revenue and I think we had signaled that it would be closer to 4% for.

2022 and 2023.

Today some of those 2021 projects are slipping just because of timeline and same supply chain challenges. We have in providing finished goods also is happening in the capex installation market. So.

I would say that were in excess of $200 million.

In excess of $200 million is our outlook for 2022, and it will be even higher than that in 2023, and then it would float back down to our <unk>.

Normal 2% of sales.

Yes.

These are our largest businesses right vitamins litter and.

And our laundry so we got a lot of faith in the brands. We've got tremendous consumption. So we're real excited about adding this capacity because it's going to.

Stan as well for years to come.

Great. That's helpful. And then second just on shelf space in the U S. You guys have done a great job gaining share and shelf space overtime, but you're taking significant pricing granted at a time when competitors are also youre going through supply chain issues here right. So there is some product limitation.

Yes.

You're cutting marketing versus original guidance understanding it's still at a robust level. So just curious for any perspective on it.

If that creates any risk from a shelf space standpoint, how you think about that those are typically not things that retailers like to see so just how you think about sort of the level of risk given some of the dynamics that are going on in the business here.

Yeah.

I don't see the risk frankly.

We're not alone Dara as you know.

With respect to raising prices et cetera, So I think it's a level playing field.

There right now.

You should keep in mind that our growth rate as in Q3 was almost 4% and top of 10% growth last year. So.

Our brands our consumption is super strong.

The retailers are aware that they see the demand for our products. So we're not we're not worried about.

Shelf space losses, as a result of our actions.

Okay, great. Thanks, guys.

Your next question comes from call meal. It goes Ralph <unk> with credit Suisse.

Hey, guys good morning.

First and I'm, making a quick one.

The new buyback plan is the intention to continue to buy back about what you've been doing in recent years or.

Does it maybe signal a bit of an acceleration from where you were before.

Yes.

A look at our track record we've done a few hundred million dollars each and every year in a few years back when when cash is built we did closer to $500 million. So somewhere in that range between three and five is what I would tell you.

Okay great.

Okay.

Yes.

In terms of terms.

Material costs or other costs.

Obviously, we know there's a lot of inflation, but to what degree of those numbers may be increasing at a higher level than they otherwise would because right now and have started to roll off or are you still hedged and then maybe just one last shot but at some point.

Some point in 'twenty two.

Yes, I'm going to do my best to answer that your phones breaking up significantly.

Aleve youre asking about.

The hedging the hedging.

We were we are about 90% hedged for 2021 and as we entered the year.

We were significantly hedged, which was which was a good thing.

And as we enter 2022 about right about now we're about 45% hedged.

And of course, there's probably I don't know between 10 and $20 million worth of benefit from 2021.

Hedging and so just as we layer layer on our new hedges versus versus that.

It's a headwind.

But that's something that we've known about for a long time and are managing.

To do as of right now hedges are very expensive. So we actually leaned towards a lot of the spot market.

As of right now the volatility in the market in 2021.

I think made the banks less likely to offer up any reasonable hedges for 2022. So that's a quick overview of the hedging.

Got it. Thank you sorry about the audio if you didn't get us get me.

Good now.

Sure.

<unk> talked.

Talk to you guys soon.

Okay.

Your next question comes from Andrea Teixeira with JP Morgan.

Hello. Thank you. Good morning, So I think just going back to the point about pricing and price gaps.

In some of like obviously, you've done well rolling the pricing and rolling it.

And I think thats too much point, obviously youre not alone.

But for the most price sensitive categories, you compete in and for the areas that you've seen these price increases to rollout any any color around the volume elasticity.

Given the widening price gaps most likely and related to that.

Your main competitor in this segment is increasing couponing I believe like coming back from.

Perhaps level from last year, how do you feel about closing the gap in pricing and as well as the fact that the U S.

At some point.

The private labels I think having taking the time to take action Dan If you can.

Help us kind of reconcile that yes.

Well, Matt as Matt said and I mentioned two on elasticities are those tested the elasticity as or better than we expected.

Competition has moved and so we're really happy with that.

Thank you.

I think some competitors as they do more couponing.

Or whatnot is or higher trade.

In laundry.

We have added a little bit of trade back in Q4, but were well below normal levels. As an example, so I think overall Andrea I would say.

Better than expected from a price cap perspective.

And that's helpful, but from from that roll off of them.

The hedging right, 45% and now you kind of enter China, China to doing mostly spot so.

They had the wind will be massive right and you quoted the 170 million cost pressure that is I think net of net of hedges right. So should we think about that number.

Obviously extrapolate that number into 2022, obviously, that's going to be a much bigger impact on us. So it means that the way to think.

Yeah, well, let's just take a big step back $170 million is versus our outlook. Our plan. If you add in it lets talk year over year the year over year number is about $250 million or about 9% of Cogs. Okay. So that's the year over year inflation in 2021, but we're talking about my comment on the on the hedging was between 10 to 20.

Million.

In the Grand scheme of things of the peanuts compared to the $250 million that I'm talking about and so yes that will be a rollover. Some of these latest price movements will be a rollover, but that's what pricing actions that we've talked about in different categories that we feel pretty good about because.

Because competition is moving and it's not just.

One category or even within CPG, it's broad based within many different categories across many different aisles.

Yes, so just to fine point that so 250, it would be 270, all things equal but is that based on spot prices alright, that's based on forward curve.

That's 2021.

First in 2020 actual so its actual and then and then spot pricing for the last two months of the year.

And then the last two months of the year would add you around $20 million only on that China, No no thats more known.

No Andrew it's 202 hundred $50 million for the full year forecast 2021 versus 2020, if we didn't have any hedges you would add another $10 million to $20 million.

Correct and then for 2022, it has to be higher than that because obviously the the beginning of the year. The pressures were much lower than what we're seeing now right. So that's why I wanted to.

Make sure I understood.

Alright.

You called incremental inflation in 2022, I would I would not expect to have another year of 9% inflation on top of 9% inflation, Okay mhm.

No I understood alright. Thank you so much I'll pass it on.

Your next question comes from field Chapelle the Truest Securities.

Thanks, Good morning hornbill.

Just following up on Nick's question about innovation I guess.

My My my question is.

You're seeing supply shortages.

And pulling back on marketing, but we're about to flip as we go to the first of the year I mean, typically you rollout a lot of new products in <unk> and step up marketing in <unk> and at the same point, you've said you're not sure you'll bill.

Believe that things will be back to normal in terms of supply chain until sometime in the first half. So I guess does it change one what gives you confidence that things improve in the first half and two.

Does it change your cadence of kind of rolling out new products.

And marketing behind those and stuff like that or is everything normal at this point.

Yes, Bill, we're saying is that we expect the supply issues to abate.

Some of that is in our control. So we do expect even though our fill rates today or in the low eighties and theyre normally nine.

99%, we think that that is going to improve over the next few months.

So that's a good thing.

We're leaving money on the table, because we haven't been able to.

Customer owners right now so as far as marketing goes typically Q1 is our lowest quarter for marketing. So you wouldn't expect a pickup in marketing spend in Q1 is it's oftentimes around 9% 10%.

But you are right, we do see the new.

New products do start hitting shelves in March April So Q2 is off the month when we have the.

A quarter when we start amping up.

The marketing so that would that would be our plans right now.

So what youre seeing in terms of our fill rates are improving kind of month to month, where you get I mean.

Just trying to get what what gives you confidence that things are better by April.

Well because we were.

We're in touch with all of our suppliers and co Packers and were also were up also optimists by nature than that.

Hurricane out ahead and it hadn't happened we would have been on the road to recovery and further along than where we ended up we kind of ended up at the same spot, but that was largely due to the additional hurricane pressures.

No Bill.

We had 7% force matures.

Those chemicals that are coming from that part of the U S. It's not just household chemicals affect personal care products as well. So it is all of those things get sorted out and they are improving just talking to the suppliers down in.

And what we see Anna for example, things are getting better.

And is that is that supply improves our fill rates are going to go up and we're going to take advantage of the demand.

Got it no that helps a lot and then one last.

As you look back at vitamins in particular is there.

Work, you've done to kind of understand how many of the incremental consumers over the past 18 months are going to kind of stay in the category versus as we come out of this they kind of go back to their more normal patterns in terms of vitamin consumption.

Yeah.

Our work tells us that household penetration is up almost 10% year over year. So we're seeing as.

As a repeat.

Of new people coming into the category with repeat purchases with a high loyalty rate of around like 80% plus which is great. Yeah. So if you just look at the quarters like Q1, Q2, Q3 consumption of <unk> year over year 20.

25% up 10 of 24, just big numbers consistent three quarters and of course, the tailwind is two tailwind. So I guess one of the wellness trend to the transition from pills and capsules to gummies that that continues in them.

Good good new product lineup in 'twenty, one and get another good one and 'twenty two and I guess the other thing that is noteworthy is if you look at private label share Gummies that has declined for three consecutive quarters. So that's kind of a kind of a fun fact, too. So we're really optimistic about vitamins and that's one of the reasons why we're going to be spending a lot of money on capex.

It's one of those three businesses, we're going to be.

Putting some iron in the Graham and 22 in anticipation of growth in 'twenty three and beyond.

Perfect well, thanks for the color and the fun facts to talk to you soon.

Okay.

Sure.

Your next question comes from Kevin Grundy with Jefferies.

Hey, Kevin.

Hey, good morning, guys how are you.

Good.

So Matt if I could just pick up on the last one point of clarification.

Around.

The iron Youre going to put in the ground or Capex as you referred to it. So we're going to have to step up if im not mistaken about 25% of the business. Currently goes through co Packers and you guys have obviously done a tremendous amount of work building out the supplier and co Packer.

Co Packers that you use over the past 18 months a point of clarity is there a rethink on the 25% is that still the right number how much is that going to change on the other side.

Of a stepped up Capex and then I have unrelated follow up.

I wouldn't expect that number to go the other way.

Kevin for the simple reason that that is our operating model and that we are an asset light company.

So we do rely on co Packers, yes, COVID-19 illuminated the fact that in some cases, we were a little bit too.

Two exposed with sole suppliers or so co packers or just not enough.

Options, but we've remedied that so we think we're going to be in great shape coming out of <unk>.

Covid and keep in mind with respect to our acquisition strategy as well as St. That's unchanged two we still prefer to buy brands and businesses that are co packed so that we're not wind up with additional plants and additional needs for capex. So no change.

Got it very clear Matt real quick follow up for you and then I'll pass it on just on the fourth quarter guidance.

I guess, what I'm trying to better understand the consumption trends are strong we see that in the Nielsen data.

The fill rates sound like Youre, getting better which is encouraging but the organic sales growth guidance of 2% implies a modest deceleration on a two year stack of two year average basis. I think you made the comment SPD, maybe will lighten up a little bit.

I'm trying to reconcile the improving fill rates what we see in the Nielsen data and then the guide for the quarter and I also understand you guys are typically conservative, but just maybe help me better understand that I'm, just trying to triangulate the data points.

Sure No problem, Kevin It's really two things one is SPD comes back to normal growth rates had a fantastic 18% organic growth quarter in Q3, and part of that was because of the comp a year ago, but Q4. It comes down to a normal so I'd say, maybe half half the deceleration in the company organic growth rate is.

SPD and the other half is.

We're being conservative on the fill rates as they continue to improve but we are still assuming they are in the low eighties and and then we said in the first half of 2022. It gets back to normal. So I would just say, it's probably conservatism if great unbelievable consumption demand continues.

You just saw in Q3.

Our earlier than when you have a bigger number times, 80% fill rates then thats when you can over deliver on the quarter and that's what happened for us in Q3.

We have delivered because of consumer domestic so.

Yes. The short story is we still think the fill rates are.

What impacts.

Very good. Thank you both good luck.

Thanks, Kevin.

Your next question comes from Lauren Lieberman with Barclays.

Great. Thank you.

I'm, sorry, if I missed it but have you guys specify which categories or products are suffering most.

Supply chain wide.

Leaving the money on the table.

We havent, Laura and we've said in general our fill rates around 80% and because of having 700 force majeure is after hurricane Ida and as Matt alluded to it as household and personal care. So it's pretty broad based.

Across the spectrum.

Okay.

One of the thing I was curious about and it's a little bit tough to ask a question admittedly without knowing which categories are more or less impacted.

And recognize in proportion as you arent mobile being industry factor.

You know, what's going on with your competitive set in those categories or others on the shelf is.

Private label producer and Thats kind of stepping in but just thinking about not denying this journey because your brand, but if we go forward and supply continues to be constrained for a couple of months.

Our consumer still shopping the category is that going to other brands.

Thoughts around risk.

As you come back into stock if you if you've lost household.

Yeah, Let me just make one comment and I'm sure Matt has some color too but.

We needed distinguished between fill rates.

<unk>.

In stock levels, Okay fill rates are in the low eighties and stock levels are in the mid nineties. Okay. So very rarely is the consumer going to shelf and not being able to buy a product. What's happened is mostly retail inventories have been depleted.

And their warehouses or our inventories are lower hopefully that clears some of them, yes, and Lauren the in stock levels Werent as good earlier in the year. So we've really seen them improve quite a bit, particularly as we got towards the end of the third quarter. So looking ahead going into Q3 Q4.

We have a lot of our brands back in the low to mid nineties, whereas earlier in the year that we're not so I think a question probably more relevant for an earlier quarter.

I might also say.

We haven't spent as much on on trade spending or couponing, because we didn't want to exacerbate.

<unk>.

At shelf fill levels as well.

Alright, and actually see if you look and if you look at the.

Did with marketing marketing was 9% in Q2, it's 12% in Q3, so obviously we.

Stock levels start to improve we started dial up the marketing.

Okay. That's helpful I apologize that misunderstanding and so on.

Okay. The pull back also in terms of spend.

As long as more on the trade spend piece and couponing and as you said marketing marketing is already rebuilding.

So when we talk about then leaving money on the table right now.

The rebuilding.

Shipments to get closer to consumption into next year, it's not like there's a major hole that needs to be filled right because the stock levels are okay, and because I'd like to have more inventory, it's not like there are some major.

Catch up that has to happen.

When we think about sales growth for the full 21.

Yeah, Hey.

Think how to think about is when we talked about in stock levels, we're talking about on shelf.

But now the whole is in the Dcs the distribution centers. So that's where it's I think it's hand to mouth, and that's where the opportunity is to to close the gap between consumption and shipments in that and that was my comment to <unk> earlier, it was really the 3% or so organic in Q3 compared to the 6%.

In Q3.

Yeah, and one of the only class of trade that that's not true and as club.

Club has their inventory.

At their stores as opposed to Dcs.

Okay, Alright, great and then just my second question was.

The SG&A was down a lot this quarter you cited.

I think with litigation, but also the incentive comp.

But that was a big piece of kind of holding the P&L together this quarter and I apologize for being so short term, but that's kind of that's what happened now so as we look into 'twenty two.

Knowing pricing continues to build.

But in the interim rates.

I'm guessing there's less ability to <unk>.

Control the SG&A line.

Yes, that's fair rate given what you said you have lots of flexibility in marketing you put so much money to work during 2020, there's a lot of flexibility, but that SG&A line.

You run that pretty tightly to begin with so I was just curious on your perspective on other ways to mitigate some of the cost headwinds as pricing is still ramping.

Yes.

It's a fair point SG&A is down largely because of incentive comp wise.

Why isn't some comp down it's because gross margin we have in our in our targets and very few companies do that but we do do that we're actually we're very proud that we do that it's hard in times like this but gross margin will likely be a doughnut.

<unk>.

That's an impactful on the accrual for incentive comp so rightfully.

<unk> that you had loren.

SG&A will be higher next year, as we get back and hopefully hit a plan.

With all the levers that we typically do.

<unk>.

But we have things that can offset inflation right.

Things that can offset SG&A and the number one far and away next year is going to be pricing and then number two behind that is going to be productivity discussion.

Okay and it sounds like it's incentive comp we help up next year gross margin isn't a doughnut on that on that score.

Meaning gross margin could be up yes, we have 5000 employees that I would like to see that happen.

Okay.

Okay, alright, thanks, so much yes.

Your next question comes from Steve powers with Deutsche Bank.

Hey, thanks.

I think we've covered most of what I wanted to talk about but just I guess.

Anil cleanup on the.

Some of the near term.

<unk> constraint dynamics.

The cadence of relief that you've talked about it seems sort of multifaceted with and.

And sort of complex and therefore, I'm, assuming that it's more of like a gradual.

Our continued ongoing gradual rebuild into next year as opposed to some kind of.

Cliff a binary point of recovery.

Validate that that there is.

It's kind of a.

More even more even if bumpy glide path as opposed to some kind of discrete set of milestones we should be thinking about.

Yeah, well you are right I think he asked and answered.

Steve It's it's not a light switch.

So theres no big Theres, not going to be a spike in any point in time so.

What we hope to be able to tell you when we get together in January is the PV of sense for how COVID-19.

November December.

Started to build improvement in fill rates. For example is what we hope to be able to be telling you in January and then our expectations for the rest of the first half.

Okay, Okay, perfect and so I guess from that shipment recovery.

Versus hopefully sustained strong consumption base cases that that that happens that happens sort of progressively if not like.

A light switch as you say all of a sudden.

<unk>.

Sorry go ahead, yes, exactly right it will be gradual over time as different brands recover faster.

Stair step back up to normality.

Perfect. Thank you both.

Okay Steve.

Your next question comes from Chris Carey with Wells Fargo Securities.

Okay.

Hi, good morning.

I guess I'd Echo Steve's comment that so many of the questions have been covered already.

Maybe in that regard I'll keep it a bit more.

Medium longer term I guess there is this dynamic with the.

Churches white portfolio, whether it's.

Thats valued as a piece of that premium.

This offers the flexibility too.

Respond to different economic environments.

We're clearly in this period, where demand elasticities are basically nonexistent.

So.

Theory.

Maybe that means the value of your portfolio offers relative less value than typically it would does that give you more credence to close.

Closed price gaps to get more.

Aggressive on price gap, but I guess I'm thinking about this 80% of your portfolio and repricing in Q1, but you may have to look at more pricing.

Maybe expand pricing have you raised pricing I'm not sure, but I guess, it's a bit theoretical because it's almost like how long this demand elasticity environment last I don't know I don't think anyone does but maybe just AC or.

Your relative positioning on on shelf, but in the context of this value versus.

First premium.

Portfolio, Yes, no. We look at that we look at that closely and we continue to look at.

And when you are pricing up 80% of your.

Portfolio, we're doing a lot of work on what the price gaps are in all the categories, where we have raised pricing and intend to raise price but.

Part of our operating model long term has always been this round numbers 60, 40 split between premium and value and we do think that we do want to preserve that and we do want to preserve the price gaps.

So consequently, we will always have that ability to perform well and good and bad times. So now.

To answer your question directly we would not be looking to.

Drive these value brands have been sustained mid tier.

Okay, and then maybe if I could just sneak in one clarification I think you said that shortages are everywhere, but I think in the Paas. It said that household specifically laundry shortages around surfactants.

Is that happening certainly shares improving along January pricing is.

But part of that mix is a part of that I suppose couponing.

Couponing is part of that but.

Are you seeing disproportionate charges there versus the rest of the portfolio or is that as you said, it's a bit broad based so thanks for that.

Yeah as you see as you see share recover in most cases, 80% of the cases I would say, it's largely supply chain disruption that had happened. So as you see share recover in certain areas, it's largely because of supply chain.

Okay. Thanks.

Your next question comes from Peter Grom with UBS.

Hey, good morning, everyone. Good morning, Peter.

So I know, it's kind of early but I was just kind of hoping to get your early read on the cold and flu season and the impact. This may have zicam kind of going forward and then I guess.

Just as it moves into organic like how should we think about the potential last year total company organic revenue growth from just like a normal cold and flu season.

Okay, well as you know.

So I came at the end of 2020, it's number one brand in coal shortened events still is today Super high shares of 70% and the.

The recent consumer trends are really encouraging you probably saw.

Some of <unk> comments earlier this week.

But if you look at our Q3, all channel consumption for as I can were up about 40% versus versus 2020. So in Q4.

That's.

40% increase in all channel consumption in Q3.

Is that is not the key quarter Q4 is often 40% to 50% of full year sales. So that's ahead of us.

We did buy the brand because back back last year, because we thought it a lot.

Our long term growth opportunity and we do expect it to be a big contributor to sales and profits in 2022, because it's been so depressed.

'twenty one.

But we would we wouldn't quantify but we think that that might be.

I would just say, it's going to be a good tailwind if it gets back to normal levels of cold and flu season.

Right.

Yeah.

Great. Thank you give me more color on where you can probably comment a little bit more on that in January when we give our full year outlook for 2022.

Okay, great. Thank you.

Okay.

Your next question comes from Mark Astrachan with Stifel.

Yes, thanks, and good morning, everyone.

I wanted to go back to an earlier state he made about not lapping or about lapping the stimulus and that not recurring next year. So I'm curious how you think about that in the context of the percentage of products sold on promotion as you head into next year any sort of high level thoughts comments discussions.

With retailers in terms of what they may be asking for or kind of how that plays out as we go through.

22, obviously, we're all sitting here with a lot of a lot of moving parts, but any sort of color you can give at this point would be helpful on that.

Yeah, well look we did pull back on promotions disappear promotions and couponing. So when we did it pretty early on because it didn't make a lot of sense to me promoting too.

Shelves that were completely stock as I said earlier the in stock levels, particularly towards the end of Q3 and looking ahead into Q4.

Are now approaching the nineties. So consequently, there is an opportunity to start introducing trade promotion back in 2022 and that is our our intent as well but of course a.

Competitive actions are something that we have to watch as well to decide how much or how little that we introduced back in but.

With some of that is starting to happen in Q4.

Great. Thank you okay.

Your next question comes from Jon Andersen with William Blair.

Good morning, Thanks for squeezing me in.

A lot of great you guys.

Got time.

There are a lot of great questions. There is not much meat left on the bone.

I will go with this so.

Kind of a follow up to lower end last comment on gross margin, maybe being up next year.

And I guess I'm thinking about your pricing.

Your pricing to offset the dollar inflation.

Recover gross margin rate and it also sounds like youre, bringing on are planned to bring on new capacity that could add incremental manufacturing overhead at least before that capacity is fully utilized.

As we think about kind of the gross margin outlook for the next 12 24 months.

Could it be different than what we've seen from church over a longer historical period of time, where you've had very good secular gross margin expansion.

Yes, I appreciate the question.

We're going to defer that question to January when we give our outlook of all the details on all the moving pieces that were still firming up all of our pricing plans that we're talking about for the balance of the 30%.

All of those other moving pieces so.

But you are right, we said, we're going to price to protect dollars and not margin and thats.

We think the.

The right approach, but we'll give you more detail on what we think gross margin will do in January.

Okay. Thank you.

Yes.

And our last question comes from the line of Jason English with Goldman Sachs.

Hey, folks thanks for slotting adjacencies like that anymore.

Let me close this out here.

Real quick you mentioned in stock levels are better but service levels are worse, how could those coexist for insights to improve shouldn't you have been over shipping because you kind of restore those levels.

Now as orders increase.

That drives up your shipments, but you could still have a low fill rate.

So if demand is exceptionally high and you fill at 80% you can still have in theory, you could stop 99% and stock levels at shelf.

The hole is in.

So we may be shipping more.

But it's not it's not staying in the in the Dcs, it's going directly to the stores to maintain the improved in stock levels, but you still are stuck with a hole in the Dcs and that's the opportunity that's a potential tailwind. So if you look at the if you just graph the dollars and shipments as an example, Jason you would see that.

We have.

Dollars and shipments that are similar to past practice and historical levels. Just the demand is so strong.

Okay, what is the high quality problem I suppose.

Looking looking at the margin line, so lots of questions around gross margin trajectory, but you are coming in with.

With marketing well below your initial budget plan.

Somewhere between 70 to 100 basis points or so below.

And.

I imagined millennials are going to look and say well gosh, they're going to have to restore that next year plus your incentive comp because the gross margins you've got to restore that to next year.

Hard to step back and look and say gosh, they kind of like a 150 basis point margin wholesale next year.

Just on restoration of the SG&A lines.

What's the flaw in that thought process.

Okay, I think I think the marketing line.

We've said many times, it's a range of 11% to 12% I think.

In 2020, if youre jumping off from that baseline that was an extreme.

We're talking about swimming and diving boards us the high dive and Thats.

Pretty elevated 15 15, 5% 15 six in Q4 of 2020, I think was our all time high in the history of the company for marketing spend as a percentage. So look we were.

We were very flush and the end of 2020, and so we spent incremental marketing.

More so than we ever had in the past and I would say our evergreen model is between 11, and 12% and we think that our 2020 plan will be.

Back within that range, probably the lower end of that range, but so thats, partly I would say is some of the floor is we're not going to get back up to the high elevens in 2022 as an example.

Okay. I was just asking relative to guidance I wasn't really referring to the tail end of last year, but I think you did got 11 five to 12 just last quarter.

So we're looking at a pretty substantial cut relative to what you had expected last quarter.

Yes definitely.

Jeff will check.

That will check the transcript I think our number was approximately 11 five for the full year last time.

I will double check that and the SG&A level.

We could debate percentage of sales all day long, but at the end of the day SG&A as kind of a bucket of heart spent.

And you spent 626 19 to be precise in fiscal 19, well, obviously heavy up this year relative to 'twenty, it's down, but you're still a big versus 'twenty one.

Why why is the incremental spend versus 19% to 21 and is there is a reason to believe that that's going to grow again in 'twenty, two or can we actually get back to something closer to closer to 19.

Yes. So is your question why even excluding incentive comp is 21 higher than 19.

Substantially higher and I know, you've always kind of put a rate out there, but in terms of percentage of spend but in absolute dollars.

It's grown meaningfully so I'm really looking for opportunity to offset the marketing next year.

And whether or not SG&A actually needs to grow or could it actually be lower next year.

Yes, well from 19 to 21, probably the biggest movement is actually probably amortization right. We we typically are very conservative some of the deals that we do do we don't we typically amortize those trade names over 10 15 years and so.

Adding zicam into the mix as an example.

Would've had amortization between 19 to 21, yes, we acquired that one in December of 2000 and look.

<unk> company SG&A is always lain, we're investing heavily.

For different things like RPI for our back office and.

We're looking at centralizing back offices for the for.

As we go into Asia in a bigger way, but all of those things are our nickels and dimes, but for us that's how we've.

Tend to find a way forward. So look again I don't want to get to 2020 too much today, we'll happy to go through it in spades in January.

Got it that's helpful. Though it's just structurally higher thank you for that.

I guess I'd say a pass it on but there is nobody else on so thank you very much have a good day.

Thank you Jason.

And there are no further questions at this time I would now like to turn the call back over to Matt Farrell, Chief Executive Officer of Church <unk> Dwight.

Okay, well, thanks, everybody for joining and thanks for your interest in lots of great questions today, and we look forward to updating everybody again at the end of January with our Q4 results in full year 'twenty two.

So long.

Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.

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Good morning, ladies and gentlemen, and welcome to the church and Dwight third quarter 2021 earnings conference call before we begin I have been asked to remind you that on this call. The Companys management 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 would now like to introduce your host for today's call Mr. Matt Farrell, Chief Executive Officer of Church <unk> Dwight. Please go ahead Sir.

Okay. Thanks, good morning, everyone. Thanks for joining us today.

I'll begin with a review of the Q3 results and then I'll turn the call over to Rick Dierker, our CFO and when Rick is done we'll open up the call for questions, but before we begin we'd like to recognize all church and Dwight employees around the world for their continued dedication to keeping our company going, especially our supply chain and R&D teams is during this quarter the.

Company faced the complexities of widespread raw material and labor shortages at our suppliers and then our third party manufacturers now lets talk about the results Q3 was a solid quarter reported sales growth was five 7% organic sales growth grew three 7% and exceeded our one.

5% Q3 outlook.

The 3.7% organic growth rate in the quarter is impressive.

Considering the prior year Q3, 2020 organic sales growth was nine 9%. So that's growth on top of growth. The adjusted EPS was <unk> 80, and it's 10 cents better than our outlook. We grew consumption in 12 of the 16 categories in which we compete and in some cases on top of big consumption gains lag.

Last year regarding brand performance five of our brands saw a double digit consumption growth and I'll name them for you vitamins.

Arm <unk> Hammer cat litter scent boosters batiste and Zicam.

Although many of our brands experienced double digit consumption growth, it's not all reflected in our three 7% organic sales growth of shipments were constrained by supply issues.

In Q3 online sales as a percentage of total sales was 14, 3% our online sales increased by 2% year over year now keep in mind. This is on top of 100% growth in ecommerce that we experienced in Q3 2020 versus 2019, and we continue to expect the online sale.

<unk> for the full year to be about 15% as a percentage of total sales.

Now as described in our release Hurricane I'd as impact was substantial which resulted in limited availability of raw materials and caused our fill levels to continue to be below normal.

Labor shortages at suppliers and third party manufacturers have constrained their ability to produce.

Transportation challenges have further contributed to supply problems now the good news is that over the past 18 months, we have made our supply chain more resilient by qualifying dozens of new suppliers and co Packers, which provides of course, both short term and long term benefits and in a few minutes Rick will tell you about our plans to <unk>.

Span capacity in 2022 with a significant increase in Capex next year to support our growth plans.

Now due to a lower than normal case fill rate, we pulled back on Q3 marketing compared to the prior year and we expect the supply issues to begin to abate in the first half of 2022 or.

His remarks in a few minutes.

On past earnings calls, we described how we expected categories to perform in 2021.

Overall, our full year thinking is generally consistent.

To name a few categories demand for vitamins laundry additives and cat litter has remained elevated in 2021.

The condoms dry shampoo and waterflood or categories have recovered and are experiencing year over year growth as society opens up and consumers have greater mobility baking soda and oral analgesics have declined from COVID-19 highs as expected. So now I'm going to talk about each business first up as consumer domestic so the consumer domestic.

Stick business grew organic sales to 8% and this is on top of 10, 7% organic growth in Q3 2020 looking at market shares in Q3 six of our 13 power brands gained share and our share results are clearly impacted by our supply issues.

I'll comment on a few of the brands right now.

Via diffusion gummy vitamins saw huge consumption growth in Q3 up 24% consumers have made health and wellness a priority. It appears that the new consumers that came into the category or staying because we look at if we look at the last year via infusion household penetration is up almost 10%.

Batiste dry shampoo grew consumption, 36% in the quarter and grew share to over 40% first time that's happened.

Dry shampoo is recovering as stores have reopened and consumers are becoming more mobile.

Next up is Waterpick waterpick consumption declined in the quarter due to the year over year timing of a major online retailer sales event with the good news is that Waterpick continues to have strong consumption year to date and continues to benefit from the heightened consumer focus on health and wellness and household products arm <unk> hammer liquid laundry held share despite.

Leading with price.

<unk> Hammer scent boosters continued to gain share.

Next up is international despite disruptions due to Covid, our international business came through with two 3% organic growth primarily driven by strong growth in the global markets group.

Asia continues to be a strong growth engine for us.

Furthermore, firm fresh vital fusion, a little critters led the growth for the international business.

Now as the next one is specialty products, our specialty products business delivered a very strong quarter with 18, 5% organic growth, but this was an easy comp the prior year quarterly organic growth for specialty products was actually down three 4%. So 18, 5%, it's a really nice rebound and this was driven by.

Both higher pricing and volume milk prices remain stable and demand is high for our nutritional supplements.

Now, let's talk about pricing.

On an additional 30% of the portfolio that means that as of Q1 2022, we expect to have raised price on approximately 80% of our global portfolio of brands do.

Our expectation of incremental cost increases we continue to analyze additional pricing actions that can be put in place next year in 2022.

Now, let's turn to the outlook for <unk>.

Significant inflation of material and component costs and co packer costs impacted our gross margin in Q3 looking forward, we expect input costs and transportation costs to remain elevated in Q4, and we expect significant incremental cost increases in 2022.

Our EPS expectations are unchanged, we expect adjusted EPS growth of 6%. This year, it's important to remember that we are comping, 15% EPS growth in 2020.

We expect full year reported sales growth of five 5% with 4% full year organic sales growth. It's also important to call out that we are committed to maintaining the long term health of our brands by ensuring a healthy level of marketing investment in Q4 and in 2022.

As many of you know, we typically target 11% to 12% marketing spend Q3 was 12, 3% and we expect Q4 to be approximately 13%.

Just to wrap things up.

October consumption continues to be strong we're navigating through significant supply challenges and cost inflation, we expect our portfolio of brands to do well both in good and bad times and in uncertain economic times, such as now we have a strong balance sheet and we continue to hunt for Tsi accretive businesses.

And next up is Rick to give you more details on Q3.

Thank you, Matt and good morning, everybody, we'll start with EPS third.

Third quarter, adjusted EPS, which excludes the positive earn out adjustments was <unk> 87 up 14, 3% to prior year.

We don't expect any further adjustments to the earn out.

The 80 cents was better than our 17 outlook, primarily due to continued strong consumer demand and higher than expected sales.

Well as lower incentive comp and lower marketing spend as supply chain shortages were impacting customer fill rates. We also overcame a higher tax rate year over year.

Reported revenue was up five 7% and organic sales were up three 7%.

Matt covered the details of the top line I'll jump right into gross margin.

Our third quarter gross margin was 44, 2% a 130 basis point decrease from a year ago. This was below our previous outlook of expansion as we faced incremental pressure from the effect of hurricane either on material costs and distribution.

Margin was impacted by 500 basis points of higher manufacturing costs, primarily related to commodities distribution and labor.

For SG&A Q3, adjusted SG&A decreased 180 basis points year over year, with lower legal costs and lower incentive comp other.

Other expense <unk> was $12 1 million a slight decline due to lower interest expense from lower interest rates.

For income tax our effective rate for the quarter was 24% compared to 17, 3% in 2020, an increase of 310 basis points, primarily driven by lower stock option exercises. We continue to expect a full year rate to be 23% and.

And now to cash for the first nine months of 2021 cash from operating activities decreased 18% to $653 million.

Due to higher cash earnings being offset by an increase in working capital. We continue to expect cash from operations to be approximately $950 million for the full year.

As of September 30, cash on hand was $180 million, our full year Capex plan is now $120 million down from the original $180 million in the outlook due to project timing. This capex moves out a year and we now expect capex in 2022 to exceed $200 million Future's bright as we continue to expand manufacturing and distribution capacity.

Primarily focused on laundry litter and vitamins.

On October 28, the board of directors authorized a new stock repurchase program up to $1 billion.

As you read in the release this is a sign of our confidence in the company's future performance and the expectations of our robust cash flow generation.

Our number one priority for capital allocation remains acquisitions and given our low leverage ratios, we have confidence to do both.

Through October we purchased approximately $130 million worth of shares in Q4, we will likely get ahead of our 2022 planned purchases as well.

And after the full year outlook, we now expect the full year 2021 reported sales growth to be approximately five 5% and organic sales growth to be approximately 4%. Our consumption is strong and outpacing shipments, we expect our customer fill levels to improve throughout Q4.

Turning to gross margin, we now expect full year gross margin to be down 170 basis points previously down 75 basis points.

This represents an incremental impact from our last guidance due to broad based inflation on raws and transportation costs that was exacerbated by hurricane hydro.

In our prior outlook, we had discussed the $125 million of higher cost versus our plan that number today is $170 million and the majority of that increase in the last 90 days related to transportation labor and other increases as a reminder, we price to protect gross profit dollars not necessarily margin the $45 million movement versus our pre.

<unk> outlook.

Is primarily non commodity related.

Spot pricing today is elevated compared to spot pricing just three months ago and after the full year.

We expect adjusted EPS to be 6% our brands continue to go from strength to strength, a strong consumption and organic sales growth lapped almost 10% organic growth a year ago.

And while inflation is broad based we have taken pricing actions to mitigate which gives us confidence over the long term.

Adjusted EPS is expected to be 61 per share up 15% from last year's adjusted EPS and with that Matt and I will be happy to take any questions.

Yeah.

Ladies and gentlemen, if you have a question at this time please press the star and the number one key on your Touchtone telephone.

Question has been answered or you wish to remove yourself from the queue. Please press the pound key.

Your first question comes from the line of Rubis pattern.

Let's open hymer.

Good morning, Thanks for taking my question.

Sure.

Hey, Bob So I guess, the first thing I just want to supply chain headwinds is there a way to frame how significant that impact was on your top line in Q3, and Q4 and just any initial thoughts in terms of the magnitude of impacts early next year.

Yes, let.

Let me direct repair I'll just take.

From a.

Topline perspective organic for the divest division was I think two 8%.

We look at what consumption was remember R.

Our fill levels at retail are pretty good are himself in stock levels are in the mid nineties, we want to be in the high <unk>, but they're in the mid nineties.

But consumption was closer to 6%. So that just means retailer inventories are depleted to some degree. So you can do the math between.

Two 7% and really the 6% consumption.

Okay, Great. That's helpful and then on the cost side. So you guys mentioned that you expect to see significant incremental increases next year is there any way to quantify like if you look at your current spot prices and cost pressures what significant could mean as of today for next year.

Yeah, Hey, repass.

I would imagine it will be a lot of questions on <unk>.

2022, and want us to quantify that.

Here's here's what I would say.

Our goal is to offset cost increases dollar for dollar.

With our with our price increases.

<unk>.

2020 to plan at this time of year is a work in process and we have we expect to have like I said significant incremental cost increases year over year 22 versus 21.

Now if you look at what's happened so far.

In April we priced up 30% and that was primarily laundry and that was high single digits.

And in July and another 20% just litter.

Additives baking soda flusters and Showerheads and that was mid to high single digits and today, we're saying another 30%, but that's largely personal care now that it'll be mid to high single digits as well.

But one of my friends likes to say is everyone is chasing a ball downhill and so costs have continued to escalate.

Even so even since the April.

Announcements in July announcements.

So we're gonna be revisiting all of the 'twenty, one 2021 pricing decisions next year and.

Rick can probably give you a little bit of color on maybe a couple of things that are causing the incremental cost increases, but that's probably as far as we would go on 'twenty, two but Rick you want to add to that just to kind of.

Triangulate, what we're seeing.

I would tell you that.

And our July outlook, if we looked at our Q4 forecast for example.

When you look at the gross margin bridge or even the dollars. We were seeing that inflation was largely going to be offset by price fast forward three months.

And the gap is a couple of hundred basis points and so that's why we're let's Matt said revisiting pricing Thats why were doing more pricing for other other parts of the portfolio.

We are going to.

It's a no brainer at this point in time, we are going to assume spot pricing as we move into 2022 for a large part of it that we're at right now we're going to assume transportation tightness.

Good thing for US, though is as our fill levels improve that tightness.

The efficiency improves right there is still macro tightness, but the efficiency of our trucks improve and we're going to assume labor is still elevated but we're going to do as best we can to mitigate as much as that and we'll give you our outlook in January.

Great. Thank you I'll pass it along.

Okay.

Your next question comes from Nik Modi with RBC capital markets.

Hey, Nick.

Hey, Matt how are you.

Hi.

So I wanted to kind of get into obviously the supply chain issues are.

<unk> celebrated a pretty weak new channels are obviously looking for more efficient assortment I wanted to get your thoughts around that especially as it relates to innovation because you don't want to say innovation is a critical part of the algorithm.

So as you think about that now and kind of going forward and continue to 'twenty. Two maybe you can just provide some context on kind of how you think that's going to play out.

Yep.

We always have a robust lineup for new products. We did in 'twenty. One we have ready to go in 'twenty, two and we got great ideas for 'twenty three so.

Retailers are interested in innovation and attracts consumers to the stores increases footfall. So I think we're in good shape for 2022 to <unk>. The question is.

Or are consumers, we do think that the balance sheet for consumers.

Is healthy right now.

So disposable income is up in savings rates are up but going the other way as inflation right. So one headline is that.

At $4.

For a gallon of gasoline.

But as far as the willingness to buy new products and for demand to stay strong. The stimulus has ended do think household balance sheets are are going to be strong are strong at the moment and likely will sustain strong demand for a couple of quarters, although visibility is poor beyond.

A quarter or two as we all know.

But.

We got a good lineup for 2021, and we do think at least in the near term the consumer it seems somewhat flush in.

Often influences the buying intent.

And Matt if I could just follow up when it comes to during the pandemic.

Those are obviously migrating called well known brands exploration drop people wanted to get in and out of the store quickly for health and safety reasons have you seen export exploration actually pick back up you know consumers are looking for some of those newer nietzsche kind of concept oriented brands.

No I wouldn't say I wouldn't say, yes to that.

Nick.

Uh huh.

I still think that the.

The larger brands are still are still learning.

Excellent. Thanks, so platform okay.

No.

Your next question comes from Olivia Tong with Raymond James.

Thank you good morning.

Few questions on pricing not surprisingly first on the new pricing planning do you know whether your competition has also taken the same or similar pricing in personal care and then just a little bit more color on the pricing questions. You already tucking talking you mentioned price elasticity that it was better than you had anticipated curious if you could give a little bit more color.

In terms of.

Once we had anticipated and what youre seeing with respect to impact of consumption. Thank you.

Yes, we are aware.

And a couple of personal care categories, where our competitors have already already moved.

But we wouldn't call those competitors out on this call nor would normally see.

Site the percentage increase that they had but there are a couple of categories and I expect they're going to be more Olivia.

And people who are already moving in personal care.

We moved early on on laundry and largely household products, our first two rounds.

April announcement and also the July announcement, because laundry litter additives baking soda you remember so next up is going to be personal care, but that's as far as I can go with respect to competition and then on elasticity is I'd say, we're really happy where we're at is that for many of the household products I think we moved first in laundry as an example, but.

Competition is starting to move in Alaska is less because these are better than we had expected which is good and then.

<unk> when I originally.

Told you about the older price increase.

Competition.

Competition did not move and we did all of our math in our forecast and it's obvious that competition is competition has moved in litter as well.

Great and then.

In terms of the marketing spend.

Kind of getting pulled back a little bit this quarter because of.

The in stock levels are you are you expecting to reinstate that as time progresses, and then also given.

Pricing plan fairly decent.

And obviously hopefully by next year supply chain challenges to get a little bit better should we expect fiscal 'twenty to be a better growth year, given all those different factors.

And we take our marketing first yes, so marketing year over year is down, but it's up sequentially. Olivia. So you may remember.

The first half of the year, we were like high single digits marketing as a percentage of sales. So we dialed it up in Q3, yeah. It is.

Less than in Q3, 2020, but we went from 9% to 12% 12, 3% sequentially from Q2 to Q3, and we expect Q4 to be 13%. So.

As the in stock levels and stores have improved we've dialed up the marketing.

Your second question was.

Just around the fiscal 'twenty two.

If you're taking pricing our consumption is relatively solid and supply chain challenges that are constructing new and hopefully those do get a little bit better at time progression. Just wondering if you think fiscal 'twenty two it shouldn't be a better growth year, given some alleviation of challenges, but also a question coming through.

Again, I will jump in but we're not going to comment really on our outlook for 2020, yet we'll go through it in detail next quarter I'd say, yes, there is tailwind Matt talked about.

Shipments have been lagging consumption, we do well in any economic environment value and premium.

Macro economy also matters right and when we have a lot of stimulus in 2021.

It cannot repeat at that level in 2022. So those are the brief comments on the outlook.

But look I would say just to echo what Matt said, we were at almost 14% market in Q3, a year ago and almost two 5% marketing in Q4 year ago, those are well in excess of what we would normally spend.

And marketing so those aren't really the right comparable rent comparable as our evergreen model between 11% and 12%.

Great. Thank you.

Okay.

Your next question comes from Dara <unk> with Morgan Stanley.

Hey, guys.

So a.

A couple of things.

Just one you mentioned capacity expansion in the release in 2022 and 2023.

And I think you used the word significant so can you just help give us a sense for the level of spending you are expecting there or what percent of volume youre, hoping to unlock is that.

Is that more something that's typical where you're building more capacity each year or is it really an outsized level of spend versus history.

And is that just capacity or are there potential other areas of increased investment also as you look out over the next couple of years.

Yes, maybe I'll start and that has something to add.

This is a new new news at Cagny. This year, we kind of alluded to that we have significant capacity investments for laundry litter and vitamins. We also said that I think at our analyst day.

Typically we are 2% or lower on capex spend as a percent of revenue and I think we had signaled that it would be closer to 4% for <unk>.

2022 and 2023.

Today some of those 2021 projects are slipping just because of timeline and same supply chain challenges. We have in providing finished goods also is happening in the capex installation market. So.

I would say that were in excess of $200 million.

In excess of $200 million is our outlook for 2022, and it will be even higher than that in 2023, and then it would float back down to our <unk>.

Normal 2% of sales.

Yes.

These are our largest businesses road vitamins litter and.

And our laundry so.

We've got a lot of faith in the brands, we've got tremendous consumption. So we're real excited about adding this capacity because it's going to.

Stan as well for years to come.

Great. That's helpful. And then second just on shelf space in the U S. You guys have done a great job gaining share and shelf space over time.

You're taking significant pricing granted at a time when competitors are also youre going through supply chain issues here right. So there is some product and limitations.

Cutting marketing versus original guidance understanding it's still at robust levels. So just curious for any perspective on if that creates any risks from a shelf space standpoint, how you think about that those are typically not things that retailers like to see so just how you think about sort of the level of risk given some of the dynamics that are going on in the business.

Sure.

Yeah.

I don't see the risk frankly.

We're not alone Dara as you know with respect to raising prices et cetera. So.

It's a level playing field.

There right now.

Sure.

You should keep in mind that our growth rate as in Q3 was almost 4% and top of 10% growth last year. So.

Our brands our consumption is super strong.

And the retailers are aware that they see the demand for our products. So we're not we're not worried about.

Shelf space losses, as a result of our actions.

Okay, great. Thanks, guys.

Your next.

<unk> comes from Kamil <unk> with credit Suisse.

Hey, guys good morning.

First and I'm, making a quick one.

Of the new buyback plan is the intention to continue to buy back about what you've been doing in recent years or.

Does it maybe signal a bit of an acceleration from where you were before.

Yes, if you look at our track record we've done a few hundred million dollars each and every year in a few years back when when cash to build closer to $500 million.

Somewhere in that range between three and five is what I would tell you.

Okay great.

As far as it related to Covid.

Yes.

Hey, Jeremy.

Payroll costs or other costs.

Obviously, we know there's a lot of inflation, but we think we have those numbers may be increasing at a higher level than they otherwise would because has now started to roll off or are you still hedged and then make those mall shopping at some point at.

At some point in 'twenty two.

Yes, I'm going to do my best to answer that your phone is breaking up significantly I believe you're asking about.

The hedging the hedging.

We were we are about 90% hedged for 2021 and as we entered the year. We were we were significantly hedged, which was which was a good thing.

And as we enter 2022 about right about now we're about 45% hedged.

And of course, there's probably I don't know between 10 and $20 million worth of benefit from 2021.

Hedging and so just as we layer layer on our new hedges versus.

Versus that.

Headwind.

But that's something that we've known about for a long time and are managing.

Do as of right now hedges are very expensive. So now we actually leaned towards a lot of the spot market.

As of right now the volatility in the market in 2021.

I think made the banks less likely to offer up any reasonable hedges for 2022. So that's a quick overview of the hedging.

Got it. Thank you sorry about the audio if you didn't get us get me.

Good now.

[laughter] talked to you guys soon.

Okay.

Your next question comes from Andrea Teixeira with Jpmorgan.

Hello. Thank you. Good morning, So I think just going back to the point about pricing and price gaps.

In some of like obviously, you have done well rolling the pricing and rolling it out.

And I think that's too much point, obviously youre not alone.

But for the most price sensitive categories, you compete in and for the areas that you've seen these price increases to rollout any any color around the volume elasticity give.

Given the widening price gaps most likely and related to that.

Your main competitor in this segment is increasing couponing I believe like coming back from a depressed level from last year, how do you feel about closing the gap in pricing and as well as the fact that you.

At some point.

The private labels I think having taken the time to take action on them. If you can.

Help us kind of reconcile that yes.

Well, Matt as Matt said and I mentioned two on the elasticities are those tested the elasticity as or better than we expected.

Competition has moved and so we're really happy with that.

Thank you.

I think some competitors.

Do more couponing.

Or whatnot is or higher trade.

In laundry.

We have added a little bit of trade back in Q4, but were well below normal levels as an example.

I think overall, Andrea I would say, it's gone better than expected from a price gap perspective.

And that's helpful, but fell from that roll off of Dan after hedging right the 45%.

And now you're going to enter China in China to doing mostly spot so.

They had the wind will be massive right and you quoted the 170 million cost pressure that is I think net of net of hedges right. So should we think about that number.

Obviously extrapolate that number into 2022, obviously, that's going to be a much bigger impact on nozomi is that the way to think.

Yes, well lets us take a big step back a $170 million is versus our outlook. Our plan. If you add in lets talk year over year. The year over year number is about $250 million or about 9% of Cogs. Okay. So that's the year over year inflation in 2021, when we're talking about my comment on the on the hedging was between 10 to 20.

Which in the Grand scheme of things of the peanuts compared to the $250 million that I'm talking about and so yes that will be a rollover. Some of these latest price movements will be a rollover, but thats what pricing actions that we've talked about in different categories that we feel pretty good about because.

Because competition is moving and it's not just.

One category or even within CPG, it's broad based within many different categories across many different aisles.

Yes, so just a fine point that so 250, it would be 270, all things equal but is that based on spot prices based on forward curve.

That's 2021.

First in 2020 actual so its actual and then and then spot pricing for the last two months of the year.

And then the last two months of the year would add you around $20 million only on that China No no thats more now Andrew.

Now Andrea its 200 $250 million for the full year forecast 2021 versus 2020, if we didn't have any hedges.

You would add another $10 million to $20 million.

Correct and then for 2022, it has to be higher than that because obviously the the beginning of the year the pressures or much lower than what we're seeing now right. So that's what I wanted to.

Make sure I understood.

Alright, we called incremental inflation in 2022, I would I would not expect to have another year of 9% inflation on top of 9% inflation, Okay mhm.

No I understood alright. Thank you so much I'll pass it on.

Yeah.

Your next question comes from Phil Chapelle, the Truest Securities.

Thanks, Good morning Warrenville.

Just follow up on Nick's question about innovation I guess.

My My question is.

You're seeing supply shortages and pulling back on marketing, but we're about to flip as we go to the first of the year I mean, typically you rollout a lot of new products in <unk> and step up marketing in <unk> and at the same point, you've said you're not sure you'll.

Believe the things will be back to normal in terms of the supply chain until sometime in the first half. So I guess does it change one what gives you confidence that you know.

Things improved in the first half and two.

Does it change your cadence of kind of rolling out new products.

And marketing behind those and stuff like that or is everything normal at this point.

Yes, Bill we are saying is that we expect.

The supply issues to abate.

So some of that is in our control. So we do expect even though our fill rates today or in the low eighties and they're normally.

99%, we think that that is going to improve over the next few months.

So that's a good thing because if we're leaving money on the table because we haven't been able to.

Customer orders right now so as far as marketing goes typically Q1 is our lowest quarter for marketing. So you wouldn't expect a pickup in marketing spend in Q1, it's oftentimes around 9% 10%.

But you're right, we do see the new products do start hitting shelves in March April. So Q2 is often of the month when we have the <unk>.

Quarter, when we start amping up the.

The marketing so that would that would be our plans right now.

So what youre seeing in terms of our fill rates are improving kind of month to month, where you get.

I'm just trying to get what what gives you confidence that things are better by April.

Well because we were.

We're in touch with all of our suppliers and co Packers and were also were up also optimists by nature than that.

We had 7% forest matures.

Those chemicals that are coming from that part of the U S. It's not just household chemicals affect the personal care products as well so as all of those things get sorted out and they are improving just talking to the suppliers down in Louisiana.

Louisiana for example, things are getting better and.

Is that is that supply improves our fill rates are going to go up and we're going to take advantage of the demand.

Got it no that helps a lot and then one last.

As you look back at vitamins in particular is there.

Work, you've done to kind of understand how many of the incremental consumers over the past 18 months are going to kind of stay in the category versus as we come out of this.

They kind of go back to their more normal patterns in terms of vitamin consumption.

Yeah.

Our work tells us that household penetration is up almost 10% year over year. So we're seeing as is.

Repeats.

Of new people coming into the category with repeat purchases with a high loyalty rate of around like 80% plus which is great. Yeah. So if you just look at the quarters Bill like Q1, Q2, Q3 consumption of <unk> infusion year over year, it's up 25% up 10 of 24.

Big numbers consistent three quarters and of course, the tailwind is two tailwind. So I guess one of the wellness trend to the transition from pills and capsules to gummies that that continues in them.

Good good new product lineup in 'twenty, one and got another good one and 'twenty two.

The other thing that is noteworthy is if you look at private label share Gummies that has declined in three consecutive quarters. So that's kind of a kind of a fun fact, too. So we're really optimistic about vitamins and that's one of the reasons why we're going to be spending a lot of money on capex. It's one of the three businesses, we're going to be.

Putting some iron in the Graham and 22 in anticipation of growth in 'twenty three and beyond.

Perfect well, thanks for the color and the fun facts to talk to you soon.

Okay.

Yeah.

Your next question comes from Kevin Grundy with Jefferies.

Hey, Kevin.

Good morning, guys how are you.

Good.

So Matt if I could just pick up on the last one a point of clarification.

Around.

And we're going to put in the ground or Capex as you referred to it. So we're going to have to step up if im not mistaken about 25% of the business. Currently goes through co Packers and you guys have obviously done a tremendous amount of work building out the supplier and co Packer.

Co Packers that you use over the past 18 months the point of clarity is there a rethink on the 25% is that still the right number how much is that going to change on the other side.

Of a stepped up Capex and then I have unrelated follow up.

I wouldn't expect that number to go the other way.

Kevin for the simple reason that that is our operating model.

We are an asset light company.

So we do rely on co Packers, yes, COVID-19 illuminated the fact that in some cases, we were where we were a little bit too.

Two exposed with sole suppliers or so co packers or just not enough.

Options, but we've remedied that so we think we're going to be in great shape coming out of.

Got it very clear Matt real quick follow up for you and then I'll pass it on just on the fourth quarter guidance.

And I guess, what I'm trying to better understand the consumption trends are strong we see that in the Nielsen data.

The fill rates sound.

It sounds like Youre, getting better which is encouraging but the organic sales growth guidance of 2% implies a modest deceleration on a two year stack of two year average basis. I think you made the comment SPD, maybe it will lighten up a little bit.

Yeah sure no problem, Kevin It's really two things one is SPD comes back to normal growth rates.

Fantastic, 18% organic growth quarter in Q3, and part of that was because of the comp a year ago, but Q4. It comes down to the normal so I'd say, maybe half half the deceleration in the company organic growth rate as SPD and the other half is we're being conservative on the fill rates as they continue to improve but we are.

We're still assuming they are in the low eighties and and then we said in the first half of 2022.

It gets back to normal so I would just say, it's probably conservatism if great unbelievable consumption demand continues like we just saw in Q3 or earlier than when you have a bigger number times, 80% fill rate then that's when you kind of over deliver on the quarter and that's what happened for us in Q3.

We have delivered because of consumer domestic so.

Yes. The short story is we still think the fill rates or what impacts.

Got it very good. Thank you both good luck.

Thanks, Kevin.

Your next question comes from Lauren Lieberman with Barclays.

Great. Thank you.

I'm, sorry, if I missed it but have you guys specify which categories or products are suffering most.

Apply chain wide.

Leaving the money on the table.

We havent, Laura and we've said in general our fill rates around 80% and because of having seven force majeure is after hurricane Ida.

And as Matt alluded to its household and personal care, so it's pretty broad based across the spectrum.

Okay, because one of the things I was curious about and it's a little bit tough to ask a question admittedly without knowing which categories are more or less impacted.

And recognizing a portion of your mobile be an industry factor.

Whats going on with your competitive set in those categories.

Are others on the shelf is private.

Private label producer and this kind of stepping in but just thinking about not denying the strength of your brands, but if we go forward and supply continues to be constrained for a couple of mine.

Our consumers are still shopping the category going to other brands.

And thoughts around risk.

Come back in stock if you if you've lost some of those households.

Yes, let me just make one comment and then I'm sure Matt has some color too but.

We needed to distinguish between fill rates.

<unk>.

In stock levels, Okay fill rates are in the low eighties in stock levels are in the mid nineties. Okay. So very rarely is the consumer going to shelf and not being able to buy our product. What's happened is mostly retail inventories have been depleted.

We have a lot of our brands back in the low to mid nineties, whereas earlier in the year. They were not so I think question probably more relevant for an earlier quarter.

I might also say.

We haven't spent as much on on trade spending or couponing, because we didn't want to exacerbate.

<unk>.

At shelf fill levels as well.

Alright.

And if you look at it.

Did with marketing marketing with 9% in Q2, it's 12% in Q3, so obviously we as in.

Stock levels started to improve we started dialing up the marketing.

Okay. That's helpful I apologize that misunderstanding and so.

Okay. The pull back also in terms of spend particularly there is one is more on the trade spend piece and couponing and as you said marketing marketing is already rebuilding.

So when we talk about then leaving money on the table right now.

The rebuilding.

Shipments to get closer to consumption into next year, it's not like there's a major holes that need to be filled right because the stock levels are okay, and we would like to have more inventory its not like theres some major.

Catch up that has to happen.

When we think about sales growth for the full 20 window.

Yeah.

<unk> got to think about is when we talk about in stock levels, we're talking about on shelf.

So now the whole is in the Dcs the distribution centers. So that's where it's I think it's hand to mouth and Thats, where the opportunity is to to close the gap between consumption and shipments in that and that was my comment to repass earlier, it was really the 3% or so organic in Q3 compared to the 6% consumption.

In Q3.

Yes <unk>.

That's a trade that that's not true and as club.

Club has their inventory.

At their stores as opposed to Dcs.

Okay, Alright, great and then just my second question was.

The SG&A was down a lot this quarter you cited.

I think with litigation, but also the incentive comp.

But that was a big piece of kind of holding the P&L together this quarter and I apologize for being so short term, but that's kind of that's what happened now so as we look into 'twenty two.

Knowing pricing continues to build.

But in the interim rate.

I'm guessing there's less ability to <unk>.

Control the SG&A line.

That's fair rate given what you said you have lots of flexibility in marketing you put so much money to work during 2020, there's a lot of flexibility, but that SG&A line.

Thank you.

You run that pretty tightly to begin with so I was just curious on your perspective on other ways to mitigate some of the cost headwinds as pricing is still ramping.

Yes.

It's a fair point SG&A is down largely because of incentive comp was incentive comp down that's because gross margin we have in our in our targets and very few companies do that but we do do that we're actually we're very proud that we do that it's hard in times like this but gross margin will likely be a doughnut and so thats.

That's an impactful accrue.

Accrual for incentive comp so.

<unk>.

Conclusion that you had loren.

G&A will be higher next year, as we get back and hopefully had a plan.

With all the levers that we typically do.

<unk>.

But we have things that can offset inflation and we have things that can offset SG&A and the number one far and away next year is going to be pricing and then number two behind that is going to be productivity discussion.

Okay, and it sounds like it's incentive comp we help.

Up next year gross margin isn't a doughnut on that and Thats why I guess, Germany gross margin could be up yes, we have 5000 employees that I would like to see that happen.

Okay.

Okay, alright, thanks, so much.

Yes.

Your next question comes from Steve powers with Deutsche Bank.

Hey, thanks.

I think we've covered most of what I wanted to talk about but just I guess.

Final cleanup on the.

Some of the near term supply constraint dynamics.

The cadence of releases that you've talked about it seems sort of multifaceted.

And sort of complex and therefore, I'm, assuming that it's more of like a gradual.

Our continued ongoing gradual rebuild into next year as opposed to some kind of.

Cliff for a binary point of recovery.

Validate that that there is.

It's kind of a.

More even more even if bumpy glide path as opposed to some kind of discrete set of milestones we.

We should be thinking about.

Yes.

Youre right I think he asked and answered.

Steve it's not it's not a light switch.

So theres no big there is not going to be a spike in any point in time so.

What we hope to be able to tell you when we get together in the January is give you a sense for how co in November December.

Started to build.

Improvement in fill rates for example is what we hope to build will be telling you in January and then our expectations for the rest of the first half.

Okay.

Yeah, Okay, perfect and so then I guess from that shipment recovery.

Versus hopefully sustained strong consumption base cases that that that happens that happens sort of progressively if not like.

A light switch as you say and all of a sudden death.

Yeah.

Sorry go ahead, yes, exactly right it will be gradual over time as different brands recover faster.

Stair step back up to normality.

Perfect. Thank you both.

Okay Steve.

Your next question comes from Chris Carey with Wells Fargo Securities.

Okay.

Hi, good morning.

I guess I'd Echo Steves comment.

Many of the questions have been covered already.

And maybe in that regard I'll keep it a bit more.

Medium longer term I guess.

Dynamic with the.

Church, <unk> Dwight portfolio, where there's a piece that's valued is a piece that's premium.

This offers.

Flexibility too.

Respond to different economic.

Environments.

But.

We're clearly in this period, where demand elasticities are basically nonexistent.

So I mean in theory.

Maybe that means the value end of your portfolio offers relative less value than typically it would does that give you more credence to.

Closed price gaps to get more.

Aggressive on price gaps I guess im thinking about this 80% of your portfolio would be pricing in Q1, but you may have to look at more pricing.

Maybe expand pricing have you raised pricing I'm not sure, but I guess, it's a bit theoretical because it's almost like how long. This demand environment last I don't know I don't think anyone does but maybe just how you see your.

Your relative positioning on on shelf, but in the context of this value versus.

First premium mix in your.

Portfolio, Yes, no. We look at that we look at that closely and we continue to look at.

And when you are pricing up 80% of your portfolio, we're doing a lot of work on what the price gap SAR and oil and categories, where we have raised price in an intent to raise price but.

Part of our operating model long term has always been this round number 60 40 split between premium and value and we do think that we do want to preserve that and we do want to preserve the price gaps.

So consequently, we will always have that ability to perform well and good and bad times. So now.

To answer your question directly we would not be looking to.

Drive these value brands have been to say mid tier.

Okay, and then maybe if I could just sneak in one clarification I think you said that shortages are everywhere.

I think in the Paas. It said that household specifically laundry, it's some shortages around surfactants.

Is that happening certainly shares improving and launch it on pricing.

But part of that mix is a part of that I suppose couponing.

Less couponing as part of that but.

Are you seeing disproportionate charges there versus the rest of the portfolio or is it as you said, it's a bit broad based.

Scott.

Okay. Thanks.

Your next question comes from Peter Grom with UBS.

Hey, good morning, everyone. Good morning, Peter.

So I know, it's kind of early but I was just kind of hoping to get your early read on on the cold and flu season and the impact. This may have on Zicam kind of going forward and then I guess.

Yes.

Just as it moves into organic like how should we think about the potential last year total company organic revenue growth from just a normal cold and flu season. Thanks.

Okay, well as you know we.

So I came at the end of 2020, it's the number one brand in coal shorten events still is today Super high shares was 70% and.

The recent consumer trends are really encouraging you probably saw.

Some of <unk> comments earlier this week.

But if you look at our Q3, all channel consumption for as I can were up about 40% versus versus 2020. So in Q4.

Yes.

40% increase in all channel consumption in Q3.

Is that is not the key quarter Q4 is often 40% to 50% of full year sales. So that's ahead of us and we did buy the brand because back back last year, because we thought it.

Our long term growth opportunity and we do expect it to be a big contributor to sales and profits in 2022, because it's been so depressed and.

In 'twenty, one, but we would we wouldn't quantify what we think that that might be yes. We would just say it's going to be a good tailwind if it gets back to normal levels.

Yes exactly.

Great. Thank you give me more color on yes, we could probably comment a little bit more on that in January when we give our full year outlook for 2022.

Okay, great. Thank you.

Okay.

Your next question comes from Mark Astrachan with Stifel.

Yes, thanks, and good morning, everyone.

I wanted to go back to an earlier statement you made about not lapping or about lapping the stimulus and that not recurring next year. So I'm curious how you think about that in the context of the percentage of products sold on promotion as you head into next year any sort of high level.

Thoughts comments discussions with retailers in terms of what they may be asking for or kind of how that plays out as we go through.

22, obviously, we're all sitting here with a lot of moving parts, but any sort of color you can give at this point would be helpful on that.

Yeah, well look we did pull back on promotions disappear promotions and couponing. So when we did a pretty early on because it didn't make a lot of sense to be promoting too.

Shelves that were completely stock as I said earlier the in stock levels, particularly towards the end of Q3 and looking ahead into Q4 are now approaching the nineties.

Consequently, there is an opportunity to start introducing trade promotion back in 2022 and that is our our intent as well but of course.

Competitive actions or something that we have to watch as well to decide how much or how little that we introduced back in but.

With some of that is starting to happen in Q4.

Great. Thank you okay.

Sure.

Yes.

Your next question comes from Jon Andersen with William Blair.

Good morning, Thanks for squeezing me in.

A lot of great you guys, we got time.

Yes, there are a lot of great questions. There is not much meat left on the bone.

I will go with this so.

Kind of a follow up to lower end last comment on gross margin, maybe being up next year.

And I guess I'm thinking about your pricing.

You are pricing to offset the dollar inflation not recover gross margin rate and it also sounds like youre, bringing on or plan to bring on new capacity that could add incremental manufacturing overhead at least before that capacity is fully utilized so as we think about kind of the gross margin outlook for the net.

12 24 months.

Could it be different than what we've seen from church over a longer historical period of time, where you've had very good secular gross margin expansion.

Yes, I appreciate the question.

We're going to defer that question to January when we give our outlook of all the details on all the moving pieces that were still firming up our all of our pricing plans that we're talking about for the balance of the 30%.

Those are the moving pieces. So but you are right. We said, we're going to price to protect dollars and not margin and and Thats we think.

The right approach, but we'll give you more detail on what we think gross margin will do in January.

Okay. Thank you.

Okay.

And our last question comes from the line of Jason English with Goldman Sachs.

Hey, folks thanks, Jason.

Let me close this out here.

Real quick.

In stock levels are better but service levels are worse, how could those coexist for instance to improve shouldn't you have been over shipping because you kind of restore those levels.

Now as orders increase.

That drives up your shipments, but you could still have a low fill rate.

So if demand is exceptionally high.

Phil at 80% you can still have in theory, you could sell a 99% and stock levels at shelf.

The hole is in.

So we may be shifting more.

But it's not it's not stand in the in the Dcs, it's going directly to the stores to maintain the improved in stock levels, but you still are stuck with a hole in the Dcs and that's the opportunity that's a potential tailwind. So if you look at the if you just.

Graph the dollars and shipments as an example, Jason you would see that we have.

Dollars and shipments that are similar to past practice and historical levels. Just the demand is so strong.

Okay, what's the high quality problem I suppose.

Sure.

Looking looking at the margin line, so lots of questions around gross margin trajectory, but you are coming in with.

With marketing well below your initial budget plan I think it's somewhere between 70 to 100 basis points or so below.

And.

I imagined Lenny if theyre going to look and say well gosh, they're going to have to restore that next year plus your incentive comp because of the gross margins you've got to restore that to next year.

So hard to step back and look and say gosh, they've got like 150 basis point margin wholesale next year just on restoration of the SG&A lines.

Whats the flaw in that thought process.

Okay, I think I think the marketing line.

We've said many times, it's a range of 11% to 12% I think.

In 2020.

Jumping off from that baseline that was an extreme.

If we're talking about.

Women in diving board Thats, the high Def and Thats.

Elevated 15, 15, 5% 15 six in Q4 of 2020, I think was our all time high in the history of the company.

For marketing spend as a percentage so look we were.

We're very flush and the end of 2020, and so we spent incremental marketing.

More so than we ever had in the past and I would say our evergreen model is between 11%, 12% and we think that our 2020 plan will be.

Back within that range, probably the lower end of that range, but so thats, partly I would say is some of the floor is we're not going to get back up to the high elevens in 2022 as an example.

Okay. I was just asking relative to guidance I wasn't really referring to the tail end of last year, but I think you did guide 11, five to 12 just last quarter.

So we're looking at a pretty substantial cut relative to what you had expected last quarter.

Yes definitely.

Jeff will check double.

That will check the transcript I think our number was approximately 11 five for the full year last time.

I will check that and then SG&A level.

We could debate percentage of sales all day long, but at the end of the day SG&A as kind of a bucket of heart spent.

And you spent 626 19 and to be precise in fiscal 19, well, obviously heavy up this year relative to 'twenty, it's down, but you're still uptake versus 'twenty one.

Why why is the incremental spend versus 19% to 21 and is there is a reason to believe that thats going to grow again in 'twenty, two or can we actually get back to something closer like closer to 19.

Yes. So is your question why even excluding incentive comp is 21% higher than 19.

Substantially higher and I know, you've always kind of put a rate out there, but in terms of percentage of spend but in absolute dollars. It's.

It's grown meaningfully so I'm really looking for opportunity to offset the marketing we load next year, and then question, whether or not SG&A actually needs to grow or could it actually be lower next year.

Yes, well from 19 to 21, probably the biggest movement is actually probably amortization right. We we typically are very conservative from the deals that we do do we don't we typically amortize those trade names over 10 15 years and so.

Adam Zicam into the mix as an example.

Would've had amortization between 19% to 21 required that one in December of 'twenty and look we're a lean company SG&A is always lane.

We're investing heavily.

Sure.

Current things like <unk> for our back office and we're <unk>.

Looking at centralizing back offices for the for as we go into Asia in a bigger way, but all of those things are our nickels and dimes, but for us that's how we've.

We tend to find a way forward. So look again I don't want to get to 2020 too much today, we'll happy to go through it in spades in January.

Got it that's helpful. Though is just structurally higher thank you for that.

I guess I would say I'll pass it on but there is nobody else on so thank you very much have a good day. Thank you Jason.

And there are no further questions at this time I would now like to turn the call back over to Matt Farrell, Chief Executive Officer of Church <unk> Dwight.

So long.

Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.

Q3 2021 Church & Dwight Co Inc Earnings Call

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